I was wrong in my FT column on Monday when I said:
Indisputably, an orderly resolution regime is required for all financial institutions, banks and non-banks alike.
To my dismay, this is disputable after all.
The Treasury secretary... released more details on Wednesday on a plan for a legal framework to put a "non-bank" into receivership at the behest of the government. With the backing of Ben Bernanke, Federal Reserve chairman, Mr Geithner wants powers to "resolve'' ailing companies that are deemed systemically important.
He told legislators on Tuesday that such powers would have allowed the government to handle better the collapse of AIG, the giant insurer now surviving on $173bn of taxpayer funds.House Republican leader John Boehner said on Tuesday that Mr Geithner's plan sounded like "an unprecedented grab of power".
That is the kind of comment that makes me wonder if the Republicans ever intend to be taken seriously on these issues. How can one intelligently oppose an FDIC-like resolution regime for AIG and other systemically significant non-banks?
I've heard it said that the FDIC's pre-bankruptcy powers should be seen as a quid pro quo for deposit insurance, which AIG did not enjoy, since it was not a deposit-taker. Fine, but do you mean to tell me that AIG's liabilities were not underwritten by taxpayers? Of course they were. See what happened to that $173 billion. Well then, what is wrong with plain bankruptcy in such a case? Perhaps you remember Lehman, an experience nobody cared to repeat. AIG was kept out of ordinary bankruptcy for a reason.
As my column pointed out:
Bankruptcy was tried, of course, in the case of Lehman, and was not a great success: many see that as a catalyst for the worst phase of this crisis. After the Lehman debacle, keeping counterparties whole to avoid systemic collapse was the entire point of coming to the rescue of AIG and the others.
Apparently, the lesson of the Lehman case was drawn too hastily. Do not worry too much about moral hazard, many concluded. Letting banks that took excessive risks fail in order to encourage more prudent behaviour is all very well in theory; in practice, you pull the ceiling down on your head.
Yes, but then one must also understand that the AIG outcome - keep everybody whole but taxpayers - is the alternative, and this no longer looks so good either. It fails the test of fairness, which is what the outcry is all about. It fails the test of efficiency too. The company's death-wish business model, which involved insuring risks being taken by other financial groups on a literally insupportable scale, had moral hazard written all over its transactions. As James Hamilton of the University of California at San Diego has pointed out, if AIG's counterparties were betting that the government would stand behind those suicidal credit default swaps, which in turn allowed them to keep rolling the dice, they turned out to be right.
So the question is this: if you cannot let a systemically significant bank or shadow bank collapse, and you cannot keep it whole at taxpayer expense, how do you dispose of it in an orderly way? How do you arrange a fair and efficient sharing of the losses? A template exists for US banks, though not for shadow banks or for hedge funds pretending to be insurance companies, in the resolution procedures of the Federal Deposit Insurance Corporation.
If the best the
Republicans can do in opposing this line of thinking is issue
all-purpose admonitions against government power, it would be better
for everybody including themselves if they just shut up.
This sets the stage for Venezuela style government take overs. Trust me on this, the FDIC overstepped it's powers when it strong armed the OTS and wiped out Washington Mutual to gift wrap it and hand the 300 billion dollar bank over to JP Morgan for 1.9 billion.
The LAST thing this country needs to do is to give the Treasury the power to seize any old company they deem "important".
Keep in mind that Lehman Brothers was taken down by short selling and JP Morgan freezing their cash to make them illiquid.
These kinds of regulations set the stage for the inside elite to steal companies, wipe out shareholders, and cannibalize the assets amongst themselves.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4882281.ece
http://wamustory.com
The seminal, and really important, debate is not about the efficacy of Geithner's plan --- but about democratic sway over corporatist Empire.
We are now entering the first world war of democracy vs. global corporatist empire.
‘Resolution authority’ of democratic government(s) over the global ruling-elite 'corporate financial Empire' is essential.
Almost 15 years ago David Korten wrote "When Corporations Rule the World" --- and now they do, if democratic government of the people doesn't assert the authority to ‘put them down’ when they have violated the public trust, the public charter, and are wrecking our human political economy.
Alan MacDonald
Sanford, Maine
It's been very troubling to see Republicans play very cynical politics as if these were ordinary times and they were making a tactical play over a farm bill or something. There is a principled opposition one could mount, but they keep raising red herrings and minutia, and their occasional good points -- e.g., about deficit spending -- are soaked in hypocrisy. It could only get more absurd if Tom DeLay were still leading the opposition.
With the shortcomings of the Obamans and Dems in congress, a smarter opposition is needed.
Ouch.
Bravo.
But we're still dicing around the real problem, and the ongoing confidence-drain:
Too big to fail.
For those us on the left, the deal some of us are willing to cut with Geither and Obama Admin on what has come down goes like this: Geithner and the Executive Branch, with the necessary laws from Congress had damn well better create these new reigns and bits in the horses mouths of these runaway organizations. Anything short of doing so, with real bite, would represent the true sellout of the Government and the Taxpayer to the Corporatist oligarchs.
We are already extremely anxious and many of us very doubtful that this reigning in will actually take place. The world economy is so huge and complex that if government does not up its proportion of control, global corporatist capital will have won the game, set, and match. We're hoping we can come back from being down game and set.
I was surprised that the government _didn't_ have that power over other financial companies. IMHO any company being "bailed out" should be considered in receivership, with all assets potentially up for sale at whatever price they'll fetch at that moment.
That should go for AIG, whose normal insurance operations ought to be quite valuable.
A bigger question is whether it's going to be possible to submit new financial instruments to regulation as soon as they appear, because this is a business always looking for a way to make big leveraged bets in places where no-one's looking.
One can't bring a new drug onto the market without FDA testing and approval.