In response to an FT article by Sheila Bair on 7th August 2014, entitled '"No more bank bailouts" cannot be an empty slogan'
"If their living wills are deficient, the authorities should make full use of the tools at their disposal to make them safe, including restructuring or break-up. If they fail to do so, the public will conclude that there is one set of rules for the big banks and another for everyone else"
That ship has already sailed I'm afraid Ms Bair! There IS a different set of rules for the banks, and nothing has happened since 2008 to change that.
Here is David Stockman, Budget Director in President Reagan's first term:
"The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.
Had the market been allowed to finish off the work of the economic gods in late September 2008, the TBTF problem would have been substantially alleviated. Today there might have existed a half dozen “sons of Goldman” in the form of M&A, trading, investment banking and asset management boutiques—run by chastened veterans who lost their lunch during the 2008 Wall Street cleansing.
The excuse for Washington’s massive intervention against the free market in the form of TARP and the Fed’s monumental flood of liquidity, of course, is that the US economy was about to be annihilated by something called financial “contagion”. But that is a specious urban legend invented by the crony capitalists who controlled the Treasury and the money-printers who had fuelled the housing and credit bubble at the Fed.
As I have also shown, for example, AIG’s dozens of insurance subsidiaries were money good and would have been protected in bankruptcy by insurance regulators and capital maintenance rules, while settlement of the holding company’s fraudulent CDS insurance would have been parceled out pennies on the dollar by a Chapter 11 judge to the dozen giant global banks who had stupidly attempted to turn toxic CDOs into AAA credits. Likewise, FDIC could have liquidated Citigroup’s regulated bank, while allowing the gamblers who bought the stock, bonds and other obligations of the holding company to face their just deserts.
In short, TBTF became a “problem” to be ostensibly remedied with bureaucratic malarkey like living wills primarily because Washington made it a problem—- by means of its panicked bailouts of Wall Street in the fall of 2008. Indeed, the true solution to TBTF is always and everywhere to allow the free market to cleanse its own excesses and imbalances and to impose financial discipline and demise upon outbreaks of reckless gambling and leverage when they occur".
Some people will dispute Mr Stockman's analysis of course. We will never know now will we? Or will we? What happens next time?
For me it comes down to whose analysis do I trust? So I ask myself some questions: Who benefitted the most from the bailouts? Who was going to be exposed for incompetency and/or criminality? Who was making the decisions?
Personally I do not buy the 'Bernanke and Paulson saved the world' thesis. I think the Fed's policies got us there in the first place, I think that Mr Bernanke's assessment of what caused the great depression is wrong, and that he has invested 30 years in a bankrupt economic philosophy. I think Mr Paulson was a bag carrier for the CEOs, except Mr Fuld of course.
These living wills are not worth the paper they are written on, and please pardon the pun, they never will be. If and when it happens again, the Government will try to bail them out, if they can't do that they will bail us all in. If the dollar collapses it will be time to call the IMF, who will no doubt be ready with their Special Drawing Rights.
I don't trust these folks Ms Bair, as I'm sure you've guessed by now! They have no respect for free markets, no understanding of how the real world works and they have got very little idea what they are doing. When you pull back the curtain, The Great Oz is just a little old man sitting in front of a bank of levers that produce nothing more than smoke and mirrors.