Friday, April 16, 2010

It's Not "Financial Regulation"; It's Just More of the Same

We're reminded of the old prison-camp joke about "change" and underwear.

Except we're not living in a prision camp, are we?

...Does the bill, as McConnell said, “institutionalize too big to fail?” Of course. There can’t be any reasonable doubt about this. The bill authorizes the Fed to regulate all non-bank financial institutions that are “systemically important” or might cause instability in the U.S. financial system if they failed.

...Does the bill, as McConnell has said, provide for permanent bailouts? Yes, again without question. The administration and the Democrats, especially Dodd, seem wounded by this suggestion. To them it seems obvious that this can’t be true. Why, they protest, the bill says that these firms have to be wound down, not bailed out. But why then is there a $50 billion fund set up to assist this wind down? In his statement yesterday on the Senate floor, in which he said the opposition had used “falsehoods” to oppose his bill, Dodd said: “And middle class families on Main Street won’t have to pay a penny: the largest Wall Street firms will have to put up money for a $50 billion fund to cover the costs of liquidating the failed financial firm.” The costs of liquidating the failed financial firm? What might those costs be? The answer is that the $50 billion will be used to pay off the creditors,...

When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout. And the signal it sends to the market is the most dangerous part of this bailout, because it tells the market that creditors will be taking less risk when they lend to small companies than if they lend to large ones, and this—as noted above—will simply provide the credit advantages to large companies that will not be available to small companies.

I told you that Chris Dodd is a Bankwhore.

HT: WashExaminer


J. Strupp said...

Chris Dodd is a bankwhore. McConnell is a bankwhore who is projecting his incompetence on to other bankwhores in Congress.

Bottom line, TBTF institutions will always be bailed out by the government. This is a fact of life so we might as well swallow it down and get on to dealing with the elephant in the room: The fact that we allow banking institutions to grow to the size where their risk to society far outweighs their benefit. Where they BECOME TBTF institutions in the first place.

Any politician, regardless of political affiliation, who does not support the limiting the size of the big banks in this country is not for effective FinReg. Any politician, regardless of political affiliation, who does not support massive increases in capital reserve requirements by the biggest banks in this country is not for effective finReg.

As finanical regulation progresses, there will be two parties. One which openly dismisses bank size limits and increases to capital requirements and one who talks about "permanent bailouts" because it politically calculating to link their opponents to the recent bailout. McConnell is for as much finanical regulation as any other greaseball politician bought and paid for by Wall Street.

Dad29 said...

Any politician, regardless of political affiliation, who does not support the limiting the size of the big banks in this country is not for effective FinReg.

Here we differ.

The fact of the matter is that when GE wants to obtain a $5Bn letter of credit, it's a lot easier to go to ONE bank than 50 of them. When you propose to 'limit the size' you also propose to increase the costs of that transaction (inter alia.)

What you and I saw in the Citi-Zombie picture was NOT a matter of size; it was a matter of stupidity (and, probably, some avarice). BIG difference.

We also both know that around 80% of Citi's loan portfolio is very solid stuff. All of that could be sold off easily. The last 20%? Shareholders, beware, and too bad for you.

Look at the other side, by the way. Most of the bank failures in the last 2 years have been small banks (i.e. less than $2Bn in total assets, and most are FAR less than that.)

So if large assets are the problem, how come the tiny-bank fails?

J. Strupp said...

Keep in mind that I don't support the break up of big banks into something resembling a thousand regional banks. They just need to be at market cap that doesn't threaten systemic risk to the entire system. These banks can still be quite large to provide financing to companies like GE without blowing up the whole system if they fail.

And agree that stupidity was the culprit in regards to Citi, etc. But I don't care how stupid these guys are. That's not the issue. The issue is that these guys were stupid AND posed a massive systemic risk to the global economy. Citi can be as irresponsible as they want as long as they are small enough to be resolved by the FDIC or some other institution created to wind them down.

As for most of the bank failures in this country consisting of mostly small banks, I agree. But remember one VERY important thing dadster. The only reason every major bank in this country (besides maybe J.P. Morgan and Goldman) didn't fold in Sept. of 2008 is because of government intervention in AIG. Small banks fail in financial crisis. TBTF banks do not. This is, was and always will be how it works.

P.S. it has been prove time and time again that massive banks provide no major advantage to a nation or it's economy.

Dad29 said...

They just need to be at market cap that doesn't threaten systemic risk to the entire system.


Change the capital requirements (upward, of course) and that's that.

J. Strupp said...

Because how much capital is "enough" dadster? Simply requiring the banks to add capital may help but it won't eliminate the existence of TBTF institutions. How do I know this? Because before every financial crisis in our history, we have always assumed that the big banks had "enough" capital to weather the storm. We don't have a crystal ball. We have no idea how much capital is "enough".

Tell you what, the following is a speech given by Meryvn King, Governor of the Bank of England. I would say that it's probably the most influential speech given in regards to the direction this nation NEEDS to take on this subject. King answers the question of why capital requirements won't do the job. It's a short read:

J. Strupp said...

Sorry it got cut off. He's the speech:

Dad29 said...

Yah, well, King mentioned re-instituting Glass-Steagall (100% a good idea).

AND he mentions, very delicately, the problem of "Easy Al" Greenspan--whose real motto is 'let the good times roll.'

Back in the good old days, banks were also required to maintain an 85% (or less) loan/deposit ratio, which is no longer operative; they're now running over 100%, albeit marginally. WTF?

So in the end, it's not really a question of TBTF. We're back to examining the character of both the bankers AND the FRB, which had plenty of power to crank down on lending.

AND, of course, the GSE's, which became political sandboxes and treasure-chests for favored constituencies, aided and abetted by Clinton and GWB.

More capital. Separate investment-houses from commercial banks. Make the FRB and the GSE's independent of political interference.

IOW, govern. Govern for the good of the country, not of the Partie(s) in Gummint (PIGS.)