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While Congress debates, FDIC steps to fore of credit crisis

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Even as proposals for a financial bailout dominate the news, an existing federal agency – the FDIC – has stepped into a prominent role as crisis manager of last resort for faltering banks.

In the past week, the Federal Deposit Insurance Corp. has become a major deal broker in a manner that would normally make its actions a lead-the-news story. With two of America’s 10 largest deposit-taking institutions looking like dominoes that could fall, the FDIC made a quick call: Wachovia and Washington Mutual would be sold now rather than potentially cost the government later.

The actions are not without controversy. Shareholders were all but wiped out and now two other giant banks have become larger still – Citigroup by buying Wachovia, and JPMorgan Chase by buying WaMu.

But to many experts in bank regulation, the moves are a reassuring sign that the nation’s defender of depositors is on the case. They say the FDIC will continue to play a big role, even if Congress approves other rescue efforts.

“The FDIC has been very efficient at closing banks quickly, so that it hasn’t had to put much money in” to save depositors, says Peter Morici, an economist at the University of Maryland. “It is good if it remains proactive.”

Congress is weighing other measures to revive the financial system, such as by allowing the Treasury to buy distressed bank debts that have caused investor confidence to fray. If such measures go forward, banks will still fail, Mr. Morici says. When the FDIC steps in promptly, he says “it mitigates the losses” that bank failures create for taxpayers and the economy.

In both the WaMu and Wachovia cases, the FDIC was able to resolve problems without tapping its Deposit Insurance Fund, which banks pay into to insure depositors. That was achieved by acting early, so that the banks were in shape for quick resale.

The moves have thrust FDIC chairman Sheila Bair into the limelight, and not only for her influence when banks falter. She’s also busy trying to bolster the confidence of depositors even as she prods banks to dig out of trouble.

“You simply must accept that the credit downturn is far from over,” she told the Florida Bankers Association last month. “It’s a tough slog, but there’s no easy way out.”

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