Should the banks have to bail each other out?
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On the surface, it seems only fair — let the fat cats in the financial biz be responsible for bailing out their brethren when said brethren seem to be going down for the count.
But does it really make sense?
Here’s how the New York Times describes pending legislation:
The legislation, drafted jointly by Treasury officials and Representative Barney Frank, the head of the House Financial Services Committee, would create a special fund, paid by assessments on financial companies with more than $10 billion in assets, to bear the costs of big firms that fail.
A statement by the committee said that the legislation followed a “polluter-pays model where the financial industry has to pay for its mistakes — not taxpayers.” Assessments on those companies would be made only after the collapse of a large institution, and the legislation gives the government authority to levy such payments over an extended period.
Now, the bill includes a lot of good stuff about regulating the industry, about upping mandatory capital reserves, about forcing greater transparency on hedge funds and private equity, about preventing future Bernie Madioffs and Lehmans and such. I applaud all of it.
But I just not comfortable with blanket guilt and responsibility. The “polluter pays” rule means that if Dow Chemical, say, messes up a river, Dow Chemical pays — not Dupont or Bayer. So, putting it in financial terms, if Madoff commits fraud, should my financial advisor have to pay his victims? If BofA makes bad loans, should Citigroup have to bail them out (those are probably the two lousiest examples I could have chosen, but what the heck…)? And, if healthy banks are held responsible for bailing out rivals, should they also have a right to prevent those rivals from taking potentially catastrophic risks? Is this slope too slippery?
I’m not sure it is — but just as importantly, I’m not sure it’s not. A lot more thinking has to go into this bill before it’s both fair and enforceable.
And on the subject of those who pay should have a say in the rules…
Now GMAC, which has been bailed out twice already, to the tune of $12.5 billion, needs still more money. And if we give it to them, we — meaning we taxpayers — could well become majority owners of the company. And yet, according to the Times, the government still could not oust management.
The laws have got to be changed. Shareholders have got to be able to throw the youknowwhats out. And if the government is the largest shareholder…
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If the alternatives are:
1) the other banks pay
2) we the people pay
3) a huge bank fails and our financial system collapses
I’ll take 1. You have expressed disagreement, but not suggested alternatives.
Ah, but I have, many a time. I genuinely believe that under existing antitrust legislation, the government could force the break-up of any institution that would be “too big to fail”, and that by forcing transparency on the creation and trading of exotic financial instruments, they could also make it a lot harder for bonus-chasing executives to take huge gambles with shareholder’s money. But I still don’t want to force Ford to pay for GM’s failures, etc.
In response to another comment. See in context »It is revealed that the 9/11 terrorists were known by both the FBI and the CIA but they did not communicate with each other, they did not connect the dots. Government response: Create a giant bureaucracy called Homeland Security that includes lots of agencies but not the FBI or CIA.
The health care industry’s biggest threat against society was runaway cost. Government response: More regulation, weak public option and no cost controls.
Government bails out banks, wall street and industry because of “too big to fail”. Why are they too big? Because of repeal of The Glass-Steagall Act of 1933. Government’s response: more regulation, a bigger fed, no control of boards or executives and no stopping “too big to fail”, allowing business as usual.
Our Government is:
a) Stupid
b) Ignorant
c) Corrupt
But I’m not following you, libtree. If repealing legislation — Glass-Steagall in this case — caused the problem, then why would reenacting this or similar legislation be a stupid, ignorant or corrupt response?
And as I’ve said many a time, i don’t think we need new legislation to get rid of too-big-to-fail. I think antitrust legislation on the books should do the trick
In response to another comment. See in context »They are not re-enacting Glass-Steagall and they should nor will antitrust ever be used against banks, antitrust is on the books when was the last time it was used? Microsoft vs. Netscape?
Congress is trying to frighten these companies without dealing with the underlying problem. The point was congress always avoids the obvious and goes instead for some smoke and mirrors. We will go on with pushing paper around enriching one sector without creating any value for the society. The financial sector is recovering and the news is the economy is growing. This is pure horseshit.
Look I admit this is not my area of expertise but banks are back squeezing the blood out of their customers with fees, even fees for not using credit cards and are not lending and still have loads of crap debts that are not on the books because of an accounting change. To me this is all about calming the average citizen to get them out there to shop.
It’s an illusion just like Homeland Security makes us safer and Health Care legislation will lower costs and protect Americans from private insurance companies and new financial regulations will stop another crash.
Compared to most of the world, I’m a cynic. Compared to you, I’m a polyanna! I still think that legislation can help matters, that regulation can force banks to do right by their customers, and that a calmed populace will be happier shopping (and yes, that spurs the economy) than they are stuffing their remaining pennies under their mattresses.
In response to another comment. See in context »Yeah, I have heard that before…but look I don’t think that a solution to avoiding another meltdown should revolve around the issue of who should pay for the rescue. Other banks cannot afford to pay for failure without putting a huge portion of their earning into escrow. That’ll be the day.
The plan on the table is complicated and convoluted and its design and purpose is obvious: Save the merger of Wall Street and Banks. It is still about risk. One institution gambles while the other is supposed to be about safety. Today there is nothing stopping a bank from taking a mortgage, chopping it up and selling it.
Another problem is that with this rescue big banks are getting bigger because small banks are failing at an alarming rate thus cutting what little competition there is. We can put the breaks on mergers but the remaining Wall Street giants are bigger with the fall of Lehman and now the banks will follow.
The only safe thing to do is break them up and that is not on the table.
Why?
In response to another comment. See in context »i read your comment twice, just to see if there was anything I disagreed with. It sounds to me that you and I are on the same page — am I missing something?
In response to another comment. See in context »Claudia,
Certainly, recognizing that banks are all in the game together is recognition that they are all in the Ponzi scheme together. But we can’t deny that we need the banks to grease the skids under our economy.
The problem with breaking up the too big to fail banks using anti-trust is that the smaller pieces might be less solvent than the big Kahunas. We could be gambling with the collapse of our economy. Now that might make the Teabaggers happy, but that’s because they are well-armed.
We’re going to agree to disagree on this one. I think the last year proved that big doesn’t mean solvent. If the smaller pieces weren’t viable, then let them disappear or merge with another smaller piece. The economy wouldn’t have imploded if just a small part of Lehman had gone down…I’ll stick with regulate and legislate…
In response to another comment. See in context »