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Mark Warner thinks Mitch McConnell is either a fool or a liar. Ezra Klein reports:
And in an interview in his office this morning, Warner was not too happy with McConnell’s characterization of their work. “It appears that the Republican leader either doesn’t understand or chooses not to understand the basic underlying premise of what this bill puts in place.”
“Resolution,” Warner continued, “will be so painful for any company. No rational management team would ever choose resolution. It means shareholders wiped out. Management wiped out. Your firm is going away. At least in bankruptcy, there was some chance that some of your equity would’ve been retained and you could come out in some form on the other side of the process. The resolution that Corker and I have tried to create means the death of the company. The institution is gone.”
McConnell may be both a fool and a liar, but Warner’s argument is wrong. The death of the institution and the wiping out of equity holders is not the end of too big to fail. It’s the creditors that matter. It’s the bailing out of creditors that creates the moral hazard. And it appears that the Dodd Bill doesn’t solve that problem. Simon Johnson (very smart guy who totally understands how too big to fail lets execs loot their institutions using taxpayer money) also thinks McConnell’s a fool but it turns out he’s only half a fool.
After saying that McConnell is “completely wrong” Johnson writes:
The resolution authority will not end "too big to fail" for large complex cross-border financial institutions. It simply will not "“ if you think differently, just go talk to our G20 counterparts, as I have done. There is no cross-border resolution mechanism, there is no international process to negotiate one, and there is no chance you will see such a process in the next 20 years.
In other words, the resolution authority in the Dodd Bill doesn’t solve the too big to fail problem. We’re going to end up with ad hoc solution where all the political pressure will be to bail out creditors, the policy we have implicitly followed for the last three decades when large complex financial institutions get in trouble after borrowing too much money. We bail out the people who financed those bad bets.
Johnson’s writes earlier:
Senator Mitch McConnell continues to insist that the Dodd bill creates permanent bailouts "“ and that it would be definitely better to do nothing.
It’s the second part of the statement that is “completely wrong.” That it is better to do nothing. That might indeed be completely wrong but maybe it was just a rhetorical flourish on McConnell’s part.
Johnson solution is to solve the “too big” part of “too big to fail” by shrinking the banks. (Arnold Kling agrees, btw.) I don’t understand how this would actually work. But for me, the more important point right now is that the Dodd Bill does not seem to solve the too big to fail problem. Yikes.
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stephenaboyko The US capital market governance system needs repair to addresses a core structural flaw of the capital market that conflates "risk" and "uncertainty." If there is complexity, there is uncertainty. To achieve real regulatory reform, policymakers have to move beyond risk management to randomness governance of both determinate and indeterminate underlying economic conditions. Trying to govern both risk and uncertainty with the legacy, one-size-fits-all deterministic regime is analogous to having one set of driving instructions for both the U.S. and U.K. In a world of financial complexity, innovation, and bubbles, it is "randomness" that includes both uncertainty and risk that should become the main focus of robust capital market governance.As Dodd tries to reduce financial scale through regulation, it should be noted that it was the regulators who allowed many financial institutions to merge into TBTF status. Recall the S&L meltdown, where the indeterminate "asset" on the books of many insolvent S&Ls was "regulatory goodwill" "“ the regulator's reward for acquiring an even more insolvent thrift. Who could have foreseen the Resolution Trust Corporation's (RTC) liquidations that occurred when minimum reserve requirements became illusory in a setting where capital consisted of vapor assets? As risk becomes uncertainty during Minsky moments, risk becomes uncertainty.Stephen A. BoykoAuthor of "We're All Screwed: How Toxic Regulation Will Crush the Free Market System" and a series of five SFO articles on capital market governance.http://w-apublishing.com/Shop/BookDetail.aspx?I... azmyth Purge the insolvent in the holy flames of bankruptcy. I have never met a cinder that was not fervent in its praise for the free market. blog comments powered by Disqus var disqus_url = 'http://cafehayek.com/2010/04/too-big-to-fail-and-the-dodd-bill.html '; var disqus_container_id = 'disqus_thread'; var facebookXdReceiverPath = 'http://cafehayek.com/site/wp-content/plugins/disqus-comment-system/xd_receiver.htm'; var DsqLocal = { 'trackbacks': [ ], 'trackback_url': 'http://cafehayek.com/2010/04/too-big-to-fail-and-the-dodd-bill.html/trackback' };Previous post: Protectionist Blather
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