'Too Big To Fail'? Wait - What About Anti-Trust? 11 comments
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At each announcement of a subsequent bailout or other beneficial program to the banking industry, the anger of the US wealth holders has grown. It started with disappointment and grew first to irritation. With the announcement of TARP, this irritation grew to annoyance. With the announcement of Geithner’s latest plan, the annoyance has advanced into fury. This is not because the people do not understand the reason for the bailout: they respect the need for a functional financial system. Instead, they do not understand why the legal recourses we have in place are not adequate to deal with the problems.
We have a long and very successful history of using bankruptcy, conservatorship, and other forms of reorganization to deal with failed firms. It has worked for the steel industry, for real estate (multiple times), the banking industry and for tens of thousands of other individual organizations that have either been rehabilitated through the Chapter 11 process or liquidated through the Chapter 7. Very intelligent people are beginning to ask why this time around is different.
The Federal Reserve, the Treasury and the executive branch are telling the people that this time is different. To some degree, they have a point. The financial system is of central importance to the economy and, without it functioning, more pain will be felt than necessary.
But this does not mean we need to continue to hand out unfathomable sums of wealth to the management, debt holders and owners of these organizations. They took risk and happily accepted their bonuses, interest payments, and dividends and capital gains while times were good. Now, when things have turned sour, are any of them volunteering to reinvest their prior distributions to keep the industries viable? I have yet to see a single senior executive, bondholder, or shareholder make a material new investment into any of these institutions. This doesn’t seem like a fair allocation of risks to this pundit.
Instead, these stakeholders went hat in hand to the government and demand a bailout. They swore that without it, the system would fail, but they refused to give up their beneficial economics to allow the system to survive. Instead, they threatened complete destruction of the country we all love without a bailout on their terms.
Under the reorganization process, the shareholders would have been wiped out (including management, who in the financial space own sizeable portions of these companies or take huge distributions of profit). But, due to the importance of this sector to the economy as a whole, their demands were met outside of the formal legal structure. They have benefited not only from the most visible programs like TARP and TALF, but also from the discount window, TSLF, PDCF, MMIFF. While esoteric in function, each of these programs represents a de facto transfer of wealth from holders of USD assets (or future income) to the stakeholders and employees of the recipient financial institutions.
The people now need answers. They don’t need to be told that the financial system is in dire straits or that it cannot fail: They already know and acknowledge that. They need to be told why the specific allocation of economics are fair and necessary as well as why existing avenues under the legal system are not adequate to solve the problem.
If the answer is truly that these firms are “too big to fail” then we must immediately take steps to have them dismantled. Individual firms cannot be allowed to be (or become) large enough to hold the government or the people it represents hostage. We already have antitrust laws in place to deal with this problem too. Let us use them.
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Makes perfect sense to me. Good article.
We need to put some teeth into the graduated corporate income tax, and ensure that industry consolidation is resisted by the threat of ever-increasing tax burden. A healthy economic ecosystem should not by dominated by a few super-sized actors, regardless of their financial health, but should be characterized by many smaller, strong competitors, with the weakest denied the easy-out of complete takeover by the strong. Creative destruction requires the weakest to be dismantled, not swallowed or bailed out. Otherwise, you wind up with Citigroup, an organization with no organic growth, capitalized entirely by ever increasing risk, and threatening to transfer that risk to the American public.
Like the author, I am perplexed by the government's sense that its hands were completely tied in this affair. Riddle me this: why is it that for years and years businesspeople used to say that "contracts were made to be broken," but as soon as the government steps in to financially back a company, they're all of a sudden saying that we have to "protect the sanctity of contracts?," and our government is right there to support that contention. I guess we can all afford to take the high road when we don't have to pay the bill.
When companies don't have unlimited funds at their disposal, it's amazing how creative and cooperative they can be with each other in renegotiating their obligations. If AIG had told its counterparties that they could either have their insurance premiums back or get nothing in a bankruptcy, wouldn't those counterparties have been willing to work something out? Instead, the government raced in with billions of dollars and made good on 40-to-one bets. Goodbye $170 billion of taxpayer money. How smart was that?
Businesses restructure deals and renegotiate contracts with employees, vendors, customers, and business partners all the time. The likes of Goldman Sachs are probably laughing their asses off at how naïve the government was for making good on their bets. If the government can't learn how to do business the way businesses do, then maybe it shouldn't be rushing into the corporate sector with billions of dollars in taxpayer money.
And don't let our lawmakers off easy. They took huge donations from the banks and brokers and then allowed the financial firms to do whatever they wanted. They -- both Republicans and Democrats -- could have prevented all of this from happening.
comcast is another type problem. they go in and undercut the competition and just take the loss until they kill the local competitor. then they raise their price and squeeze the public from the new acquisition.
comcast seems to have bought a decent piece of the present officeholders.
greenguy
points something out. i would suggest breaking up the unions so they cannot strangle a company. they are the other side of the lack of competition problem. the union protects poor work ethics and shoddy workmanship. it is to hard to fire the entrenched. i do not want to see wage caps on anyone. that is arbitrary control. the brain surgeon probably wants more for his skill and expertise. it is a fight against accepting mediocrity. let the cream rise to the top. we don't want doctors that are really only smart enough to fasten the boltss on a car part.
Congress does not even read the legislation they pass anymore; What results would you expect?
The collateral damage to the "Financial System" is more of an inconvenience to the architects of destruction.
The Complexity Of Corruption Is Vast.
To Assume Benevolence Is Foolish.