Saving too-big-to-fail banks: Here comes a new government takeover strategy
Filed under: Economy, Bank of America, Citigroup
The federal government could soon have the right to seize control of troubled financials institutions that are deemed "too big to fail," fire their top executives, wipe out shareholders and rewrite the institution's loan agreements. These are among the provisions in a new bill that Representative Barney Frank is likely to introduce this week, according to a report in Monday's New York Times. If Frank's bill makes it though the legislative process, bankruptcy court would no longer be the ultimate decision maker for giant financial institutions whose collapse could jeopardize the financial system. Instead, the government would take that role.The federal government has been trying to figure out how to deal with such major financial institutions for almost 30 years. In 1980, First Pennsylvania was the first bank that the FDIC bailed out because the Federal Reserve and the U.S. Treasury deemed it was too big to fail. This doctrine has continued up to now, with rescues of AIG (AIG), Bear Stearns, Fannie Mae and Freddie Mac, as well as bailout funds for many huge financial institutions including Citigroup (C) and Bank of America (BAC), both of which are still on government life support.
Clearly, the current handling of banks that are too big to fail isn't the way to go. But is wiping out the traditions of bankruptcy court and the rights of bondholders the best answer to the problem? According to the Times report, Treasury Secretary Timothy Geithner will support Frank's bill in testimony before the House Financial Services Committee on Thursday.
The Times reports that the White House sees the plan as "the equivalent to setting up living wills for corporations." These systemically important institutions would be required to come up with their own procedure to be disentangled in the event of a crisis. The Obama administration wants these plans to be laid out for the public in advance.
This proposal sounds like a trial balloon that's going to quickly burst. Opposition will rapidly grow to such a dramatic change in the handling of failed financial institutions. But the plan just might succeed in getting the the financial industry in the mood to negotiate something less drastic. Bondholders also won't like to see the government take control from them, so they may be ready to come to the table with more creative ideas.
Of course, some experts want to go further and are calling for breaking up the too-big-to-fail institutions. Among those are former Federal Reserve Chairman Paul Volcker and Bank of England Governor Mervyn King. They'd like to see commercial banking and investment banking split into two separate institutions. Volcker is pressing for some form of a Glass-Steagall-like bill to reconstruct the wall between commercial banking and investment banking. Glass-Steagall, passed after the Great Depression, was repealed in 1999.
The administration doesn't want to split up the giant institutions, so instead it's looking for a different way to rein them in. It seems clear that the White House knows the public won't accept any more bailouts.
The banks continue to ignore the administration's attempts to gain some control over their financial health. And the banks have gone back to their plans for large bonuses and executive pay packages, despite great opposition from the administration and the public. So, obviously a bigger stick is needed. The question is: Will the threat of a government takeover help get these financial institutions back in line?
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and The Complete Idiot's Guide to the Federal Reserve.
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Reader Comments (Page 1 of 3)
10-26-2009 @ 10:57AM
Chuck said...
My God this jerk already created so much on the "everybody should own a house" and now he is at it again. When are you people in Mass. going vote this idiot out of office.
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10-26-2009 @ 11:31AM
Ted said...
I wish someone in congress would tell Barney Frank that socialism does not work!
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10-26-2009 @ 12:12PM
Paul said...
How can you say that Socialism does not work?, China is an example of a communist government where it's leaders control the government, but it runs on a capitalist system, they will one day be the number one economy in the world, we are the one's who are broke, what do you call credit card interest rates?, banking is a business and should be regulated by the government, they along with Wall Street have bankrupt the USA, they have the same old Greed right now, that is ok, they have your money and are still taking those huge bonus checks even though they created this mess, it is time we have controls, and yes we are a Socialist country on a Capitalist system
10-26-2009 @ 2:25PM
Greg said...
Socialism it is here!!!! This is totally wrong!! Clean house in 2010!! Then we need a NEW party in 2012.. NO Reps & No Dem's .....
10-26-2009 @ 3:51PM
flamingrose40 said...
Rebecca Carr said...
If you are too big to fail and the taxpayers have to bail you out, then you are no longer a private company. Either manage your own affairs or accept the government as your boss. You cannot have it both ways.=====I follow your train of thought, but you lost me at accepting govt as your boss....well if it is US TAXPAYERS that are bailing these banks out...then its US TAXPAYERS that are their bosses!! And as such we have the right to say to OUR EMPLOYEES..."You created this mess, now until you fix it, no bonuses, salary cut in half, no more bailouts...until you have it fixed..then and ONLY then will you be given a bonus" ....See this is part of the misconceptions of govt and banks...that you get the bonus whether you do well or not...NO MORE..Bonuses will ONLY be granted to those that produce positive results!! The govt should NOT have their hands in banks AT ALL!! They have a running track record of bankrupting EVERYTHING they get their hands on...ie..Social Security, Medicare, Medicaid, Postal Service...show me ONE single entity that the Govt has taken over that has prospered!!!
10-26-2009 @ 11:34AM
Nancy said...
NO ONE expects the bill to stand a chance of passing. This article is hype by media and AOL...
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10-26-2009 @ 11:37AM
Tom said...
Ted...Are you kidding??? Socialism combined with capitalism is what has made America great!
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10-26-2009 @ 11:54AM
Mel said...
Tom... are you kidding. Every time another socialist program goes into effect it just erodes the freedoms and liberty's that this country was built on.
10-26-2009 @ 11:42AM
Johnek said...
I, businessman myself, support an idea of Barney Frank.
CEO of Banks and Hedge Funds behave as the owners of these banks. They forgot that they are just hired employees and they do not deserve more then such. Because extreme fragmentation of ownership through pension funds etc. stockholders have nothing to say. Selected Friends known as Board of Directors assure that CEOs never loose. They get bonuses in spite of the company collapse.
These group is not different from so called “NOMENCLATURA” in Soviet Union, which was a selected group of trusted agents of the Communist Party delegated to be managers of Soviet Industry. They never were without managerial jobs. Once managers, always a managers. We in USA heading the same way to the same collapse as an old USSR!
Johnek
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10-26-2009 @ 11:48AM
dave said...
The democrats cant wait to turn the USA into Venezuela, the democrats are dangerous to free enterprise. its not just franks its all of the democrats.
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10-26-2009 @ 11:51AM
Mel said...
These people are complete MORONS. The only thing worse is the MORONS that keep electing them. There is NO business that is to big to fail. IF the feds would have just butted out the idiots would be gone, the ones that are good would be prospering and we would be on a road to ture recovery. But just like the 30's the government is going to prolong the pain for as long as they can. Like Rohm said "let no good crisis go to waste". How's the hope and change working for you now???
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10-26-2009 @ 11:51AM
BT said...
When Barney "Thinks or Talks" Americans lose Billions.
Can't he become a fashion designer or get on as a Judge on Dancing WIth The Sars and leave the rest of us Americans alone??
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10-26-2009 @ 11:54AM
Kevin said...
We are going to wear out the term TO BIG TO FAIL.When do we start holding the Corp Executives and Board of Directors ACCOUNTABLE for the mess they have created ......the last time i checked they were getting very big checks for being so SMART........or should i say greedy & Reckless.
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10-26-2009 @ 11:56AM
nick said...
Wonder when Obama Chavez Jr will take over all banks and have the government run the whole show, really sounds like the brains of a ACORN thug.
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10-26-2009 @ 12:05PM
Rick said...
Sounds like a premonition of things to come.
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10-26-2009 @ 12:05PM
BT said...
Quite a few Americans are thinking that we are heading for a Revolution in this country. It will not be about Blacks vs Whites, Christians vs Jews etc. It will be about Patriots who believe that the Marxists (Obama, Frank, Peloisi, Reid etc)are about to change this country's directions, and take to the streets.
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10-26-2009 @ 4:22PM
Francis Coleman said...
What do you mean? I am afraid they are going in the direction of Socialism. That means, either national socialism (some of us who are old enough have witnissed its terror) or international socialism, speak communism (even more people are old enough to remember its terror). Anyone tell me please, how can theser people be stopped?
10-26-2009 @ 12:16PM
John said...
I have been in Banking for 30 years and when the economy take a big drop that no one new was coming especially our goverment the politicians want to find someone to blame. They have first blamed the Banks then the Insurance companies, then the big auto manufaturers, then the health providers, and now the media (fox News) to bigin with. Why is it we the public do not use our brains and put the blame where it belongs and that is in the capital and all the politician who did not do their jobs. Now they think they can fix it I think Barney Franks was one of the main reasons we are here and he should be voted out by his state in the next election.
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10-26-2009 @ 12:18PM
Rebecca Carr said...
If you are too big to fail and the taxpayers have to bail you out, then you are no longer a private company. Either manage your own affairs or accept the government as your boss. You cannot have it both ways.
Reply
10-26-2009 @ 12:17PM
ij70 said...
It becomes more and more obvious that this administration is very lazy. Instead of doing, instead of changing, all they do is put patches and band aids. The administration is treating symptoms, while the disease continues unchecked.
One more thing. The Glass-Steagall Act must be reinstated.
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