Allan Sloan explains why plans for breaking up big breaks that run into trouble, the “living wills” prescribed in the Dodds-Frank financial reform legislation, are inadequate:
Living wills sure sound great. Unfortunately, they can’t possibly work if we have anything resembling the 2008–09 panic, in which financial markets essentially closed down. It’s not just me saying that—lots of players, including the Treasury’s former chief restructuring officer, Jim Millstein, are saying it too. The problem is exacerbated because Dodd-Frank bars the Fed from helping stricken institutions the way it did during the height of the panic. The only financing allowed is from the Federal Deposit Insurance Corp., which isn’t likely to want to take the heat for financing the purchase of stricken institutions’ assets at bargain prices by rich, powerful outfits like Goldman Sachs (GS), J.P. Morgan (JPM), Blackstone (BX), KKR (KKR), or Carlyle.
“There are few, if any, institutions with the balance sheet to support the purchase of one of these businesses in good times,” Millstein says. “In a crisis, when funding in the credit and equity markets is unavailable, no one will be able to do it unless the FDIC supports the purchase with debt and equity financing [which he considers unlikely]. Therefore, there is no credible way to break them up and sell them during a crisis.” Depressing, but true.
The obvious and painful solution is to break up institutions that present systemic risk now. It will never be done. Where else would regulators get multi-million dollar jobs after their term in public service?
If a bank is so large that it creates systemic risk that nobody can handle it is underinsured. Raise its rates until a sufficient pool of capital is available to handle that sort of crisis. That’s what insurance is for, to create pools of capital that can be tapped in an emergency. The answer may come back that the rates would be ruinous and no bank could pay them. That’s ok, as then no bank would maintain itself at a size that would cause systemic risk. They would divest themselves of units until they were of a manageable size. Regulatory intervention is not necessary. Proper sizing of insurance premiums is.
One of the big problems stemming from the boom was that we had an insurance premium holiday at the FDIC for quite a few years. Had we not done that and socked away the premium money, we would have been in a better position to weather the storm without the extreme measures that ended up being taken.
I’m not sure that all of our bank-like-entities are under FDIC purview.
Certainly financial firm bailouts went wider than that.
Welcome to the dark side Dave.
the country is characterized by “a vile servitude to financial manipulators who loot the economy. ”
As Pat Lang says in his fine essay today at turcopolier.typepad.com.
The failure of the leading prez. candidates from the GOP to recognize such a thing and the failure of Obama to do much but continue to kowtow to the bankers to get re-elected, also says the US has no business policing the world, warring and meddling in the Mideast or considering itself indispensable in any manner shape or form on its justified road to collapse.