FDIC for I-Banks

The events leading up to Bear Stearns’ deal with JPMorgan were essentially a run on a non-commercial bank. As rumors spread that Bear Stearns would not be able to meet its obligations in part due to its exposure to the being-liquidated-as-we-speak Carlyle Capital, everyone starting pulling out their money and decreasing any exposure they may have had to the firm. In the first half of the 20th century, the federal government dealt with runs on commercial banks by creating the FDIC through the Glass-Steagall Act. Why not insure investment banks and certain other financial institutions in a similar manner?

There are obvious problems with insuring investment banks, such as the fact that this would require increased regulation of their balance sheets, not to mention capital reserve requirements on some assets that cannot realistically be valued.

Despite this, the Federal Reserve did essentially just that with Bear Stearns. Since the Fed could not afford to have the firm default on its obligations due to the potential impact on the already bloodied credit markets, it chose an acquisition of the company by JPMorgan. The Fed could not directly insure the most toxic elements of Bear’s book because it is not a commercial bank, but has basically done that to the tune of $30 billion for those same assets now that they’re on JPMs balance sheet.

Furthermore, the ~$2.33/share deal (based on JPM closing price of $42.71) for the 85-year-old investment bank seems a steal by most metrics, thus it appears reasonable that another buyer may emerge. While everyone waits for a new suitor, JPMorgan acts as the buyer of last resort. It cannot back down from the deal due to the fact that there is no material adverse change clause written in. This is similar to how insurance works. If all goes well (someone else acquires Bear or through some miracle it stands on its own two feet) everyone parts their ways and all liabilities are paid off. But if more shit hits the fan and no one wants to touch it, JPM buys it for nothing and similarly follows through on Bears obligations.

I am generally not keen on regulation but history is littered with liquidity crises of financial institutions. Why has no one come up with a way for the federal government to systematically insure regulated financial institutions other than commercial banks? Insuring I-banks is fraught with problems, but why not insure portions of their balance sheets, such as against counter-party risk on certain derivatives to help prevent liquidity crises?