President Obama turned the corner in his address to the joint Houses of Congress. How? He began to shift from management to leadership. While acknowledging the hole in which we find ourselves, he articulated his vision for pulling this country (and the world) out from that hole and, more importantly, what lofty goals lay beyond.
He hit the mark when he called for banks to start lending and for an overhaul of our regulatory system. (In fact, he chastised the banks for failing to lend.) Parsing his speech further, the president put to rest the notion that banks will be nationalized. Behind his declaration that the federal government will carefully monitor lending and bank management is the notion of conservatorship, not nationalization.
How should it work? We believe three principles should guide actions designed to restore health to the financial system:
· immediate protective conservatorship of the banking conglomerates in distress;
· restructuring of the financial services industry; and
· comprehensive regulatory modernization.
We begin by pointing out the obvious: investors will not be attracted to the plague they perceive on the banks' balance sheets. There can be no disagreement that toxic assets must be excised, but our strategy requires that this be done carefully and patiently. The burdened banks should be placed under protective conservatorship. To be clear, though, we are not talking about the traditional receivership and very rarely used conservatorship powers of the FDIC, which were designed for seizure situations involving isolated institutions that could be resolved easily or closed permanently. Rather, we are talking about something more akin to what was done with Freddie Mac and Fannie Mae. As with those institutions, the intent of our proposal is to signal that the institutions involved are likely to survive in restructured form so long as they are protected from the immediate demands of creditors. This step is necessary if financial institutions are to become attractive to investors again.
This would be different from nationalization, where this is no indication that government-backed managers would do any better job than their private counterparts. Yet inaction is not the answer either. When all is said and done we cannot be left with banks and other financial institutions that cannot be managed at current scale or in combinations that continue to intensify dangerous levels of risk, conflict of interest and inconsistent missions.
We believe that such conservatorships are the appropriate vehicles to implement a process of purging the banks of their toxins and restoring to the marketplace a strong array of good banks. The conservatorship is the most effective use of the power government now has to control the future of the financial system and force the behemoths to
· shed their healthy assets, devolving these into separated "good" banks, investment companies and insurance companies which can attract investor funds;
· demonstrate that the devolved entities have a manageable coherence of function; and
· if needed, divest surplus assets in order to reduce the devolved subsidiaries to levels of proven manageability (i.e. sizes at which there is a clear record of high performance and safe management).
Meanwhile, the government would provide continued support in the form of the conservatorship that offers protection from creditors and possible backstops against losses for the remaining "bad asset" husks.
This system worked well to stabilize Fannie and Freddie, so it should be accorded a level of credibility that a purely new program would not enjoy. In addition (and unlike the Fannie/Freddie approach) shareholders would not only be apportioned a share of the potential losses but would also receive shares in the new green shoots.
At the same time, a leaner, more diversified financial services industry requires more effective oversight. This implies, as almost everyone seems to agree, that we need major regulatory modernization. Whether a "super regulator" is the answer is unclear, given the problems of functional diversity and the limitations of capacity and scale already outlined. But the regulatory system should at least be coherent, coordinated and comprehensive, which it is not at present, and capable of explanation in two large-type pages or less, which is also not the case now.
The hub of any evolving regulatory system must be an agency with authority to monitor the safety and stability of the financial system and its multiple participants, whether they be national banks, state banks, savings and loans, hedge funds, insurance companies or the like. To accomplish this objective, it is high time to set aside the regulatory turf battles that have plagued our fragmented financial system for a century or more.
Would this course of action wind back the clock? Yes, to some degree, though only to basic principles. Geographic restrictions probably never made sense once networks and systems were developed for managing, operating and servicing remotely. But the wisdom that rebelled against unbridled product deregulation has been vindicated over and over again, from the collapse of the Citi-Travelers-Salomon combination to the present debacle. Glass-Steagall was out of date, but the concerns about conflicts of interest within the financial industry and opportunities for regulatory arbitrage are not. And our vanity about management capacity has surely been deflated over the past few weeks as we have learned that stupidity prospers at every level of management to the very highest, and that the self-assuredness of executive titans becomes downright dangerous when basic information for decisions, let alone checks and balances, is more of a management and regulatory mantra than something people actually have or can use.
Just because investment bankers, commercial bankers and retail bankers think they can generate excess profits by being freed to operate under the discipline of the market, such as it has proved to be, does not mean it is un-American to stop them if this hurts us all. Conservatorship should be taxpayer-focused, not industry-focused.
The authors are on the faculty at the Duke University School of Law.
It's ok for the Gov;t to controll every aspect of your life but one the right to kill a baby in the wonb.
That is untouchable.
What's missing? What's missing is a plan for getting the thieves out of the banks, and into jail. Fraud on this scale has not been seen since France in the 18th century. The French revolution started out as an attempt to replace the monarchy with a bourgeoise democracy, but it quickly deteriorated into the Reign of Terror.
The public is not going to shovel uncontrolled $trillions into the hands of the very same people who stole the money in the first place. Most people still don't realize how much was stolen, but they do know that the people who stole are still in place and demanding $trillions more. As the public comes to realize the scale of the theft (far beyond any scam that Hollywood could have dreamed up), they are going to get really sore.
Then again, the CEOs were following the example of the Bush administration, weren't they? Listening only to "intel" that supported bad decision making . . . how can that lead to anything BUT more bad decisions.
"Nationalization" is a bridge to somewhere, too: reprivatized banks! And it is a far cheaper, shorter, more logical, and more direct bridge to healthy banks, than pouring taxpayer resources into insolvent zombies.
All this talk of "conservatorship" is bunk. What's basically happened is that Obama has chosen to protect shareholders and corrupt and incompetent executives from the consequences of their greed and stupidity, at potentially massive cost and risk to taxpayers.
Why? Why should the shareholders' patently failed investments be preserved?
Why should we transfer taxpayer funds into the undeserving pockets of these people?
Why shouldn't these utterly irresponsible, avaricious, and incompetent executives lose their jobs?
Through their grotesque, short-sighted greed and stupendous, utter failure, they have destroyed the financial industry and maimed the economy. That they should keep their jobs is an outrage. Throw these losers out in the street and give young blood a chance!
It is bunk. It's the Hope! trick. But not original to Obama.
When there is a clamor for actual written laws and regulations, and the threat of enforcement of the same, the politician who wants to protect his special interests comes out and gives "hope" that he will do something about it, like "monitoring" his friends, which is no commitment at all, and not a compromise either. Rather, it is a signal nothing is going to happen after all.
The national Democratic party has been in the pocket of the financial services sector for years. The Obama administration is just brazen about it, and why not? The media asks few questions, and the Republicans generally are in favor of anything that looks like giving more money to the wealthy.
"(In fact, he chastised the banks for failing to lend.) "
Bush did the same thing.
"Behind his declaration that the federal government will carefully monitor lending and bank management..."
Which means nothing in politics. Literally, when a politician says something like that, there should be a translator present explaining "He means he is going to nothing of substance."
"...is the notion of conservatorship, not nationalization."
No it is not. Sorry, but that's wishful thinking.
Boot the execs, wipe out shareholders, give bondholders a massive haircut, break the zombie banks up, and sell them off piece by piece.