Too Big to Jail

The government is exploring expansive controls over "too big to fail" financial institutions. According to The New York Times, the House Financial Services Committee may introduce legislation this week.

The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.

I have some sympathy for increasing the government's regulatory power. If a nation has no choice but to rescue banks critical to its welfare, shouldn't its government possess the right tools?

But "wipe out shareholders and change the terms of existing loans?"

I wonder how the capital markets will react. I wonder whether it makes sense to invest in organizations like J.P. Morgan Chase or Goldman Sachs, two institutions core to our economic well being. Will these organizations, big and powerful from success, pay more for capital and lose their competitive edge given the overhang of federal intrusion? I wonder whether the government will abuse its power by changing the terms of existing loans to support the public policy goals of administrations -- Democrat or Republican.

Then, there's that other problem.

Are government officials equipped to run big banks? The Chairman of the House Committee on Ways and Means is under investigation for an alleged failure to report hundreds of thousands in rental income. The Secretary of the Treasury had his own tax problems.

Maybe they belong in the "big house."

Both parties have their share of scandals, some of which have gone unpunished. But let's put the incendiary issue of financial ethics aside for the moment. Back in 2003, the current Chairman of the House Financial Services Committee argued that Fannie Mae and Freddie Mac were in good shape. Here's what The New York Times reported.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Hello, subprime.

Uncle Sam is wrestling with a tough issue that must be addressed -- how to govern organizations vital to our nation's economic welfare. But I'd rather see legislators focus on leverage and preventive cures than after-the-fact remedies like "amending loans."

And don't forget to include the big hedge funds who operate under fewer constraints.

Norb Vonnegut

 

 

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Comments

[Amazed1985]

I don't understand what the problem is. Most (I guess All) people would love to buy life insurance AFTER they are dead but it doesn't work that way. Likewise, insurance companies are smart enough to make people pay for insurance BEFORE they need it. They have a pool of money to cover insurance claims. Likewise, the need to model an insurance system for the financial institutions after that of the FDIC bank insurance or even auto insurance. Both have worked well over time. If you get lots of tickets (take more risk) or have an expensive sports car (lots of assets to protect) you pay more insurance. When you get in a wreck (financial crisis), the insurance will pay for the problem. Of course the insurance premiums need to be matched with the risk which is not the case with the FDIC right now. The FDIC would like to raise premiums on banks to cover future loses but congress and the Obama administration is not allowing these needed higher premiums. Of course, that will leave us tax payers responsible for the shortfall.

[condor101]

"Are government officials equipped to run big banks?" Absolutely! Contrary to the propaganda from the right wing and their MSM, there are a lot of very intelligent people that work in the government sector. In addition, if need be, there is a pool of millions of americans with banking and finance experience to draw talent and replace the current corrupt top bankers that brought this country to near financial ruin.

Our government manages our military; The very best military in the world. Our government manages nuclear weapons and keeps america safe. Do I believe our government can manage bailed out banks? Absolutely!
With a takeover, should loans be amended? Absolutely!

It's necessary to control and regulate the Banks and stop the corruption that is taking place before our eyes.

[Norb Vonnegut - Huffpost Blogger]

Condor,

I agree it's important to stop corruption. I also agree our Armed Forces are exceptional. But while members of the military train and build their skills as government employees, traders build their skills on Wall Street—not inside the government. I disagree with your suggestion that Uncle Sam's military competence ensures the government's financial acumen.

You might be interested in the attached link: http://www.bloomberg.com/apps/news?pid=20601039&sid=aLllpEiqrgpQ.

The article paints an interesting picture. It appears that Uncle Sam enriched several financial institutions as it negotiated credit swaps on behalf of AIG, a financial institution it now controls. Some of those same financial institutions are making so much money during 2009 that they can afford to pay huge bonuses.

Meanwhile, AIG (under government control) ceded much of its ability to participate in the rebound. Here's another article you should review: http://online.wsj.com/article/SB125677194092914501.html?mod=WSJ_hps_LEFTWhatsNews. In particular, check out Hank Greenberg's solution. Had Uncle Sam listened, I believe we'd be closer to recouping the $80 billion that AIG still owes.

Norb Vonnegut