Interesting Analysis
I have spent some time reading this post over at The Baseline Scenario and it is just sticking with me:
Professor Kashyap has a sharp perspective the administration’s financial sector reform thinking, in part because he has long worked alongside key people now at the National Economic Council (the NEC, by the way, has disappointingly little transparency; even Treasury is more open).
So we should take him seriously, writing Tuesday in the Financial Times, on the importance of the proposed new “funeral plans” for banks.
Kashyap’s point is that if banks are forced to explain, in convincing detail, how they can be wound down, this will effectively limit the complexity and scale of their operations. (See “Rapid Resolution Plans” on p.25 of the regulatory reform proposals; p.26 in the online NYT version)
The notion is intriguing, if such rules are actually enforced. Essentially, banks would be required to specify the extent and nature of costs for any bailout they may require.
Allright! Sounds like real transparency! I am behind this all the way, but wait:
A key part of any plan would be the people involved. Are there critical individuals who would need to be kept on to wind down positions (as was claimed to be the case with AIG FP)? Would they therefore require large retention bonuses? How large exactly?
Huh??
So if players at big banks had to be kept around should their business fail and require government intervention they would have to be paid big bucks as "retention bonuses"? I am lost on this. The issue is easily skirted by legislation or presidential order: Failed Bank? You are working for free until resolution. This kind of baloney "keeping the best people" is the purest sign we have learned nothing from mthe financial crisis. Even now banks are handing out either mega pay raises or huge bonuses, just like before even thought they only function due to intervention and backstops. This kind of thing is getting me mad. Anyways, to continue the article:
A checklist approach is definitely not going to work (been there, done that, for countries). You need something that can simulated or, even better, played out in a war game. Bring in some difficult outsiders and try to break the bank in the messiest way possible (in a game), then follow the consequences and costs.
These banks are so large and intertwined with so many other, it’s hard to fathom how a “funeral plan” would be reassuring – unless it means that they become smaller and less complex.
And this brings up the real weakness of this approach to reform – the political economy. How do regulators of any kind press for meaningful plans regarding closing down, say, Citigroup or JP Morgan Chase? The CEOs of those firms have direct access to the Secretary of the Treasury and on Pennsylvannia avenue they are regarded as gurus and bastions of the economy. They’ll say, “look, if you let this person force us to simplify our business, there will be less credit growth and a big recession.” Which recent Treasury Secretary would be able, at that moment, to face them down – particularly as these bankers can, if pushed, go to the big boss?
As has been the case across time and space since the Big Bang, the solution to the problem is both easy and well known and has no chance of ever happening. Here we see a matter of fact explanation of how:
-low or lower growth simply will not be tolerated
-the banks have too much influence
-everything will be done to get "credit flowing" regardless of the realities on the ground.
With a second round of stimulus now in real discussion and he commercial real estate market entering it's very own decline it will be very interesting to see how this banking system makes it out alive, and the US along with it.
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