Don't Expect the Resolution Authority to Be a 'Cure-All'

By James Kwak

The administration is putting a lot of eggs in the Resolution Authority basket — the idea that, if it gets the power from Congress, it can take over large banks and wind them down, sell them off, or run them temporarily without taking the financial system down.

I agree that taking over Citi (C) last winter would have been preferable to what did happen. But I wrote somewhere (sorry, can’t find it now) that resolution authority has a political problem — if, say, JPMorgan Chase (JPM) runs into trouble five years from now, how much confidence do we have that the government would actually invoke the power and take over the bank when push comes to shove? Even if a Democratic administration were in place, the executives at JPMorgan would scream bloody murder, as would the Republican Party, and the administration would have to decide if it wants to fight that political battle (“Socialism!!!”) before pulling the trigger.

Adam Levitin has a more thought out variant on this concern that I just found. Here’s his bottom line:

“[I]n most failures of too-big-to-fail institutions, the government will have to provide funding for the resolution, and this makes the resolution a political issue. For this reason alone, I think we are kidding ourselves if we believe that we can regularize the resolution of systemically important institutions. It would be great if we could regularize too-big-to-fail resolution, but I don’t think it is possible to come up with any set of rules that we won’t break at the first sign of them creating distributional results that we do not like. “

I’m not saying the government shouldn’t have resolution authority; I’m just saying we shouldn’t assume that it will solve our problems.

Comments

[john s. gordon:]

wise advice here.
> jack

Nov 10 08:55 AM

[questioner5000:]

Without the "To Big To Fail" commercial banks, who would have taken over Countrywide, Merrill Lynch, Wachovia, Washington Mutual, and Bear Stearns, (though the last two included masive government "sweeteners" for that "speed-dial buddy" of Geithner's)? The FDIC? Third National Bank of Podunk? Some tax-exempt credit union?

Nov 10 09:31 AM

[fizzicyst:]

Answer to questioner5000: Without the "Too Big To Fail" banks, Countrywide, Merrill Lynch, Wachovia, Washington Mutual, and Bear Stearns would not have been too big to fail. So, they would have been let to go under, which would have been a wonderful solution. Their grossly overpaid leaders would have been out of a job, had their stock and options in their own companies become worthless, and had their reputations damaged. The leaders of surviving banks would have become scared enough to become MUCH more conservative about the risks they take on.

Isn't that the way our capitalist system is supposed to work ???

Nov 10 12:15 PM

[woollyB:]

Cure-all? I would be stunned if the resolution authority cures anything.

Nov 10 03:08 PM