Too big to fail...
The "too big to fail" analysis by the regulators may be constructive, but the discussion is too opaque for any outsider to understand. It all seems to be an exercise in mass delusion. It is absolutely obvious that any of the banks being analyzed would cause havoc in the financial system if they began to fall apart. How Citibank passed the grade in this exercise for government public relations purposes and others did not boggles the mind of someone who knows Citi's culture. In fact Citi was the only firm of the eight held up to the highest standard to receive a passing grade by both the Fed and the FDIC.
Yet Citi still has on the ground locations in more countries than any of the other banks, certainly making their plans more difficult. Hats off to them for getting it right, but can anyone remotely suggest that a catastrophic fraud or systems breakdown at Citi would not be an event requiring government intervention.
In all of this discussion, what keeps getting lost is the fact that all of the "taxpayer money" involved in the "bailouts" of the banks was PAID BACK IN FULL within five years at a max, often much earlier, with in most cases 7% interest. That's not a bad rate for the government given what the general public has been able to look forward to for the last eight years. The only bailouts not fully repaid have been in the auto industry and with AIG. With any intelligent hindsight, there are few people that think that letting the auto industry, with all of the ancillary jobs it supports, fail for some rigid principles. It would definitely not have been good for the economy in the short term and long term. With AIG, the government still owns most of it, and in that sense it definitely is being repaid on a market basis.
The other fact is that some of the well managed big banks had the diversification and capital to save some of the failing firms. JPMorgan absorbed the rapidly collapsing Bear Stearns and the pathetically managed Washington Mutual, and Wells Fargo saved Wachovia, a firm that could not shoot itself in the foot any longer, no foot left. As all know, the run on Lehman seemimgly could not be stopped(too fast, too complicated, limited management team), and for the market the wheels came off the bus, creating a chaotic situation until the ultimately biparisan, to some extent, major TARP bill was put in place. That took months to begin to kick in, but it eventually did
This is certainly not meant to say that the regulators' work on stress tests and the plans for a crisis that exist at major financial institutions is not constructive. It is for the most part if the government bureaucracy is not overly burdensome, and will hopefully prepare U.S. institutions better for whatever totally unpredictable crisis may happen in the future. The truth, however, is that there will always be risk in markets. In 2008, some of the biggest banks were best prepared for the crisis.
Yet Citi still has on the ground locations in more countries than any of the other banks, certainly making their plans more difficult. Hats off to them for getting it right, but can anyone remotely suggest that a catastrophic fraud or systems breakdown at Citi would not be an event requiring government intervention.
In all of this discussion, what keeps getting lost is the fact that all of the "taxpayer money" involved in the "bailouts" of the banks was PAID BACK IN FULL within five years at a max, often much earlier, with in most cases 7% interest. That's not a bad rate for the government given what the general public has been able to look forward to for the last eight years. The only bailouts not fully repaid have been in the auto industry and with AIG. With any intelligent hindsight, there are few people that think that letting the auto industry, with all of the ancillary jobs it supports, fail for some rigid principles. It would definitely not have been good for the economy in the short term and long term. With AIG, the government still owns most of it, and in that sense it definitely is being repaid on a market basis.
The other fact is that some of the well managed big banks had the diversification and capital to save some of the failing firms. JPMorgan absorbed the rapidly collapsing Bear Stearns and the pathetically managed Washington Mutual, and Wells Fargo saved Wachovia, a firm that could not shoot itself in the foot any longer, no foot left. As all know, the run on Lehman seemimgly could not be stopped(too fast, too complicated, limited management team), and for the market the wheels came off the bus, creating a chaotic situation until the ultimately biparisan, to some extent, major TARP bill was put in place. That took months to begin to kick in, but it eventually did
This is certainly not meant to say that the regulators' work on stress tests and the plans for a crisis that exist at major financial institutions is not constructive. It is for the most part if the government bureaucracy is not overly burdensome, and will hopefully prepare U.S. institutions better for whatever totally unpredictable crisis may happen in the future. The truth, however, is that there will always be risk in markets. In 2008, some of the biggest banks were best prepared for the crisis.
posted by John Borden at 5:04 PM
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