I’ve posted on several occasions (example here) on the question of why the Obama administration isn’t talking about regulations that prohibit companies from becoming systemic risks to the the nation’s economy. We hear a lot about these institutions, which are invariably described as being “too big to fail.” So why aren’t we preventing companies from becoming too big to fail in the future.
I was beginning to think that it was a stupid question as I don’t see news articles discussing this.
Well at least now I have someone more reputable than this poor blogger saying that’s exactly what we need to do. Former International Monetary Fund Chief Economist Jim Bourg lays out in the May issue of The Atlantic how the economic crisis in American is not unlike those he sees in developing countries. The prescriptions the IMF usually lays out can apply to the U.S.
Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.
The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.
Bourg’s says the best way to fix the problem, expensive though it may be, is to nationalize the bad banks.
Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.
The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.
Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.
So why isn’t the administration ensuring that no institution can ever again become too big to fail?
The Philadelphia Phillies got their World Series rings today. Attending the ceremony were three former players.
Former Phillies Pat Burrell (right with Ryan Howard), Geoff Jenkins and Adam Eaton took part in the ceremony. Burrell got a rousing ovation before heading off to Boston to play a night game for Tampa Bay. Eaton, who was left off the postseason roster, was booed.
Philly fans. Gotta love ‘em.
I slept with 20 young women this weekend. Not only were they beautiful, they were athletic, charming and well behaved. Actually, I slept with 22 women this weekend but two were, ah, more mature. One was my wife; the other was the team chaperone.
My wife was the only one with whom I shared a bed (and there’s much to be said for mature women, my dear). The others I “slept with” were scattered about our house, mostly in the basement in sleeping bags or curled up in comforters on the floor. (The chaperone had her own bed, however, a requirement for “mature” sleepers.) About the house were our youngest daughter’s college rugby team.
We had plenty of floor space but too small a hot water tank. So Karla had enlisted the neighbors to share their showers after Saturday’s matches. One neighbor, when called, said he didn’t know his wife had made the commitment and that the bathroom needed a little straightening first. We howled. These are rugby players for God’s sake!
The team was invited to play in the prestigious Cherry Blossom tournament at the last minute. Even if they found a hotel, they couldn’t have afforded it. So when Hunter called and asked if they could stay at our home, much to my own surprise I immediately said yes. I don’t normally acquiesce to inconveniencing myself. But as we so rarely hear from Hunter, I wasn’t going to pass up a chance to actually see her. Face to face, it would be more difficult for her to cut conversations short.
The visit paid off in some ways and was costly in others.
Hunter is not a born leader. She usually shied away from leadership responsibilities, or the possibility of failure. She told us this weekend that she completed the application for AmeriCorps but didn’t send it in as she was afraid she wouldn’t be accepted. This from an intelligent young women with social work experience and a heart of gold.
But this year, she was elected captain of the rugby team. As we watched her interact with the players, laying out the strategy before the matches, calling plays during them, and then leading the debriefing afterwards (the chaperone said women athletes “need to process”), she seemed comfortable in her role. She was already an accomplished athlete, helping her high school basketball team make the state semi-finals. But as she put it this weekend, “In basketball I never wanted to take the shot with the game on the line. Now, I want the ball. When we need to score, I’ll call a play for me to get it. I’ve never felt like that before.”
She got the ball often during the weekend, scoring three times. Even though she’s to graduate in May, she intends to keep playing. She’s been invited to try out for the U-23 team that represents the Southern states.
We were more proud of her new found confidence. Struggling to figure out what comes after graduation, rugby and the leadership experience it has given her could provide the boost she needs.
But this was a rugby tournament. It ended as have others for Hunter – in the hospital with a shoulder dislocation. The first time we ever went to see her play, we found her slumped on the pitch having dislocated the shoulder as we drove up. The second dislocation was two years ago. She could no longer avoid surgery – surgery that made a recurrence only a five percent possibility.
But she was on the short end of that bet. They popped it back in at the emergency room. She’s sore today. Her orthopedist says surgery is likely again. A surgeon friend says rugby could be out of the question.
Did she have enough time to learned the most important lesson rugby may have to teach her? That she can be a leader. That taking on more than you might be comfortable with is a way to grow. That occasional failure is only a byproduct of trying your best. With the game of life on the line, will she want the ball?
Here’s one of those compensation consultants, defending exorbitant CEO Pay, along with a rep. from the AFL-CIO debating CEO compensation packages.
He claims it’s a numbers game, meaning that they’re not really making that much money.
Anchor Mark Haines then asks the labor rep that if it’s true you get what you pay for, why shouldn’t they be paid as they are? He must have known the answer. She says, after what’s happen in the banking industry, did they really know what they were doing?
Haines then points out that Japanese companies, which tend to “kick out butts,” are making far less than American CEOs. Haines then lays the blame where it deserves to be, “The boards have no spine.”
Which is what President Obama said yesterday
[T]oo many corporations have operated for too long is that you have a CEO who basically selects his board; the board, in a fairly cozy relationship oftentimes with the executive, hires a executive compensation firm, which, surprisingly, tends to think that it’s necessary to retain the best talent to pay people $20 or $30 million a year; and we get into the kinds of habits and practices that I think have not been — have not served shareholders well, I think ultimately distort the decision-making of many CEOs.
Late in the afternoon, Jim Cramer and Haines tackle CEO pay. Haines again blames the boards of directors. Cramer, who had transformed himself into a populist since being raked over the coals by Jon Stewart, joins in beating up on the compensation committee chairmen of boards of directors (about 3:00 into the video).
OK. It’s not just some crack pot Post reader and blogger who says it, the president of the United States, in response to a question on CEO pay at the G-2 press conference today, just said that the problem is…
- CEOs select their boards
- Setting up a cozy relationship
- Then they hire comp. consultants and
- Surprise, they get $20-30 mil. comp packages
- Does not serve shareholder interest
- Distorts CEO decisions
- Need shareholder voice/vote
And as CNBC pointed out yesterday, big salaries don’t automatically provide shareholder value.
So, as I just wrote to several Post reporter’s and its ombudsman, what about an examination of the role of boards of directors?
“If the Republicans can’t break out of being the right wing party of big government, then I think you would see a third party movement in 2012.”
—Newt Gingrich, who was rushed to the hospital after making that comment as the gun in his holster went off before he drew it. He’s being treated for a wound to the foot and manic depression.
Calling the president “George W. Obama,” Margaret Carlson says the administration likes those who shower before work over those who shower afterwards.
With the announcement this week that Chrysler LLC and General Motors Corp. would be on 30- and 60-day timetables to fix themselves or risk bankruptcy, it was clearer than ever that the financial industry holds much more sway in the halls of power than do grease monkeys, even ones cleaned up at Harvard.
Treasury Secretary Timothy Geithner, unlike Henry Paulson, doesn’t hail from Wall Street, but he’s one more example of how titans of government swiftly come to sympathize with titans of finance. They slip in and out of each other’s worlds, promote each other to the top, and mystify their work to convince the uninitiated that no one else can do it.
They easily have their way with compromised regulators ready to look the other way as a small sliver of the population plays high-risk poker with other people’s money. This sliver then has its way again unwinding the damage caused. Huge sums are pocketed on both ends.
And what is really made from these transactions? What is created that benefits society?
This decision also shows Washington’s preference for those profiting from things you can’t see in which large sums of money pass through multiple hands, over those you can see.
…When GM goes into bankruptcy, as seems inevitable, and the relics of the dealer network are separated by hundreds of miles and we are all driving Kias, will coddling the bankers to the detriment of autos seem so wise? Detroit put the country on wheels, bankers put it on the skids, but the latter need never worry again about what will happen when they go too far. They know the music slows but never stops on Wall Street.
Which is the key point. Someone please tell me how the Geithner banking bailout plan ensures the financial industry won’t do it again with some new financial instrument with which they play Russian roulette and lodge the bullet in the taxpayers brain? Nothing I’ve seen so far ensures it won’t happen again. New regulations are nice, whenever the administration gets around to detailing them, but so far the financial industry is getting a sweetheart deal.
The government plan in effect involves insuring almost all losses. Since the private investors are spared most losses, then they primarily “value” their potential gains. This is exactly the same as being given an option.
Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year’s time. The average “value” of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is “worth.” Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!
Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That’s 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest — $12 in “equity” plus $126 in the form of a guaranteed loan.
If, in a year’s time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that’s left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37.
We can only hope you can buy a Kia for $37.