From Washington comes the news that the Minority has won their first major amendment to the Dodd financial reform bill.
And once again,
We, the People, lose.
The next crisis will give us a choice of hitting the taxpayers (again), or precipitating a depression deeper than the 1930’s. Nice going.
The silly part is that the amendment that would really work, the Brown-Kaufman SAFE Banking Act, is not even part of the discussion. As Senator Sherrod Brown most succinctly said:
“Too big to fail is too big.”
But we’re not even going near that. Too bad. We wouldn’t be talking about this particular problem if a handful of financial giants hadn’t gotten so big that letting them fail would ruin all of us.
Instead, lead puppet Dodd and his counterpart Shelby in the “opposition” did their Kabuki theater, making a drama out of putting in, and later taking out, a $50 billion fund to pay for the people needed to untangle the mess once one of these hydras is sliding down toward its place in the underworld.
Why do I say the taxpayer will be on the hook, yet again?
Simple. If an AIG-equivalent meltdown is going on, no one is going to have the strength of their convictions to lay a fee on the remaining weakened institutions to pay for the cleanup. And make no mistake about it, the cleanup will be expensive.
As I said at the time AIG went down, the main reason AIG got bailed out to the tune of $85 billion on Thursday was that Lehman went under on Tuesday, and every person who could calculate the value of a swap that needed unwinding or “novating” had already gone without sleep for two days trying to clean up the Lehman mess, and they weren’t even a tenth of the way through the job. In fact, that process isn’t over more than a year later.
Obviously people will have to do the work when a gigantic financial firm goes under, and they’ll have to be paid. Will the rest of the industry agree to pay them? Not bloody likely, and they’ll be right if things are so bad that a Citi or AIG or Fidelity is about to be put to death when they say they can’t afford an extra penny.
I’ve seen the arguments against setting up a resolution fund thrown against the wall to see what stuck.
One that appealed to the least sentient among us was the objection that customers will just have to pay the new fee when they do business with the TBTF banks. To which I reply: “Why would that be a bad thing?”
Besides, customers won’t carry the load alone. First among the reasons customers wouldn’t pick up the entire tab is the fact that such a fee wasn’t going to apply to smaller banks, so some of the fee would come out of shareholder profits or (gasp! say it isn’t so!) bonus pools. Competition would force that to happen.
But even if the TBTF institution”s customers absorb most of the cost, why shouldn’t they be the ones who pay? The customers, employees and shareholders are the ones getting the benefits of all that size, so they should be the ones that cover the cost of unraveling the yarn if it needs unraveling. Sure seems better than charging the non-customers.
Then there are the hopelessly romantic people who say “just let it fail”. As if there won’t still be a giant mess that is hugely expensive to every person or institution that had any open business with the doomed company. As if it won’t take down dozens or possibly hundreds of other institutions.
Those romantics need to study the Herstatt Effect, named after a relatively tiny bank that almost took apart the world banking system back in the 70’s by disappearing one afternoon before being able to pay all its counterparties in other time zones.
Of course, once a huge insolvency is not unwound in an orderly way, no one in their right mind would trust the credit of any counterparty because they might have been depending on the dead one to pay them. You never know, after all. You would know that these mega-monsters had literally thousands deals and contracts and swaps outstanding, with virtually everyone else.
In a world where any and all credit is suspect, only cash (equity) would trusted. For a back-of-the-envelope idea what letting the chips fall would do, just imagine our global economy suddenly reduced to “cash only,” and figure that the GDP would shrink by the ratio of total debt and equity to just equity.
Are we really ready to go back to an economy less than 20% the size it is right now? And who’s going to pick which half to two thirds of the world population starves when that happens?
So, let me get this straight — after what we went through, and what we’ll be paying for over the next couple of generations, we shouldn’t even set aside an emergency fund to pay for the next emergency and have the people who are putting us at risk in the first place (customers, owners and employees of the gigundo banks) be responsible for putting the cash in that fund?
Instead, the policy-makers who removed the fund say we’ll be able to impose a fee on the surviving banks in the middle of the emergency because they’ll be so grateful that they’re surviving? I think not. I think those companies will skip on the bill at the crucial moment, and tell us how it would ruin them if we even thought about having them pay.
I think today’s amendment was the first installment of the performance promised in exchange for payment at that very secretive meeting a couple of weeks ago in New York with Mitch McConnell, John Cornyn, and twenty or so big hedge fund managers.
And that leaves who to pay the bill?