When a company wants to fend off a hostile takeover, its board may seek to put in place so-called "poison pill" defenses - i.e., measures that will make the firm less desirable if purchased, but which ideally will not encumber its operations if it stays independent.
Large complex cross-border financial institutions run with exactly such a structure in place, but it has the effect of making it very expensive for the government to takeover or shut down such firms, i.e., to push them into any form of bankruptcy.
To understand this more clearly you can,
The Citigroup situation is simple. They would like to downsize slightly, and are under some pressure to do so. It is hard to sell assets at a decent price in this environment, so why don't they just spin off companies - e.g., quickly create five companies in which each original shareholder gets a commensurate stake?
The answer is that Citi's debt is generally cross-guaranteed across various parts of the company. US and foreign creditors have a claim on the whole thing, more or less (including the international parts), and you can't break it apart without upsetting them. The cross-border dimensions make everything that much more knotty.
Senator Kaufman explains what this means - essentially the "resolution authority" proposed in the Dodd legislation is meaningless. How would any administration put a huge bank into any kind of "resolution" (a FDIC-type bank closure, scaled up to big banks) when it knows that doing so would trigger default across all the complex pieces of this multinational empire?
You could do it if you are willing to accept the costs - and if you understand there are big drawbacks to providing an unconditional bailout of the 2009 variety. But will a future administration be willing to take that decision? The Obama administration was not - and big finance will only become bigger and more complex as we move forward.
If you look into the eyes of the decision-makers from Spring 2009, they honestly believe that taking over Citi or Bank of America would have caused greater financial trouble and a worse recession. You can argue about their true motivation all you want; this is irrelevant. The point is that the structures in place last year remain unchanged today. If a megabank shut-down under pressure was impossible for our policymakers last year, how exactly will the situation change after the Dodd bill passes - remembering that our current policymakers or a close facsimile will run this country for the indefinite future?
Senator Kaufman is strong too on what this all means. By all accounts, this Senator is not a person who came to the boom-bust-bailout debate with strong preconceived notions, just someone who has listened carefully to the arguments on all sides. And, unlike most politicians, this Senator does not need to raise money.
Banks that are "too big to fail" are simply too big. Making them smaller may not be sufficient to prevent major crises in the future - Senator Kaufman sensibly also supports a long list of related reforms, including for derivatives markets (see his other speeches on this topic: first, second) - but rolling back our biggest and most dangerous banks certainly is necessary. And there is simply no evidence that banks on today's modern scale convey any benefits to society.
Massive banks cannot be controlled, at least not in the US context; we are not Canada. "Smart regulation" in this context is an oxymoron. Our regulators have been captured by the ideology of finance for 20 years; the big banks industry are not about to let them out on parole now.
For a long while, the Obama administration insisted that size caps for banks were not on the table. Then, in January, the president himself announced the Volcker Rules - which include a size cap for banks. We've argued this cap should be even tighter - big banks can get smaller in an orderly fashion and regulators can help - but still any cap would be a step in the right direction.
Yet there is no size cap in Senator Dodd's bill.
Given that this White House has shown it can achieve considerable things, when it applies itself, why not pursue the Volcker Rules in full?
The White House is clearly not afraid of the business lobby - Deputy Secretary Neal Wolin took on the Chamber of Commerce this week regarding the Consumer Protection Agency for Financial Products; his tone was strong and his arguments were telling.
Yet the White House, Senator Dodd, and perhaps even Barney Frank are all stuck on one issue - they can't contemplate making our biggest banks smaller (or even limiting their size).
It's as if a very clever political poisoned pill has been put into place. If you act against the big banks they will .... What exactly? Threaten to prolong the recession? Help your opponents get elected? Run ads against everything you believe in?
Whatever the reason, write it down and think about it. How do you feel about a small set of big financial firms having this kind of power? How is that good for the rest of the business community, let alone regular citizens and our democracy?
This administration is perfectly capable of taking on the big banks. All that is missing is a little clarity of thought and a fair amount of political courage. Or they can just call up Senator Kaufman.
Americans for Financial Reform
Financial reform diluted with bankers in mix - Eye on the Economy ...
Senate panel seen approving financial reform | Reuters
Senators Plan To Flood Financial Reform Bill With Nearly 400 ...
The Pew Economic Policy Group | Financial Reform Project
Will Republicans Support Financial Reform? - Paul Krugman Blog ...
Financial Reform Watch : Financial Services News & Information ...
House approves financial reform bill - - POLITICO.com
Playing Dodd: Why Politics Favors His Financial Reform Bill | BNET ...
Sen. Dodd urges quick action on financial reform | Reuters
City Brights: Zennie Abraham : Chris Dodd's financial reform ...
Dodd introduces financial reform legislation - Washington Times
Senator Dodd's Financial Reform Bill: Trying to Prop Up a Broken ...
Senator Chris Dodd Unveils Sweeping Financial Reform Legislation ...
On financial reform, Dodd gives activist shareholders more power ...
Dodd expected to offer more modest financial reform legislation ...
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
With Dodd running this we'll never get good reform. Dodd is totally owned by banks and Wall Street.
If we may judge from his bust, Socrates was far from being handsome. A bald head, a great round face, deep set staring eyes, a broad and flowery nose. His likeness was more like that of a porter than of the most infamous philosopher. Attired in the same rumpled tunic, walking leisurely, undisturbed by the bedlam of politics, gathering the young and the learned, luring them into some shady nook of the temple porticos and asking them to define their terms. He was not so welcomed at home and from his wife's point of view he was a good for nothing bum who brought more notoriety than food. But look at what this man has left for humanity. Novo
Too big to fail is an oxymoron. Nothing is too big to fail. Somethings are so big that if they fail, a lot of people get harmed in some way. That won't stop the failure.
If there is no size cap in Senator Dodd's bill, how about adding a KAUFMAN amendment. In addition, please review the proposed regulations and tighten them up. It would be nice if regulators didn't have to be an extension of major banks or major accounting firms. What will it take for us to make them a stand alone, independent governmental entity? Why is Congess wasting the taxpayers money by spending all of this time to come up with a financial proposal that is so weak and won't change anything about the way the banks and Wall Street do business? It is past time to hold the culprits accountable. This country's economy cannot survive a most likely crisis if Dodd's bill is passed as is. No bank should be too big to fail! Let's get serious about legislating real change! Change that heavily impacts derivatives from short sells and swaps. Change that heavily penalizes fraud and corruption. Change that doesn't penalize taxpayers with unnecessary bailouts. Our legislators need to take their time perusing this proposed bill and, after doing exhausive research, they should amend the bill putting forth a final bill that will send a loud message to the banks and to Wall Street. A resounding message that lets them know that it's a NEW DAY and that they will no longer be running roughshod over the government or the the American people.
What ever comes out from Dodd. Is NOT to be trust. I'm glad this ruffian is on the way out.
The truth does hurt...looks like Florida is regretting that Obama vote.. Florida's unemployment hit 12.2 percent in February, the highest rate on record, soaring past even the rates recorded in the 1973-1975 recession, the state work force agency said Friday. February's rate rose a 0.2 percentage point from the January revised rate of 12 percent. More than 1.26 million people are out of work in the state. In South Florida, the unemployment rate remained nearly level in February with a month earlier, with Broward County at 10.8 percent compared with a revised 10.9 percent for January; Palm Beach County at 12.4 percent compared with a revised 12.5 percent; and Miami-Dade County at 11.2 percent, up from a revised 11.0 percent in January. Unemployment in all three counties is still up significantly from the same month a year earlier, when the rates ranged from 8.0 percent to 8.3 percent.
Why, is Florida dull enough, like you, to assume that Republicans would have given a g*d dam n whether any working person lives or di.es, much less has a job? Dullard?
I am really sad. Didn't think I would live to see the fall of the US. Thought it would be 30-50 years from now.
Guys We must Break up the huge banks & AI G !!! as A T & T - Bell phone system- was broken up baby bells in the 80 's bring back strong anti trust Reagan Bush Greenspan & pals- took all that away !So we had NO safe guards to prevent MASSIVE abuse of power we have seen in recent years l FOLKS- TELL YOUR REPS NOW www.senate.gov www.congress.gov we need STRONG REGULATION NOW
Goldman Sachs runs the finances of the US and call the shots - Democrats and Republicans demonstrate subservience to this institution for at least the last 20 years.
Sorry, but that's just not true.
BINGO!! Sanity gets the prize for truth and honesty this morning! fanned
What a great column. However, I am sure they are thinking about all the other multinational banks who WOULDN'T be dismantled and who could then presumably move in and gobble up the little US guppies. If the US banks are busted up, the rest of the world's monster banks should also be busted up. And who could make that happen? Nobody.
spot on!!
Read Full Article »