When a company wants to fend off a hostile takeover, its board may seek to put in place so-called "poison pill" defenses - i.e., measures that will make the firm less desirable if purchased, but which ideally will not encumber its operations if it stays independent.
Large complex cross-border financial institutions run with exactly such a structure in place, but it has the effect of making it very expensive for the government to takeover or shut down such firms, i.e., to push them into any form of bankruptcy.
To understand this more clearly you can,
The Citigroup situation is simple. They would like to downsize slightly, and are under some pressure to do so. It is hard to sell assets at a decent price in this environment, so why don't they just spin off companies - e.g., quickly create five companies in which each original shareholder gets a commensurate stake?
The answer is that Citi's debt is generally cross-guaranteed across various parts of the company. US and foreign creditors have a claim on the whole thing, more or less (including the international parts), and you can't break it apart without upsetting them. The cross-border dimensions make everything that much more knotty.
Senator Kaufman explains what this means - essentially the "resolution authority" proposed in the Dodd legislation is meaningless. How would any administration put a huge bank into any kind of "resolution" (a FDIC-type bank closure, scaled up to big banks) when it knows that doing so would trigger default across all the complex pieces of this multinational empire?
You could do it if you are willing to accept the costs - and if you understand there are big drawbacks to providing an unconditional bailout of the 2009 variety. But will a future administration be willing to take that decision? The Obama administration was not - and big finance will only become bigger and more complex as we move forward.
If you look into the eyes of the decision-makers from Spring 2009, they honestly believe that taking over Citi or Bank of America would have caused greater financial trouble and a worse recession. You can argue about their true motivation all you want; this is irrelevant. The point is that the structures in place last year remain unchanged today. If a megabank shut-down under pressure was impossible for our policymakers last year, how exactly will the situation change after the Dodd bill passes - remembering that our current policymakers or a close facsimile will run this country for the indefinite future?
Senator Kaufman is strong too on what this all means. By all accounts, this Senator is not a person who came to the boom-bust-bailout debate with strong preconceived notions, just someone who has listened carefully to the arguments on all sides. And, unlike most politicians, this Senator does not need to raise money.
Banks that are "too big to fail" are simply too big. Making them smaller may not be sufficient to prevent major crises in the future - Senator Kaufman sensibly also supports a long list of related reforms, including for derivatives markets (see his other speeches on this topic: first, second) - but rolling back our biggest and most dangerous banks certainly is necessary. And there is simply no evidence that banks on today's modern scale convey any benefits to society.
Massive banks cannot be controlled, at least not in the US context; we are not Canada. "Smart regulation" in this context is an oxymoron. Our regulators have been captured by the ideology of finance for 20 years; the big banks industry are not about to let them out on parole now.
For a long while, the Obama administration insisted that size caps for banks were not on the table. Then, in January, the president himself announced the Volcker Rules - which include a size cap for banks. We've argued this cap should be even tighter - big banks can get smaller in an orderly fashion and regulators can help - but still any cap would be a step in the right direction.
Yet there is no size cap in Senator Dodd's bill.
Given that this White House has shown it can achieve considerable things, when it applies itself, why not pursue the Volcker Rules in full?
The White House is clearly not afraid of the business lobby - Deputy Secretary Neal Wolin took on the Chamber of Commerce this week regarding the Consumer Protection Agency for Financial Products; his tone was strong and his arguments were telling.
Yet the White House, Senator Dodd, and perhaps even Barney Frank are all stuck on one issue - they can't contemplate making our biggest banks smaller (or even limiting their size).
It's as if a very clever political poisoned pill has been put into place. If you act against the big banks they will .... What exactly? Threaten to prolong the recession? Help your opponents get elected? Run ads against everything you believe in?
Whatever the reason, write it down and think about it. How do you feel about a small set of big financial firms having this kind of power? How is that good for the rest of the business community, let alone regular citizens and our democracy?
This administration is perfectly capable of taking on the big banks. All that is missing is a little clarity of thought and a fair amount of political courage. Or they can just call up Senator Kaufman.
Simon Johnson: Hard Pressed, Senator Dodd Gives Ground
Senator Chris Dodd has good political antennae. He knows that his financial reform bill will come under severe pressure because it has a weak heart -- the provisions that deal with "too big to fail" are simply "too weak to make any sense."
Americans for Financial Reform
Financial reform diluted with bankers in mix - Eye on the Economy ...
Senate panel seen approving financial reform | Reuters
Senators Plan To Flood Financial Reform Bill With Nearly 400 ...
The Pew Economic Policy Group | Financial Reform Project
Will Republicans Support Financial Reform? - Paul Krugman Blog ...
House approves financial reform bill - - POLITICO.com
Playing Dodd: Why Politics Favors His Financial Reform Bill | BNET ...
Sen. Dodd urges quick action on financial reform | Reuters
City Brights: Zennie Abraham : Chris Dodd's financial reform ...
Dodd introduces financial reform legislation - Washington Times
Senator Dodd's Financial Reform Bill: Trying to Prop Up a Broken ...
Senator Chris Dodd Unveils Sweeping Financial Reform Legislation ...
On financial reform, Dodd gives activist shareholders more power ...
Dodd expected to offer more modest financial reform legislation ...
These are three possiblities how our financial system could have evolved after the nationalization (also called bail-out):
1. These banks would have been slashed the week they have been nationalized. The government would set new rates to make loans, credits, etc. affordable without forcing the banks into bankruptcy. Several decentralized banks are less likely to be too-big-to-fail banks.
2. These banks would have been nationalized and united to one government-owned (not run) bank that makes loans, and credits available at a rate that keeps banks self-sufficient. People would be happy, the government wouldn't have to worry about too-big-to-fail because it is informed.
3. These banks would be nationalized and kept in their current size. But the government would have the power over how much those banks can charge for fees, rates, credits, loans, etc. They would also need approval from the government for large investments.
Everything would be possible if our government wouldn't be so coward when it is time to do the right thing.
SilentSolidarity
Consolidation of wealth is consolidation of power. Power corrupts. Absolute power corrupts absolutely.
I, for one, would rather see a total collapse of the economy. It would be better to build a better system out of the rubble. A system with the regulations and protections that will prevent a future catastrophe.
~;^}>
However we should always respect the fact that we are fellow Americans during our debates, proposals, compromises, and conflict resolution. Our forefathers always re-united after the politics was over, leaving as friends. The extremists on both sides of a debate should be careful that they do not burn their bridges. We should all come together again, despite the despicable behavior of the GOP and the poor example they set. Rise above it, we can do better.
The correct term should be "Too Big TO BE ALLOWED To Fail."
The Democrats seem to have a tremendous problem with proper framing and naming of issues. This one could be put into very simple terms:
"Too big to be allowed to fail is too big to be allowed to exist."
If the failure of a particular corporation/company/business/whatever would cause unacceptable harm to the economy, then that entity needs to be forcibly broken up into components in such a way that those conditions no longer exist, for the safety of the economy and the country. Call it a "National Security" priority.
To prevent the "too big to be allowed to fail" conditions from occurring again, I propose a progressive multi-tiered corporate tax system where yearly profits over X (to be determined) are taxed at [are you insane?] percent.
*witholding stiffels any possibility of a tax strike and should never be allowed.
One of the priorities is "rolling back our biggest and most dangerous banks certainly is necessary".
We need to separate traditional banking & savings from investment banking and other forms of gambling with other peoples money. We need to severely regulate the speculators that distort our markets and skim the profits away from the rest of us. We need to close the tax loopholes and tax shelters they use ( even to the extent that they pay little or no taxes at all!). Their executive compensation and pay needs to be brought into control, and in limited proportion to front-line workers pay. We need to impose a stiff luxury tax, and excess profit tax. We need to take back our economy now!
Unfortunately, with the Supreme Court decision on Corporations and the First amendment, we seem to be sprinting in the wrong direction to even consider a fix at this point in our history.
However, TBTF has affected the old pocket book, so I would say it is more than just politics.
BTW, this is not an endorsement of multi-tranche CDOs or CDSs. It's just an observation that even if such speculative junk exists, as long as no single failure can drag down the whole world economy, we can live with it.
Size does matter.
Analyzing the data, it seems we went awry with "free trade", where we're supposed to compete with a laissez-faire approach, while our competitors are totalitarian regimes that can fix wages and other economic parameters so that the nation wins. We're supposed to be oblivious to who's the creditor nation and who's the creditor nation in deciding on the policy. The ideology alone should rule, and data indicating adverse results should be ignored.
The "too big to fail" concept should be looked at as being like a hostage situation. What it really means is, if we don't pay off the hostage takers (the banks), then they'll kill the hostage (the economy). Well, we've paid off the hostage takers, but we didn't get the hostage back, and as far as I can tell, certain institutions became "too bigger to fail".
Seems to me, if we have to pay off the hostage takers, we should be getting the hostage back. (That translates into eliminating the concept of "too big to fail.)
One thing I want to know is, since the banks were redistributing the risk in the form of $145B bonuses, ... how many of these banks were being given interest free or below market rate loans from the fed?
Seems to me, if one is in a hole that they want to get out of, then, the first step is to stop digging.
But if the Volcker Rules are invoked, then out of mere spite the big banks will throw America into a Great Depression.
Tough choice.
Seriously. don't believe me???
I'll personally send you 25.00 with paypal RIGHT NOW if you can watch even 6 minutes of this withOUT crying (or vomiting)
Seriously.
Try it.
http://evanmarkfilms.com/blog/filmography/withnoonetoprotectthem/