Is This the End of 'Too Big to Fail'? 23 comments
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WASHINGTON -- A deal between the Treasury Department and a key House Democrat would give the government sweeping new powers to police the country's largest financial companies, including the ability to seize and break up failing companies and order large firms to shrink.
Uh huh.
The proposal would require financial firms with more than $10 billion of assets to pay for the unwinding of a collapsed competitor. The measure would also give the Federal Reserve the power to direct any large financial holding company to sell or transfer assets or stop certain activities if the central bank determined there could be a "threat to the safety and soundness of such company or to the financial stability of the United States." This suggests the Fed would win new authority to order companies to shrink.
The Fed.
The same Fed that ignored the subprime lending fiasco? The same Fed that gave a rubber stamp to a black-letter unlawful merger between Citi (C) and Travelers, then lobbied for retroactive passage of Gramm-Leach-Bliley to legitimate it? The same Fed that permitted primary dealers and other large financial institutions under its supervision to transact credit default swaps with AIG (AIG) despite the fact that AIG's financial products group was inadequately capitalized (by a factor of 50 or more) to cover those transactions?
The Hill of course sees it differently:
The Financial Services Committee and the Obama Administration are committed to ensuring that the taxpayers are never again called upon to take responsibility for Wall Street’s business decisions. The bill creates a strong, inter-agency council to monitor and oversee stability of the financial system and address threats to that stability. The bill provides strengthened supervision for large, interconnected financial firms to prevent failure. A new resolution regime will ensure that firms that fail despite these measures will do so in a way that minimizes impacts on taxpayers, the health of the financial system and the overall economy.
Let's not mince words - there is good in here. Among the good parts of this bill are that "too big to fail" will become formally invalid as public policy.
It requires the failed firm's creditors and shareholders to bear "first loss", and, if the brief is to be believed, only if they are entirely wiped out and there remains a shortfall will assessments be laid - on other large financial institutions, not the taxpayer. This should result in large amounts of "social pressure" to stop stupid actions, since the risk of them can fall on other large market participants.
It requires that securitized products retain 10% of the risk (which can be reduced to 5% but not lower by regulators) of any product so securitized, stopping the "pass it all on and watch the bomb go off on the back of the fool who you sold it to" game.
And finally, it requires approval of the Treasury Secretary for The Fed's employment of 13(3) authority - the blanket "we can lend to anyone" authority that The Fed has cited (and in my opinion both abused and exceeds the limits of) during this crisis. In addition, it prohibits "special facilities" entirely - that's a real improvement.
Left unanswered is whether there are criminal penalties imposed for violations. My expectation is that like the rest of the "toothless tiger that roared" games out of Washington DC, the critical "or else" is missing, but we'll see once the markup is complete.
I cannot endorse this as written, but I can say that it is a vast improvement over what we have now, and what has happened to date. For The Fed to have that primary seat at the table and the "final backup authority" they must be subject to regular and comprehensive audit, so as to insure that the people can see they are complying with the strictures of law - otherwise any so-called "restrictions" are nothing other than a joke.
In addition it is critical that this law include criminal penalties for violations as any failure to follow the constraints laid down will of necessity expose the taxpayer to enormous loss (as has occurred in this instance), and as there is no reasonable civil penalty available in such a circumstance, severe federal criminal penalties are appropriate.
We must not only end "too big to fail" we must also end "too bribed to give a damn", which has permeated the entirety of Washington DC over the last three decades.
The bill being debated in committee hearing today (and presumably being marked up soon) is a good start, but without the addition of full "sunshine" and criminal penalties for violations to the mix it will remain merely a set of suggestions that can and will be ignored when it suits the "rich and powerful", just as has been "Prompt Corrective Action" and the existing bevy of alleged "laws" that supposedly prohibit and should have prevented the outrageous practices that led us into this mess.
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Into the Breach, Take your last paragraph and Substitute -Federal, State and Local Governments- for financial institutions.
Lets bring fiscal responsibility into Government on all levels.
A "pipe" dream.
All FED employees and politicians need not respond. We already know whose bed you sleep in and how your paid for your "Services".
Our Founding Fathers believed in the checks and balances of power and thus they created three branches of government.
Throughout this financial crisis, the executive branch has been the one dictating which institutions must be saved and which ones sacrificed.
What was the point of bankruptcy laws and court when the Treasury and the FDIC could rearrange pay order?
Did Wamu and Wachovia really fail?
Did we really need to save AIG to prevent system wide collapse or was it bailed out simply for Goldman's bonus?
By the way, please be careful criticizing FDIC-
"'Inspired by your post, I looked into the agreements posted on the FDIC site and blogged about it as well. The FDIC became obsessed with my site/post (visiting my blog post over 20 times in just over 2 days). I took it down, but not sure that I should have.'
activerain.com/blogsvi...
'Once I told them who I was and my intentions to expose their role in this huge cover-up, the FDIC (as I later found out) made a call to federal agents to pay me a visit. And that they did. Soon after, I found myself in an interrogation room. Let me be clear, the FDIC ombudsman is lying crooked SOB and is guilty of providing baseless/false information to federal agents. This man should be locked up in jail.
It appears as if the FDIC misused its federal authority to put some heat on me by informing the FDA terrorist division that I was a person of interest to question regarding the white powder mailings sent to JP Morgan and the Federal Reserve. Yes that’s right, I said the FDIC misused its federal authority. You see, despite the claims made by Shelia Bair and others, the FDIC is not really an independent insurer. They are really a branch of the U.S. Treasury, which might explain why Shelia Bair used to work at the Department of Treasury'"
marketoracle.co.uk/Art...
*imho*
This was always the idea behind the FDIC, a form of government supervised self-insurance.
On Oct 28 04:09 PM doubleguns wrote:
> I want to know who believes we can trust the FED with this authority
> and corruption will not follow/continue. Is there even one out there
> that believes this?
>
> All FED employees and politicians need not respond. We already know
> whose bed you sleep in and how your paid for your "Services".
A single bank should have multiple listing in the stock market with operations that are insulated from each other with no intermixing of risk types or racketeering. Financial companies should offer salaries that are directly related to the losses and gains and the executive should suffer losses or negative salaries deducted from what they have banked when their companies collapse or suffer major losses.
Great phrasing --- and dead-on.
On Oct 29 11:12 AM H.J. Huneycutt wrote:
> "We must not only end "too big to fail" we must also end "too bribed
> to give a damn", which has permeated the entirety of Washington DC
> over the last three decades."
>
> Great phrasing --- and dead-on.
In any case, if they are too big to fail, it means they are too big, period. Accordingly they would need to be charged a risk premium to be "too big to fail" as right now they are free-riding the risk to the taxpayers. Since the congress is so keen on "progressive" tax schemes, then maybe it can be progressive in leverage ratios (fat chance). in that regard, the risk premium to be paid would be in reigned-in lending ratios. Basically, the bigger you are as a bank, the more conservative the lending ratio you are allowed. So the huge mega-banks are required to be 10-to-1 or something like that, and the smaller regional banks can be allowed a higher ratio, since if they fail, it is not systemically risky as if Citi were to founder. Of course, one might suppose that the big banks might try to make riskier loans to make more money under such a regime. But that would happen anyways, much better bad loans at 10:1 then 30:1. On another note, under such a scheme, maybe the big banks would be "encouraged" to spin-off/sell-off disparate operations/portfolios into different smaller companies in order to shrink themselves and be able to lend at higher ratios again.
1. The UE and in particular the UK are also considering how best to address their versions of TBTF. It is important that the US and EU devise compatible solutions and implement their respective plans in a coordinated fashion so that the big banks and near banks don’t simply undercut efforts at reform by blackmail threats to take their considerable business and assets to another jurisdiction.
2. While not necessarily directly at issue in the TBTF debate, the parallel issue of whether to enact and implement a new version of the Glass-Steagall Act has significant implication for the TBTF debate.
LOL Social pressure versus greed and competition.
No contest.
> This was just so wrong.
>
> Our Founding Fathers believed in the checks and balances of power
> and thus they created three branches of government.
>
The founding fathers would be appalled. The legislative branch is terminally sick, broken. Elections every 2 years means one year electioneering, one year supposedly doing stuff. political parties are therefore captive of big election contributors. Not to mention the prospects of a post-congress job as either a lobbyist or board member at their previous financial benefactor.
The current legislative model is worse than the banking model.
Wildebeast, why would the Founding fathers be appalled at the ability of our government to find another way to insure taxpayers are not on the hook for this resolution of an insolvent bank? They fought the Revolutionary War because the Bank of England abused them!!
On Oct 28 04:16 PM tripleblack wrote:
> [quote] It requires the failed firm's creditors and shareholders
> to bear "first loss", and, if the brief is to be believed, only if
> they are entirely wiped out and there remains a shortfall will assessments
> be laid - on other large financial institutions, not the taxpayer.
> This should result in large amounts of "social pressure" to stop
> stupid actions, since the risk of them can fall on other large market
> participants. [quote]
>
> This was always the idea behind the FDIC, a form of government supervised
> self-insurance.
Less power for the Fed. The Fed is a corrupt cartel that has ruined this country. Less power for the Fed -- perhaps, if the Fed doesn't want to be audited, we'll just disband the Fed.
We rule the Fed. The Fed does not rule us.