During the discussion of the banking bailout, I said the US should put a buttload of money in the FDIC and let the banks that screwed up fail. The FDIC would protect the depositors' assets but the companies that did the dumb things they did would die.
Faeelin and others did not agree, with the former suggesting that course of action would lead to a "Lost Decade" in the US similar to Japan (IIRC).
Now, several months later, we can discuss the subject with the benefit of hindsight.
In my case, I work for a small-town newspaper and there was one bank in a neighboring county that failed (due to lots of construction loans that could not be paid back because the houses weren't sold) and was taken over by a bank based in my county. The FDIC insured the deposits, so nobody lost money, "my" bank took over, and everything was back to normal the next day.
Could this have happened on a larger scale, with healthy banks like BOA taking over Goldman Sachs and other entities that in TTL would have been allowed to fail?
The United States has a legal procedure in place to deal with institutions that are "too big to fail". It is called anti-trust legislation. AIG, Fannie Mae, Freddie Mac, Goldman Sachs and all the rest should have been taken over by either FDIC or another appropriate agency. This could and should have been done. The bailout money that was given to the crooks could have been used instead to create a workout agency similar to the agency created during the savings and loan crises and the toxic assets owned by the failed institutions moved into the workout agency. Then the institutions deemed "too big to fail" could be broken up into small pieces and their good assets sold off to regional banks.
Then, here is how you fix the mess they caused.
Subprime mess - a few hundred thousand mortgage auditors/counselors should have been hired to review every sub prime loan. Some borrowers qualified for prime loans but were given sub prime loans instead. These should have been rewritten as prime loans. Many borrowers were qualified on the teaser rates, not the eventual reset rate. These loans should have been rewritten based on the size mortgage that the borrower could qualify for given their current income. The money that was used to bail out the people who caused this mess should have been given to the homeowners instead so that they could refinance their homes at payments they could actually pay.
Derivitave mess - Many banks failed because they had assets on their books that cannot be valued. These assets have a value of course, the value is some function of whatever payments are actually made. The media called these derivitaves "toxic assets". The federal government should have taken these toxic assets from the failed institutions and created a workout agancy like they did during the savings and loan crises and had the workout agency hold the toxic assets to maturity. This actually would have yielded a large profit, the assets aren't worthless, it is just that banking regulations force banks to put a value on assets and it is not possible to put a value on these "toxic" assets.
Anti-trust actions. Any institution that was deemed too big to fail would be sliced up into small pieces and sold off to regional banks.
These actions would have protected the asset holders, saved the housing industry, and ended the careers of the people who caused this mess. All without one dime of taxpayer money going to the swindlers who caused the problem.
There would have been no bailout, instead federal money would have been used to take over troubled assets so that these could be worked out over a number of years and the good assets could be sold to regional banks.
This is exactly what was done to resolve the savings and loan crisis. The taxpayers made money on that one because the resolution trust made money on the troubled assets that it took over.