'Too Big to Fail' Is Too Hot to Handle

Do we need to resolve the “Too Big To Fail” mantra?

Sheila Bair, FDIC Chair, wants the banks with assets of at least $10 billion (there are 117 such banks) to pre-fund a Financial Company Resolution Fund (FCRF). Bair thinks that this fund is necessary to remove the mantra of being “too big to fail”. Treasury Secretary Geithner wants taxpayers to cover a Systemic Risk Failure and then have the surviving big banks repay taxpayers over time. Both ideas are awful!

Our regulators do not understand the unintended consequences – Here are a few:

There are two Deadbeat Banks with assets move than $10 billion that have reneged on TARP Dividend payments in May and August? Sterling Financial (STSA) and UCBH Holdings (UCBH) are on the ValuEngine List of Problem Banks.

There are 26 banks on the ValuEngine List of Problem Banks with more than $10 billion in assets. These banks should be required to bring their C&D and CRE exposures within the ignored regulatory guidelines, as they are on my short list for Systemic Failure.

If I was on the Board of a bank with $10 to $12 billion in assets, I would advise the bank to downsize to have assets below $10 billion. If I was on the Board of one of the 30 banks with $7 billion to $10 billion in assets I would avoid helping the FDIC resolve bank failures and not seek purchasing another bank, so the bank can stay below the $10 billion asset line.

Pre-funded or post-funded assessments are a tax on earnings that must be passed onto customers in the form of tighter lending standards and fees.

Banks with $10 to $50 billion in assets should be left alone.

There are 34 banks with assets of more than $50 billion. Citigroup (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC) should be forced to have higher capital requirements as their assets exceed $1 trillion each.

Away from the Big Four, the FDIC should form a consortium of at least twelve banks with at least $50 billion in assets as Primary Bankers to help facilitate the 500 to 800 bank failures I expect by the end of 2012.

33 FDIC-Insured Banks reneged on August TARP Payments

The number of Deadbeat Banks increased by 18 in August, more than double the 15 in arrears for May.

Under the Capital Purchase Program of TARP, banks are required to pay a dividend of 5% per year for the first five years. The next Dividend payment is set for November 15. There are 23 Deadbeat Banks that are on the ValuEngine List of Problem Banks. Let’s tighten the rules here!

Another Sign of Recession - There are now 18.8 million vacant homes in the United States, as banks continue to seize properties from delinquent dwellers.

Disclosure I Hold No Positions in the Stocks I Cover.

Comments

[Ferdinand E...:]

I tell you what. Let's change the rules well AFTER the economy starts moving up again. Or maybe a better idea is to start THINKING ABOUT changing the rules well after the economy starts moving up again.

Oct 30 11:10 AM

[epeon:]

Any bank that received TARP money should be viewed as a fail institution. Therefore, as part of the "workout", the goal should be to reduce its size so that it is not "too big to fail." Thus citigroup and bank of america should be broken up into smaller banks that can be allowed to fail.

Oct 30 11:11 AM

[fwi:]

I would get rid of the problem of TBTF banks in three simple steps:
1. Would announce that the Federal Government will guarantee all deposits, money market accounts for individuals and business within all banks (large and small) so that there would be no motivation to start a run on one bank and crowd into another. THis would stop the hideous consequence of the Feds picking their winners and losers.
2. Would announce that no more, zero, money would be offered to the banks to shore up capital requirements. IF their ratio falls below the required level, then the bank must begin to do what all businesses, investors, and households do--start selling and don't stop until they have the required funds.
3. Would announce that the newly created "bank holding companies", a la Goldman Sachs, GMAC, etc would have no more privileges at the discount window. Much higher capital requirements for all proprietary trading would be instated.. Also, at the renunciation of bank holding status by any former investment bank, the cessation of all regulations thereof.

If a bank knows it is going to get back stopped by the government no matter what risk or lending decisions it makes, it ceases to be a bank, and it forevermore is a GSE. And if a Goldman Sachs is not privileged to get "free" money from the Feds, then there would be no benefit to staying a bank holding company. And if the capital reequirements are much higher for prop trading, the risk tolerance would precipitously drop.

None of these actions would be painless, the equity markets would drop, but the net effect would be banks that perform as banks rather than hedge funds or GSEs. And most importantly, all banks, whatever their size, would meet the same market risks as their peers. THe disequilibrium of the Great Shadow of the Fed that has caused the bloated nature of some banks, and the malnutrition of others would be gone.

"Tough Love" has been shown to be effective with hard core addicts. It is difficult and messy, but if the end result is a person --or a bank--free of the need for ever greater "fixes", then I think that it is worth it.

These actions would cause hundreds of banks to fail, though all depositors would be secure. It would cause the huge TBTF banks to drastically downsize. But the downsizing would be done by the bank professionals--not the government bureaucrats with every decision being political instead of economic. What would be left would be banks that were conservative enough or strong enough to conduct business without every transaction being nanny brokered.

Oct 30 12:24 PM

[greedcanbgood:]

epeon - Lest you forget that some institutions were forced to accept TARP funds....

Oct 30 04:01 PM

[MyBad:]

Question: In looking at STSA

Oct 30 06:31 PM

[MyBad:]

Why doesn't another bank buy this company? It's market value is less than $50 million, it has approx. $2.8 billion in cash and investments and no one shareholder controls more than 7.5% of its stock. For less than the money they are trying to raise, another institution could make a offer sufficient to get shareholder approval, take control, consolidate, cut out the waste and pick up a franchise with over 175 branches in a desirable part of the country. Where are the M&A players?

Oct 30 06:39 PM

[BRUCE E. W.:]

"Away from the Big Four, the FDIC should form a consortium of at least twelve banks with at least $50 billion in assets as Primary Bankers to help facilitate the 500 to 800 bank failures I expect by the end of 2012." (R. Suttmeier)

I have said all along that these mega-thong banks should not reach the size of statehood if we don't get to vote for them. However, since we are theoretically speaking about "honest" banks, I have also said that all major (big bang major) international banks should be a consortium along the lines of flexible yet interlinked alignments that countercheck each others credibility out of self interest.

I do believe, your idea of the FDIC having a "structural" arrangement for Private Bankers to affiliate as a National Finance Market has a promising set of potentials. Let's elaborate. Let's say that not only do the banks have to have sufficient assets to play in this market, but let's say that properly financed banks (autonomously) could form alliances of 10 to establish a regional cener of private finance at this designated higher level of coordinated financial power. Think of it. Everyone on the team (in the American League) is watching their team members and keeping themselves in check). Qualifications: solvency and proper finance with enough partners and you have a "league" center. Fall out of financial stability...your out! Next batter.

Now let's take this to the next strata. Suppose the FDIC were now to select the top performing 10 banks (The All -American League), and create a super team of elite perfomers (reviewed annually...only the top 10 need apply...) and utilize this as the leading banking group priviledged to deal on international and national levels with FDIC certified grade AAAAAAAAAA approval.
What do you think?
Isn't this a Hit? Let's PLAY BALL !!!!!
If we build it; will they come?????

Oct 31 12:39 PM

[BRUCE E. W.:]

One more important point. The reason the FDIC needs to be involved is to keep the game honest and make sure the books are all in order before they get to play hard ball in the stratasphere.

Oct 31 12:47 PM

[BRUCE E. W.:]

Geeze; now that I am thinking about it we can take this to still one step further. Let's just suppose that out of this "All-American League" of selected banks (or perhaps out of the total gene pool to keep things truly competitive and motivated) the FDIC were to select a list of the All American All Stars of Banking perfomance (back to a ground level individualism of autonomous and authentic performers). These pure bred individuals is where we want to put public finance to support a very well deserved position of accountability specialists (AKA: regulators).
Now the entire playing field is motivated and self regulating as checks and balances with the cream of the crop not only leading the financial center of the United States of America around the globe, but the process is asset secured and supervised by the autonomous league of all star performers plucked from the working service gene pool.
Well: I know established Big Money Lineages won't like this set-up, but it seems worth a shot at proposing at this time of crisis and perhaps the last gasping breath at real democratic reform!

Nov 01 05:19 AM