House committee approves dismantling "too big to fail" firms

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House committee approves dismantling "too big to fail" firms

Postby Bubbles McCoy » Thu Nov 19, 2009 8:11 am UTC

The BBC wrote:A key US House of Representatives committee has voted to give the government the power to take apart banks that are "too big to fail".

The bill would give a proposed new council of regulators the right to dismantle firms whose scale could hurt the economy - even if they are healthy.

Wall Street is opposed to such a measure, which is part of efforts to overhaul the banking industry.

But it will have to go through several more steps before it becomes law.

"No firm should be considered to be too big to fail," said Democrat Paul Kanjorski, who sponsored the proposal.

"Financial firms that want to play in a casino need to have their own resources to cover their bets and not assume that tax dollars are available in reserve if their bets fail," he said.

Many Republicans oppose the bill, arguing that it gives too much power to regulators and would force financial firms to scale back their size and put them at a disadvantage.

The legislation would establish a Financial Services Oversight Council, which would have to consider a bank's "scope, scale, exposure, leverage, interconnectedness of financial activities".

The council would have to consult the president before taking "extraordinary" actions.

The committee's approval makes the measure more likely to become law, but it must be first be voted on by the House and then ratified by the Senate.

An interesting concept, but I don't really see it working well in reality. Besides the rather onerous fact that this lets a regulator decide whether someone's business should remain intact or split, this isn't necessarily a convenient or prudent means of fixing what went wrong in the past two years. General Motors, for example, is technically "too big to fail," but dividing it up and expecting the pieces to survive would be lunacy. Within the banking sector I can kinda see why this might hold appeal, but it still doesn't really seem to tackle the real issues as virtually every bank failed during this recession, the problem was more that the banking sector itself failed rather than individual banks.

Anyhoo, thoughts?

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Re: House committee approves dismantling "too big to fail" firms

Postby Malice » Thu Nov 19, 2009 8:26 am UTC

Bubbles McCoy wrote:Within the banking sector I can kinda see why this might hold appeal, but it still doesn't really seem to tackle the real issues as virtually every bank failed during this recession, the problem was more that the banking sector itself failed rather than individual banks.


The problem they're trying to solve is not, "Oh shit everything's failing at once," it's, "Oh shit, these particular banks are failing... and that'll hurt the economy too much... so we have to give them tons of money now." The point is to remove that obligation to bail out banks.
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Re: House committee approves dismantling "too big to fail" firms

Postby folkhero » Thu Nov 19, 2009 9:12 am UTC

I read in "The Economist" about the idea of a 'living will' of sorts for large financial institutions. The idea is to get the supposed too-big-to-fail companies to draw up a plan to split apart or to remove parts of the company in case of they get into trouble. By cutting off the part of the company that falls into huge debt or collects too many toxic assets, the rest of the company can remain solvent and there would be no need to bail them out. The companies that were bailed out were mostly OK, they just had a few areas that got into so much trouble that it threatened the company as a whole. I think the living will system would solve many of the problems targeted in the above bill, but wouldn't require the costly and intrusive process of breaking up large financial institutions. (at least/unless until it becomes necessary)
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Re: House committee approves dismantling "too big to fail" firms

Postby scrovak » Thu Nov 19, 2009 12:44 pm UTC

I like the living will idea better. The idea in the OP sort of negates free market capitalism, the entire premise of American culture. Well, that and freedom, of course.
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Re: House committee approves dismantling "too big to fail" firms

Postby Belial » Thu Nov 19, 2009 12:53 pm UTC

scrovak wrote:The idea in the OP sort of negates free market capitalism, the entire premise of American culture.


I think pinching off the extreme ends of capitalism could maybe be a good thing.
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Re: House committee approves dismantling "too big to fail" firms

Postby scrovak » Thu Nov 19, 2009 1:00 pm UTC

While it could be a good thing, it could also be a bad thing in that it may act as a sort of incentive to not grow so big, powerful, and influential in the economy that the government separates you. Sort of like a corporate glass ceiling, only when you hit it, the company gets dismembered. I think if this went into effect you may (emphasis on may, as I'm not exactly an economic theorist) have dozens of companies and banks, etc. hovering just below that mark for the sole reason of not getting torn apart.
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Re: House committee approves dismantling "too big to fail" firms

Postby Belial » Thu Nov 19, 2009 1:05 pm UTC

And?

I mean, do we draw any particular benefit from having huge chunks of our economy tied up in one big bank instead of several smaller ones?

And by "we" I mean people who aren't bank shareholders.
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Re: House committee approves dismantling "too big to fail" firms

Postby scrovak » Thu Nov 19, 2009 1:12 pm UTC

Well once upon a time, it meant stability, in the 'too big to fail' sense, but that's obviously been shattered...
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Re: House committee approves dismantling "too big to fail" firms

Postby Bubbles McCoy » Thu Nov 19, 2009 1:23 pm UTC

Belial, you're being fairly dismissive of fairly complex economic questions here. Sometimes huge corporations are needed in a sector, while with banking it might not be that obvious I'd hope you'd agree that setting an arbitrary ceiling on chip or car manufacturing could have some fairly substantial drawbacks. Banking still has some essential returns to scale though, having a bank sitting on enough cash that it can make very large loans and still sustain a complete loss on the loan is fairly important part of the economy. Setting arbitrary limits on the size of banks will impact this, it's not nearly so simple as "trimming the extreme ends of capitalism."

Malice wrote:The problem they're trying to solve is not, "Oh shit everything's failing at once," it's, "Oh shit, these particular banks are failing... and that'll hurt the economy too much... so we have to give them tons of money now." The point is to remove that obligation to bail out banks.

I'm not really sold on the idea that particular banks failing was what was that bad this recession. While the phrase "too big to fail" has come up quite a bit, bailout money has gone to banks of many sizes and many very large institutions have failed with the rest. The government bailout was intended to save the sector as it appeared that virtually nothing would survive without some form of intervention, this bill seems like its taking the phrase and running with it in a completely non-applicable direction. I think this quote
"Financial firms that want to play in a casino need to have their own resources to cover their bets and not assume that tax dollars are available in reserve if their bets fail," he said.

is key. The bill in absolutely no way addresses this issue, simply dividing up bad business practices into a bunch of smaller organizations really won't help. If there's a clear problem with the way banks are conducting themselves as this phrasing implies, then blanket regulations should be enforced on capital balances (I'm not personally sure if there is such a solution, I'd have to do a much more exhaustive investigation into the Canadian banking system and the international one in the lead up to be confident in my regulatory opinions).
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Re: House committee approves dismantling "too big to fail" firms

Postby Belial » Thu Nov 19, 2009 1:30 pm UTC

Belial, you're being fairly dismissive of fairly economic questions here.


Am I? Here I thought I made a general statement complete with a "maybe", and then asked a question.
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Re: House committee approves dismantling "too big to fail" firms

Postby Bubbles McCoy » Thu Nov 19, 2009 1:36 pm UTC

Perhaps I was misreading you, but your tone read rather derisively to me. While you did use the qualifier "could maybe," it came off as more disparaging scrovak for being foolishly pro-capitalistic opposed to expressing any measure of self doubt (following it up with "and by 'we' I mean people who aren't bank shareholders" doesn't help much either).

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Re: House committee approves dismantling "too big to fail" firms

Postby Heisenberg » Thu Nov 19, 2009 2:11 pm UTC

scrovak wrote:While it could be a good thing, it could also be a bad thing in that it may act as a sort of incentive to not grow so big, powerful, and influential in the economy that the government separates you.

We already have that in the form of anti-trust laws.

This is a favorite plan of a friend of mine, and I think it can be good if done correctly. There's no reason the people who manage my checking account should also be doing high-risk investment banking. If the government wants to return to a regulatory system which disallows this, good for them.

I'm worried they're going to screw it up and we'll end up with lots of small savings+investment banks. Of course, while this wouldn't be the best solution for the consumer, the government could still allow the bank to suffer consequences, and if it's small enough the FDIC could still make good on their insurance for account-holders.

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Re: House committee approves dismantling "too big to fail" firms

Postby Ixtellor » Thu Nov 19, 2009 2:21 pm UTC

folkhero wrote:I read in "The Economist" about the idea of a 'living will' of sorts for large financial institutions. The idea is to get the supposed too-big-to-fail companies to draw up a plan to split apart or to remove parts of the company in case of they get into trouble. By cutting off the part of the company that falls into huge debt or collects too many toxic assets, the rest of the company can remain solvent and there would be no need to bail them out. The companies that were bailed out were mostly OK, they just had a few areas that got into so much trouble that it threatened the company as a whole. I think the living will system would solve many of the problems targeted in the above bill, but wouldn't require the costly and intrusive process of breaking up large financial institutions. (at least/unless until it becomes necessary)


So when AIG instructs AIG London Financial to take MEGA risky policies, and those policies reap rewards so high they count for the bulk of AIG profits, when the policies finally default, you just say "AIG London Financial is now its own company with assets of $1million", who pays for the $300 Billion in outstanding debt? What do you tell the policy holders, that AIG is not liable, even though they wrote the policies?

To dumb it down further.
Mike and Mary start a company. They sell two types of insurance. Mountain insurance [in the event a meteor destroys your mountain they pay to replace it] and super cheap cancer insurance to young people.
They sign a homeless man in a vegatative state to run the cancer division. Because the insurance is so cheap it draws millions of subscribers. For the next 20 years they reap massive rewards and share the profits, The mountain insurance doesn't sell that well... but they are getting RICH off the cheap cancer insurance.
After 20 years, people start to get cancer in larger and larger numbers. So many people get cancer that they can't afford to pay for it.
So they cut "homeless vegatative state" guy off and he heads up the old cancer division. He and his toxic assets are no longer an obligation to the original company. Mike and Mary WIN!


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Re: House committee approves dismantling "too big to fail" firms

Postby tzvibish » Thu Nov 19, 2009 2:29 pm UTC

This sounds a lot like the antitrust laws that forced bell to break up into its respective regional branches. Its the same in that the government has a right to determine if the practices of a corp are detrimental to the economy as a whole and the environment of competition. As much as I'm against government over-regulation, this seems like a sound piece of legislation. That said, it sounds like the metric here is whether or not the company will need taxpayer money to prevent catastrophic change due to collapse. That metric will vary widely depending on the industry and the state of the economy. So, I don't think it will be used often. I imagine that antitrust regulation will take effect before thus does in most cases.
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Re: House committee approves dismantling "too big to fail" firms

Postby Ixtellor » Thu Nov 19, 2009 2:38 pm UTC

Belial wrote:And?

I mean, do we draw any particular benefit from having huge chunks of our economy tied up in one big bank instead of several smaller ones?

And by "we" I mean people who aren't bank shareholders.


If one wanted to make the argument "yes" it might go something like this:

1) Economies of Scale. The larger the firm and its capacity to manufacture products, in this case loans, the cheaper it can do it due to a variety of factors like eliminating redundancy, smaller profit margins, ability to absorb financial blows (defaults), etc. So in theory they would provide cheaper loans to the entire market. Cheaper loans = more loans = more growth = more jobs = more taxes = higher standard of living, etc etc.

2) Large banks gain global clout and can become global players. So having very large banks, means we are more apt to get overseas mega opportunities. For example, lets say that Liberia decides to retool its economy around deep sea oil exploration. Who is going to be able to finance this mega project? Would they go with a small American bank whos assets don't cover the cost of even 3 new deep sea rigs? Or would they go with a GIGANTIC London bank?
So having large banks, opens up new opportunites and job growth in just international lending and finance.
How many employees would a bank have to hire to manage a $400 billion loan?

This is a real concern today. If we really do gimp down our financial sector, we do risk losing the ability to compete in large international finance markets. And would probably be pushed out by British, and maybe later, Chinese banks.


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Re: House committee approves dismantling "too big to fail" firms

Postby Heisenberg » Thu Nov 19, 2009 2:51 pm UTC

Ixtellor wrote:Or would they go with a GIGANTIC London bank?

I realize this is tangential to your point, but it's actually on-topic: England is doing the same thing to its financial sector.
BBC wrote:Some banks may have to split their core business from riskier practices, so they do not get too big to be allowed to fail, Mervyn King said in Edinburgh.


I think a reduction in competitiveness is a legitimate concern, but that comes with this legislation by default. For instance, insuring through AIG is far more attractive when you know that they're backed by the American taxpayer. Personally, I'm fine with making these agencies less competitive if it means getting rid of this "too big to fail" nonsense.

Honestly, conservatives should rejoice at this RETURN to free-market capitalism.

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Re: House committee approves dismantling "too big to fail" firms

Postby Dauric » Thu Nov 19, 2009 3:27 pm UTC

Heisenberg wrote: There's no reason the people who manage my checking account should also be doing high-risk investment banking. If the government wants to return to a regulatory system which disallows this, good for them.

I'm worried they're going to screw it up and we'll end up with lots of small savings+investment banks. Of course, while this wouldn't be the best solution for the consumer, the government could still allow the bank to suffer consequences, and if it's small enough the FDIC could still make good on their insurance for account-holders.


We had this, it was called Glass-Steagall (specifically the second act) and it was implemented after the Great Depression exactly because the "Consumer" banking system had gotten tied up in wall-street speculation. It was repealed by a Republican congress and signed off on by Clinton a decade ago. Go figure that repealing a law preventing banks from doing Stupid Stuff(tm) would result in banks doing Stupid Stuff(tm).
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Re: House committee approves dismantling "too big to fail" firms

Postby Heisenberg » Thu Nov 19, 2009 3:36 pm UTC

Dauric wrote:Go figure that repealing a law preventing banks from doing Stupid Stuff(tm) would result in banks doing Stupid Stuff(tm).

But we repealed it because "everyone else was doing it, and we need to stay competitive."

Thanks for the link. I knew this was a pretty recent development.

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Re: House committee approves dismantling "too big to fail" firms

Postby Owijad » Thu Nov 19, 2009 4:53 pm UTC

Belial wrote:
Belial, you're being fairly dismissive of fairly economic questions here.


Am I? Here I thought I made a general statement complete with a "maybe", and then asked a question.


I know you thought that. But you have to understand, this is the future. Glenn Beck went and ruined genuine uncertainty for all of us.
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Re: House committee approves dismantling "too big to fail" firms

Postby phonon266737 » Thu Nov 19, 2009 8:00 pm UTC

How about something a little less rigid; perhaps rather than a universal reseve rate, have one dependent on a banks assests. a small bank can operate under a reserve ratio of 10%, but as the bank grows larger, marginally increase the reserve requirements.
So, a gigantic bank, say WaMu, was previously worth 325 billion or so. Under standard Us law, they had to have 32 billion in reserves and could have the other 290 billion lent out. Thing may have worked out better, if they were forced to maintain reserves of say, 50 billion and only lend out 270 billion?

or something like that.

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Re: House committee approves dismantling "too big to fail" firms

Postby MrGee » Thu Nov 19, 2009 8:04 pm UTC

Bubbles McCoy wrote:I'm not really sold on the idea that particular banks failing was what was that bad this recession. While the phrase "too big to fail" has come up quite a bit, bailout money has gone to banks of many sizes and many very large institutions have failed with the rest. The government bailout was intended to save the sector as it appeared that virtually nothing would survive without some form of intervention, this bill seems like its taking the phrase and running with it in a completely non-applicable direction. I think this quote
"Financial firms that want to play in a casino need to have their own resources to cover their bets and not assume that tax dollars are available in reserve if their bets fail," he said.

is key. The bill in absolutely no way addresses this issue, simply dividing up bad business practices into a bunch of smaller organizations really won't help. If there's a clear problem with the way banks are conducting themselves as this phrasing implies, then blanket regulations should be enforced on capital balances (I'm not personally sure if there is such a solution, I'd have to do a much more exhaustive investigation into the Canadian banking system and the international one in the lead up to be confident in my regulatory opinions).


I have heard more than one supposed expert say exactly the opposite: small-time banks had nothing to do with dodgy mortgages or derivatives speculation, and thus remained relatively strong.

Also, the US does impose a capital requirement: banks have to hold 10% of their obligations in cash. The thing is, banks are basically in the business of loaning money they don't have. It's a fundamentally unstable industry.

As for mega-loans to Somalia or whatever...is that really an essential function that our country needs to perform? I would rather see that money get invested in domestic business.

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Re: House committee approves dismantling "too big to fail" firms

Postby Ixtellor » Thu Nov 19, 2009 8:17 pm UTC

phonon266737 wrote:perhaps rather than a universal reseve rate, have one dependent on a banks assests.


This was proposed, I haven't followed up.

Heisenberg wrote: realize this is tangential to your point, but it's actually on-topic: England is doing the same thing to its financial sector.


Yes, but the point is if other nations don't put the restraints on size and we do, they could end up with the mega lucrative international MF type loans.

MrGee wrote:As for mega-loans to Somalia or whatever...is that really an essential function that our country needs to perform? I would rather see that money get invested in domestic business.
.


1) Is it essential, no. Are computers essential? Think of it as a perk or luxury.

2) Domestic loans aren't backed by the tax payers. Its a complicated process, but a Somalia level loan can receive US taxpayer backing. So when they spend all the 'factory' money on machettes and don't repay the loan, the bank still gets paid.
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Re: House committee approves dismantling "too big to fail" firms

Postby netcrusher88 » Thu Nov 19, 2009 8:52 pm UTC

MrGee wrote:As for mega-loans to Somalia or whatever...is that really an essential function that our country needs to perform? I would rather see that money get invested in domestic business.

Well, if it results in a new market and a safer shipping channel, it is investing in domestic business. Other than that, I tend to think foreign aid to developing nations is a pretty good idea - the leadership wants badly to succeed, and when they do we'll see it back with interest. Or at least a new market.

I think this is a good idea. I'm concerned by some of the language I saw there, though: at some point it was described as a sort of "living will" for corporations so they could break up quickly if a division became too risky. That seems like a bad idea, because it encourages risk behavior - profit from it when it's good, jettison the division when the bubble bursts.
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Re: House committee approves dismantling "too big to fail" firms

Postby Dauric » Thu Nov 19, 2009 9:12 pm UTC

netcrusher88 wrote:I'm concerned by some of the language I saw there, though: at some point it was described as a sort of "living will" for corporations so they could break up quickly if a division became too risky. That seems like a bad idea, because it encourages risk behavior - profit from it when it's good, jettison the division when the bubble bursts.


Ultimately this is the problem. Setting up a set of safety procedures and safety-nets that protect the public and the economy-at-large without making them a beneficial factor on the corporate risk-benefit analysis, and skewing decisions in to realms of Stupid Stuff(tm) that otherwise wouldn't have been an option without that safety-net.
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Re: House committee approves dismantling "too big to fail" firms

Postby Bubbles McCoy » Thu Nov 19, 2009 9:29 pm UTC

MrGee wrote:I have heard more than one supposed expert say exactly the opposite: small-time banks had nothing to do with dodgy mortgages or derivatives speculation, and thus remained relatively strong.

Also, the US does impose a capital requirement: banks have to hold 10% of their obligations in cash. The thing is, banks are basically in the business of loaning money they don't have. It's a fundamentally unstable industry.

There are a lot of pet theories out there, but for the most part I think there are a lot of small factors coming together that resulted in the crash. While it's technically true that larger banks were deeply involved in the mess, I think it's a little foolish to criticize them too much when the government spoke of all their mortgage writing as a good thing. At any rate, plenty of smaller banks have folded, I'd suspect they used the same flawed risk models as everyone else.

I do know the US has a capital requirement, but I've heard rumors of Canada imposing stricter limits and having banks that pulled through the recession stronger than any other institution in the west did. However, like I said earlier I don't really feel qualified to comment on this, I don't really know if Canada just so happened to get lucky through heavy investment in the oil industry or something else of that nature. If anyone has happened to of seen an exhaustive commentary on the issue, I'd love a link.

MrGee wrote:As for mega-loans to Somalia or whatever...is that really an essential function that our country needs to perform? I would rather see that money get invested in domestic business.

I know I'm getting a little off topic here, but I've always found this attitude disturbing. What is it about domestic industries that makes them somehow deserve money more than a foreigner? Is an American somehow more entitled to work and good pay simply by virtue of where he was born? Regardless of your politics, it strikes me as somewhat wrong to defend a domestic industry in the face of a potentially superior foreign one. If for some reason a foreign country offers opportunity and an American has money and motive to support the endeavor I don't see why we'd be anything but supportive, unless you're specifically indifferent to the welfare of everyone outside of the country foreign investment is among the better ways of providing foreign aid.

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Re: House committee approves dismantling "too big to fail" firms

Postby Malice » Thu Nov 19, 2009 10:35 pm UTC

Bubbles McCoy wrote:There are a lot of pet theories out there, but for the most part I think there are a lot of small factors coming together that resulted in the crash. While it's technically true that larger banks were deeply involved in the mess, I think it's a little foolish to criticize them too much when the government spoke of all their mortgage writing as a good thing.


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Re: House committee approves dismantling "too big to fail" firms

Postby netcrusher88 » Thu Nov 19, 2009 10:44 pm UTC

Yeah... most of that criticism directed towards the government completely ignores the fact that the government insures a lot of mortgages - it's not government requiring the issue of mortgages to relatively risky individuals (or more accurately, typically low-rate mortgages with low down payments) that makes it happen, it's government insuring it. FHA loans weren't really a part of the problem, because they're guaranteed. It's a combination of the bad loans that banks made knowing full well they were bad loans, and some clever but nasty tricks where bad securities would be re-bundled and sold as good securities.
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Re: House committee approves dismantling "too big to fail" firms

Postby Dauric » Thu Nov 19, 2009 10:51 pm UTC

Malice wrote:
Bubbles McCoy wrote:There are a lot of pet theories out there, but for the most part I think there are a lot of small factors coming together that resulted in the crash. While it's technically true that larger banks were deeply involved in the mess, I think it's a little foolish to criticize them too much when the government spoke of all their mortgage writing as a good thing.


"You said it was good to have money! That means you bear some of the blame for my spree of burglaries!"


I'll agree with a certain degree of elaboration on the point: Financial experts should know their business, and know when politicians are blowing smoke out their @$$es. I'm in I.T. and if I see a software package that is endorsed and used by municipal governments all over the place, but I find a hole in their web-portal security large enough to drive a 16-wheeler through, I'm not going to go with the political groupthink and use that web-portal. I know better.

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As far as the smaller banks that failed, the vast majority of the smaller banks didn't write toxic loans, what killed them was when all the banks stopped lending money to each other just after Bear Sterns went belly-up. The larger banks could operate on their reserves for a while like a bear hibernating through winter, however the smaller banks couldn't do banking business since business credit lines -are- banking business and the vast majority of business credit had been frozen by the big companies while they evaluated their own holdings, and distrusted the evaluations of everyone else's holdings...
We're in the traffic-chopper over the XKCD boards where there's been a thread-derailment. A Liquified Godwin spill has evacuated threads in a fourty-post radius of the accident, Lolcats and TVTropes have broken free of their containers. It is believed that the Point has perished.

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Bubbles McCoy
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Re: House committee approves dismantling "too big to fail" firms

Postby Bubbles McCoy » Thu Nov 19, 2009 11:17 pm UTC

You can find quotes of democrats talking ill of any move to reign in the banking industry around 2002 on account of how great it was that housing was becoming attainable in mass to ethnic minorities, they weren't blind to the fact that ARM's were being issued they just couldn't predict how the issue would play itself out. While I'm sure there were some unscrupulous dealings, by and large I'm still a tad skeptical of claims that it was all due to deception. The big models involved in credit ratings were just flatly flawed, they observed that a ARM was uniformly profitable in the current market as a default just resulted in a capital gain so long as the market had no significant losses.

for Dauric - I have heard of smaller banks / mortgage writers that ultimately got involved against their better intuition, it did prove pretty profitable in the short term to create and sell them. Some mid sized banks were certainly deeply involved, I don't know if anyone would be advocating the dissolution of banks the size of IndyMac.

Marquee Moon
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Re: House committee approves dismantling "too big to fail" firms

Postby Marquee Moon » Fri Nov 20, 2009 3:06 am UTC

Here's a good article I read a week ago about TBTF institutions and how to deal with them. Here's what he said about the dismantling approach.

The problems with the first category of remedies—the breakup approach—are several. This approach involves more than downsizing institutions by reducing their work forces and selling some of their businesses, as is being done in many countries with and without the encouragement of governments. This approach fully applied involves breaking up institutions into unique entities with their own shareholders and managements and arbitrarily capping their absolute size. We do not know enough to say how small is small, however, or which individual institutions could fail without adverse systemic consequences, in part because those consequences depend on circumstances.

Moreover, if one large institution is broken up into, say, 5 or 25 smaller institutions, one can ask if the system really would be better off. If each of the smaller institutions follows the same or very similar investment strategies, known as herding, and has similar risk management policies, they may all experience similar stresses and losses. The systemic effects of letting them all fail would be the same as the systemic effects of letting the one large institution fail. It is possible that institutions would not herd or that their smaller, reduced size would limit some scope for excessive risk taking, but that is a conjecture, not an established fact.

The empirical evidence on the economies of scale and scope in large financial institutions is at best ambiguous. However, even if there are no economies of scale in the behemoth size range, which I am willing to believe, we also know that today 4 of the 10 largest global financial institutions by market capitalization are chartered in China. These government-owned institutions are by their construction TBTF. Unless their size and status are altered, they would be in a position to distort global competition even if they and their home country do not benefit from economies of scale and scope. One of the major global economic problems with TBTF would remain.

My conclusion is that the break-up approach to TBTF does not have much to recommend it. Many large institutions probably should be encouraged to shrink, but the economic case for breaking them up is not sufficiently strong to overcome the opposing political and practical realities.


In his opinion the best way to deal with TBTF institutions is to set up a "special resolution mechanism" that minimizes the damage done to the wider economy when they fail. I assume this would be like a long slow bankruptcy so the economy isn't hit by a big shock when the company goes under. Though he doesn't lay out any specifics, and I'm not sure how it'd be any different from a regular bankruptcy.

Goplat
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Re: House committee approves dismantling "too big to fail" firms

Postby Goplat » Fri Nov 20, 2009 5:38 am UTC

Bubbles McCoy wrote:I know I'm getting a little off topic here, but I've always found this attitude disturbing. What is it about domestic industries that makes them somehow deserve money more than a foreigner? Is an American somehow more entitled to work and good pay simply by virtue of where he was born? Regardless of your politics, it strikes me as somewhat wrong to defend a domestic industry in the face of a potentially superior foreign one. If for some reason a foreign country offers opportunity and an American has money and motive to support the endeavor I don't see why we'd be anything but supportive, unless you're specifically indifferent to the welfare of everyone outside of the country foreign investment is among the better ways of providing foreign aid.
"Is an American somehow more entitled to work and good pay simply by virtue of where he was born?" Objectively speaking, no. But as far as the U.S. government should be concerned, HELL YES. They damn well better have a pro-American bias, because if they try to help out all 200 countries in the world (most of which are not so stupid as to sacrifice their own interest for the other 199's), then America (with the force of 0.005 governments acting in its favor) will never be able to compete with other countries (each with 1.005 governments acting in their favor).


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