The Next Time

Here’s one idea of what to do the next time one of the big banks comes looking for help from the federal government:

Punish the bondholders, sack managements, turn operations over to the FDIC, investigate fraud and prosecute.

Read the whole thing.

Proof that day is not far away can be seen in the testimony in the recent Senate hearings on the foreclosure crisis:

We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks. We can’t do both.

Actions taken to date have not removed “toxic assets” from the banks’ balance sheets. Doing that would have revealed the awful shape that the banks are in. They’ve just kicked the can down the road.

13 comments… add one
  • john personna Link

    I gave a link at OTB to some tea party guy (Denninger) going off about the movement’s change of direction. It was actually pretty interesting to listen to, given its strange positioning on that Russian “question America” channel.

    BTW, hasn’t the government “hoovered up”(*) most toxic assets now, via GSEs and Fed purchases?

    * – ironic metaphor alert

    His real theme is similar to yours, which is where did the push-back against fraud and bailouts go exactly?

    In retrospect it seemed a toe-hold for “anger” and then built to anger politics rather than any kind of concrete responses.

  • These banks don’t spend millions supporting candidates for a reason. Next politically infeasible pie in the sky suggestion.

  • steve Link

    Prior to the fin-reg just passed I am pretty sure we did not know how to take a multinational like Citi through BK proceedings. No one has ever done it. After fin-reg, I think we have more to handle it domestically, but still nothing on the international front. Lawyers fees just went over a billion dollars on Lehman and it has a long way to go.


  • Drew Link

    A review of what must have been dozens of posts I made at OTB and here would discover the following appropriate modificatons:
    “Punish the bondholders (no, the equityholders first, and then the bondholders to the extent of their losses; clean the balance sheet!!!!Clean the gd balance sheet!!!; then let fresh equity own the place on sound footing), sack managements (well, as long as we are talking policymaking level; but let’s not kill for vengeance, that’s dumb), turn operations over to the FDIC (really? call that zero loans, and running a bank by people who have no clue how to run a bank) investigate fraud and prosecute. (of course. )

    I called for the standard restructuring model so many times it made my head spin. No nothings like Bernard Finel, among others, begged to differ. Well, here we are.

  • steve Link

    “I called for the standard restructuring model so many times it made my head spin.”

    Has a large multinational ever been done that way? What is the largest bank to undergo standard restructuring? Who would do it? Who would do it with TED spreads of 4 1/2?


  • Steve, FWIW former regulators like William Black (who participated in the handling of the last big bank failure) have been adamant throughout the crisis that FDIC could have handled the insolvency of the big banks.

  • john personna Link

    How would that work, Dave? I think the FDIC hit bottom on their reserve accounts. Would they have arraigned special financing (pushing a trillion) from the Fed?

    Or perhaps I should ask in what sense “handled.” If they’d let the big banks failed, and only honored the $100K insurance (or $250K later) there would have been many, many, business accounts wiped out.

    What would that have done?

  • John,

    Why aren’t you bitching about this distraction. You inconsistency is blinding here.

    The point is we have large multi-national financial institutions. We have nothing in terms of dealing with the implications if they fail. We have a very activist government, so attempts to put in place a process for how to deal with such failures is likely to never happen. In fact, we’ve essentially codified the last spate of bailouts (starting with LTCM) and such with financial reform. We have assured that the very problem of moral hazard is not only still alive and kicking we’ve made it into law.

    From the link,

    But it will take years before the impact of the law is known. That’s because most of the specific regulations have yet to be written.

    “The devil is in the details: There are a lot of unanswered question that were thrown to regulators,” said Jay Brown, a professor of corporate and securities law at the University of Denver. “The reason it was thrown to regulators is because there are no answers. So for example: What’s too big to fail? Nobody knows the answer to that.”

    Great. Nobody see a problem with this? I see a potential rent seeking nightmare. Good news if you are in DC, you can whore yourself for a few years then toddle off to Wall Street for a nice paycheck.

    By leaving so much to the discretion of existing regulators, the new law is “a boon to Wall Street lobbyists, who will now be working behind the scenes to influence the regulators,” according to John Taylor, president & CEO of the National Community Reinvestment Coalition.

    Under the new law, banks and other financial institutions will be overseen by a council of regulators. That group will be charged with identifying the kinds of “systemic” risks that spun out of control in the collapse of Bear Stearns and Lehman Bros. in the financial panic of September 2008.

    Here is an idea: things really went to Hell when Uncle Sugar told Lehman to more or less fuck off. Suddenly the bailouts everyone was expecting became much less certain and people holding toxic assets panicked. We had LTCM, the Bear Stearns situation, and prior to those things like Chrysler and even the Savings and Loan crisis. Sure S&Ls were closed and stuff, but Uncle Sugar stepped in and made sure various people involved were made whole or nearly so. No, things looked very different and people got scared.

    So…regulatory solution: don’t fail to bail out the big boys.

    But there’s little to be gained by entrusting that task to the same regulators who failed to spot the causes of the panic the first time, said Isaac, the former FDIC head.

    “If a bank went to the regulators and said, ‘We’ve got a good idea: we’re going to put our lending officers in charge of risk management,’ that bank would be put out of its misery immediately,” said Isaac. “That’s what the government just did. It put the regulators in charge of assessing their own performance. It’s a very bad system.”

    The police policing themselves. Great idea, its worked so well so far…oh wait….

    The new law also sets up different rules for big banks — those with more than $10 billion in assets — and the rest of the industry. That means a handful of banks will continue to enjoy “too big to fail” status – complete with an implicit government guarantee that lowers their borrowing costs and gives then a competitive edge, according to Hurley.

    Nice being in the exclusive club.

  • john personna Link

    Do you need a time-out, Steve?

  • Drew Link

    I’m not sure what you are getting at, Steve. Such restructurings are done all the time. If you are querying could they be done operationally, that’s very simple. If you are querying as to who had the financial horsepower, just look at the market caps at the time. Plenty of money could have been assembled. And that’s before their real market cap – accounting for bad loans – is considered.

    The fact of the matter is that the taxpayers paid for the errors of the capital providers, rather than the capital providers, and that’s just a travesty.

  • Drew,

    I’m saying that the idea that we’ll have a way of doing that wont encourage the undesirable behavior (excessive risk taking) is going to be damn hard to implement. It will be damn hard if not impossible because we’ve gone down the activist government road. As such, people with lots of money can influence the policy making process to make sure any such policies do not “hurt” them.

    I’m not talking about small companies, but the truly big ones, which were the problems are. If a small bank goes under no big deal. If a small manufacturer goes under no big deal. But the huge behemoths on the other hand present “systemic risk” and a such they wont be allowed to go under….irrespective of what kind of risk taking they engage in.

    Now you can try to curtail that excessive risk taking, but with the private profits/public losses model why would you want to if you are at one of these big behemoths? You wouldn’t. So you lobby furious and hard to ensure that your exalted position is maintained. The problem is never really addressed and may in fact end up being the default policy.

    Financial reform might be possible for the smaller entities in the market…for the big boys, nope it will be business as usual.

    I agree that it is a travesty that the tax payers have to


    I’m trying to square your diving in here on this like reforming the policies here will actually do something vs. your snarky attitude with respect to different tax regimes. In one case, you sneer at the notion of “reform” as being a distraction, but here you seem to relish all the nuances and discussion. Its inconsistent and rather obviously so.

  • PD Shaw Link

    “Great. Nobody see a problem with this?”

    Possibly, unconstitutional. The legislature can’t delegate the task of writing laws to agencies in the exective branch without providing inteligible principles. The nondelegation doctrine is not strictly applied these days, but if the standards are as opaque as suggested there will be a serious challenge, which means uncertainty.

  • john personna Link

    I asked very specific questions about an FDIC-based bailout, Steve. “How would that work?” was a serious question. You don’t have to answer them, that’s fine.

Leave a Comment