Awareness | Debate | Action
Making Failure an Option: Throw Citi Under the Bus
As long as failure is an option, these "too big to fail" corporations will continue gambling with taxpayers money, without giving taxpayers any premium. Letting one of them fail or enforcing punishments that fit the crimes may help deter future problems of this sort. JPMorgan Chase, Goldman Sachs, American Express, Bank of New York Mellon, State Street, Capital One, BB&T and U.S. Bancorp all said they will pay back TARP funds but, what about all the damage they did to the economy and the lives of responsible borrowers who are watching their neighborhoods deteriorate. Is it OK for banks to just give back some of our money (borrowed at much lower interest than we pay, if any) and just go on as if nothing ever happened?
Robert L. Borosage, Co-Director of the Campaign for America’s Future (as posted: June 9, 2009 09:25 PM on the Huffington Post site.) took notice that "on Tuesday, the lead editorial of the [Wall Street] Journal -- "Making Failure an Option" made a strong argument.
The big banks are lining up to pay back the money Treasury gave them under TARP, after passing the Treasury's softball "stress test." Eager to avoid any restrictions on pay, bonuses or activities, they are rushing to declare their health and independence.
The Wall Street Journal would allow them to get out from under the Federal thumb and go free, so long as they give up all the other guarantees and subsidies provided by the government (with the exception of deposit insurance).
But this raises the fundamental question - what economists call "moral hazard," only multiplied many times over. These banks have been deemed officially as "too big to fail." When they operate, it is with the implicit backing of the US Treasury. They will be able to borrow money more cheaply as a result, and will be tempted, big time, to take greater risks. Risk and leverage create the potential of bigger bonuses for bankers. But they can gamble with their losses implicitly covered by taxpayers. This is a recipe for renewed catastrophe.
There are different ways out of this box. Some, like Federal Reserve Governor Daniel Tarullo suggest that "too big to fail" should mean too big to exist, and that the Congress should break up the big banks into smaller, simpler, more transparent entities. Others, like Nobel Prize winner Joe Stiglitz suggest treating banks like public utilities, regulating their activities and fees strictly. Isolate the venture capital function to operate separately, but turn banks back into a version of the savings and loans of the old days. Others, like Paul Krugman and Robert Kuttner, suggest that the big banks should be treated like we treat any banks that are insolvent: take them over, strip away the bad assets, fire the management, reorganize them, merge them or sell the sound bank off at the end of the process.
The Treasury Departments under both Bush and Obama decided against taking over and reorganizing the big banks. Instead both chose to subsidize them, and nurse them back to health. Congress and the administration are turning their attention to new regulations for finance, but congressional action won't take place for a while - and initial proposals don't include either a lid on size or turning the big banks into public utilities.
Just telling them they are on their own won't work, the WSJ rightly concludes. The markets won't believe it. So the Journal suggests, Why not let one of them fail? And then it nominates Citigroup to be thrown under the bus.
"Resolving Citi - by either forcing it into a strategic partnership, if anyone will have it, or selling off its assets and breaking it up - wouldn't be cheap," the WSJ editorialist writes. But it would eliminate one of the leading "zombie" banks, end the "slow bleeding of taxpayer money into the bank," and send the banks a message: you are on your own and we really do mean it.
Citibank is essentially already owned by the Federal Government. As the WSJ notes, it has received insurance on $300 billion in deposits, some $63 billion in FDIC-guaranteed debt, and another $300 billion or so in taxpayer guarantees of its toxic assets, $45 billion in direct capital injections, and more. It is, along with Bank of America, the weakest of the major banks. And Citibank has a checkered history of needing bailouts from huge bad bets -- from the time it speculated on Russian bonds on the eve of the Russian revolution to betting on loans to Latin American governments in the 1980s, to needing bailouts twice in the most recent crisis.
Treasury has joined with the banks in peddling confidence, so it is unlikely that the editorialist's advice will be taken. But that leaves the question. If the banks are free of the TARP but officially too big to fail, what is to keep them from taking larger and larger gambles with other people's money, knowing that they pocket the profits and taxpayers will cover their losses? You don't have to believe in Vince Foster conspiracies to think this is a question that deserves a straight answer."
NOTE: Corporate Moral Hazard
Robert L. Borosage, Co-Director of the Campaign for America’s Future (as posted: June 9, 2009 09:25 PM on the Huffington Post site.) took notice that "on Tuesday, the lead editorial of the [Wall Street] Journal -- "Making Failure an Option" made a strong argument.
The big banks are lining up to pay back the money Treasury gave them under TARP, after passing the Treasury's softball "stress test." Eager to avoid any restrictions on pay, bonuses or activities, they are rushing to declare their health and independence.
The Wall Street Journal would allow them to get out from under the Federal thumb and go free, so long as they give up all the other guarantees and subsidies provided by the government (with the exception of deposit insurance).
But this raises the fundamental question - what economists call "moral hazard," only multiplied many times over. These banks have been deemed officially as "too big to fail." When they operate, it is with the implicit backing of the US Treasury. They will be able to borrow money more cheaply as a result, and will be tempted, big time, to take greater risks. Risk and leverage create the potential of bigger bonuses for bankers. But they can gamble with their losses implicitly covered by taxpayers. This is a recipe for renewed catastrophe.
There are different ways out of this box. Some, like Federal Reserve Governor Daniel Tarullo suggest that "too big to fail" should mean too big to exist, and that the Congress should break up the big banks into smaller, simpler, more transparent entities. Others, like Nobel Prize winner Joe Stiglitz suggest treating banks like public utilities, regulating their activities and fees strictly. Isolate the venture capital function to operate separately, but turn banks back into a version of the savings and loans of the old days. Others, like Paul Krugman and Robert Kuttner, suggest that the big banks should be treated like we treat any banks that are insolvent: take them over, strip away the bad assets, fire the management, reorganize them, merge them or sell the sound bank off at the end of the process.
The Treasury Departments under both Bush and Obama decided against taking over and reorganizing the big banks. Instead both chose to subsidize them, and nurse them back to health. Congress and the administration are turning their attention to new regulations for finance, but congressional action won't take place for a while - and initial proposals don't include either a lid on size or turning the big banks into public utilities.
Just telling them they are on their own won't work, the WSJ rightly concludes. The markets won't believe it. So the Journal suggests, Why not let one of them fail? And then it nominates Citigroup to be thrown under the bus.
"Resolving Citi - by either forcing it into a strategic partnership, if anyone will have it, or selling off its assets and breaking it up - wouldn't be cheap," the WSJ editorialist writes. But it would eliminate one of the leading "zombie" banks, end the "slow bleeding of taxpayer money into the bank," and send the banks a message: you are on your own and we really do mean it.
Citibank is essentially already owned by the Federal Government. As the WSJ notes, it has received insurance on $300 billion in deposits, some $63 billion in FDIC-guaranteed debt, and another $300 billion or so in taxpayer guarantees of its toxic assets, $45 billion in direct capital injections, and more. It is, along with Bank of America, the weakest of the major banks. And Citibank has a checkered history of needing bailouts from huge bad bets -- from the time it speculated on Russian bonds on the eve of the Russian revolution to betting on loans to Latin American governments in the 1980s, to needing bailouts twice in the most recent crisis.
Treasury has joined with the banks in peddling confidence, so it is unlikely that the editorialist's advice will be taken. But that leaves the question. If the banks are free of the TARP but officially too big to fail, what is to keep them from taking larger and larger gambles with other people's money, knowing that they pocket the profits and taxpayers will cover their losses? You don't have to believe in Vince Foster conspiracies to think this is a question that deserves a straight answer."
NOTE: Corporate Moral Hazard
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Comment by Cromag on June 11, 2009 at 3:07pm
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Bailout Watchdogs to the Rescue?
What’s worrisome about the bailout repayments is that banks might buy back their government-held warrants on the cheap. If the ten big banks that have been in the headlines this week after the Treasury announced they could pay their way out of TARP get discounts like multiple smaller banks before them, taxpayers will be on the losing end...again.
But there's good news: Two bailout watchdogs, the Special Inspector General for TARP (SIGTARP) and the Congressional Oversight Panel, announced today in a letter to the Senate that they intend to zero in on the sale of warrants in order to protect taxpayers and shed some much needed light on these transactions.
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