Saturday, February 13, 2010

The Big Lie

Matthew Yglesias writes The Big Lie. "Given that when a financial panic occurs the government needs to bail out many financial institutions, it makes a lot of sense to (a) enact regulation to make panics less likely and (b) make provision for necessary interventions to be done in an orderly manner that’s financed by fees on banks. In other words, less TARP more FDIC. So how are the banksters and their new best friends in the GOP fundraising community going to oppose that? Easy! As Chait and Drum observe you put together an ad that just flat-out lies and claims that a bill to regulate banks is a big bailouty giveaway to banks."

Factcheck.org covers the ad. "Does it? Not exactly. The bill (H.R. 4173), which passed the House with no Republican support, does say that "in unusual and exigent circumstances" the Federal Reserve can, with approval from an oversight council and the secretary of the Treasury, loan money to help prop up financial entities. And such monies are capped at $4 trillion. But the Federal Reserve already had such authority — with no stipulated cap on the amount it could loan. And banks that "fail," as the ad says, could be dissolved by regulators, according to another provision in the bill. Any money needed for the dissolution would come from a $150 billion fund formed at least partly by fees collected from large financial institutions."

1 comment:

Anonymous said...

According to Professor William Black, no new powers were needed and no new laws were needed in order to resolve failed banks regardless of size. Black wrote this piece one year ago. He should know, he was a major player in cleaning up the S&L crisis from 20 years ago.

"We are being played for chumps. The senior officers at big bank aren't very good lenders, but they are expert in maximizing their compensation.

"Geithner's gifts to the bankers that caused the crisis include: a unnecessary taxpayer bailout of "risk capital," a massive coverup of their banks' insolvency, gutting the proposed limits on executive compensation, and devising a "guarantee" mechanism designed to hide the expenses of the unprincipled bailouts from the American public.

Remember, executive compensation is not "merely" a fairness issue. Executive compensation and the compensation systems used for appraisers, accountants, and rating agencies were designed, and served, to create the perverse incentives and ethical rot that caused the ongoing financial crises by producing a "Gresham's dynamic" in which fraudulent and abusive lending and accounting practices drove good practices out of the marketplace.

There are proven ways to resolve the crisis that are far cheaper and more effective because they don't subsidize bankers and "risk capital." We know how to resolve failed banks. The Federal Deposit Insurance Corporation (FDIC) can place even the largest banks in "pass through" receiverships on Friday at the close of business and reopen them as "New Federal" bank Monday morning with minimal disruption to customers and creditors and retain "going concern" value. This is how the Reagan administration resolved failed S&Ls during the debacle.

Leaving the managers in charge of failed banks that they led into insolvency is suicidal. The existing managers have terrible incentives -- to cover up existing losses and to make bad or even fraudulent loans that produce the greatest (fictional) accounting income and to "live large" through bonuses and perks. (The Obama compensation limits are political cover.)

The FDIC managers have the correct incentives to finally produce an honest evaluation of which assets are toxic and how much they are worth. This transparency is essential if we are to end this crisis. Under the Bush and Obama plans we retain the existing managers that have overwhelming incentives to cover up the losses. The bankers have designed the guarantee plan to encourage banks to continue to cover up their toxic assets and not recognize their losses. These cover-ups make a financial crisis last longer and increase the taxpayers' costs.

The FDIC managers preserve the going concern value by making prudent loans and get the "New Federal" in shape to be acquired.

"New Federal" receiverships dramatically reduce cash needs. Most costs are deferred until the New Federals are sold.

Pass through receiverships save the taxpayers money and prevent perverse managerial incentives because they do not subsidize "risk capital" when banks are insolvent. Subsidizing risk capital and maintaining the failed managers at insolvent banks creates the worst possible incentives. It will cause future crises. It will delay the recovery from the ongoing crises. It robs the U.S. taxpayers and primarily benefits the wealthy -- many of them non-U.S. citizens. The contract they made was that they would get nothing if the bank failed. It has failed, and they are often complicit in those failures. The bankers have convinced the Bush and Obama administrations that the taxpayers should be looted to bail out risk capital. We should stop listening to the folks that caused the crisis and have interests hostile to our interests. Let's stop them from using us as chumps."