Obama Praises the FDIC -- So Now Can We Let the FDIC Do Its Job?
Some parts of the President's press conference (transcript here) came as quite a surprise. Consider his response to the first question about whether there needs to be a federal regulator for companies like AIG:
Well, keep in mind that it is precisely because of the lack of this authority that the AIG situation has gotten worse. Now, understand that AIG’s not a bank, it’s an insurance company. If it were a bank and it had effectively collapsed, then the FDIC could step in, as it does with a whole host of banks -- as it did with IndyMac -- and in a structured way renegotiate contracts, get rid of bad assets, strengthen capital requirements, resell it on the private marketplace.
So we’ve got a regular mechanism whereby we deal with FDIC-insured banks. We don’t have that same capacity with an institution like AIG, and that’s part of the reason why it has proved so problematic. I think a lot of people understandably say: Well, if we’re putting all this money in there, and if it’s such a big systemic risk to allow AIG to liquidate, why is it that we can’t restructure some of these contracts? Why can’t we do some of the things that need to be done in a more orderly way? And the reason is -- is because we have not obtained this authority.
If this is what he thinks, then why hasn't he used the FDIC to do precisely this for all of the banks that have taken TARP money (and many others that cannot demonstrate their solvency)? Why has he continued this policy of bailout in lieu of bankruptcy? And given the lack of willingness to unleash the FDIC to use its full authority, why does he believe that we would have allowed some new regulator for the likes of AIG to dish out the harsh medicine of bankruptcy to its equity holders and uninsured debt holders?
Lack of authority extends to too-big-to-fail banks
Well, that's what Obama wants to be able to have the authority to do but can't under current legislation.
Obama was just using AIG as an example because (1) it's already failed and (2) it's a clear example of something that's "not a bank". But if he wasn't worried about spooking the markets, he could just as easily have used Citi of BofA to illustrate the same difficulties of lack of authority to force an FDIC-style receivership. That's what the legislation Treasury will be sending to the Hill is supposed to address.
FDIC currently works just fine for IndyMac and the other banks it takes over each Friday because they're relatively tidy depository institutions, not complex financial conglomerates with lots of non-bank institutions and non-US affiliates. FDIC even could deal with monsters like WaMu and Wachovia that were basically just banks. But FDIC is currently unavailable for the worst of the systemic threats.
I don't get it - either a
I don't get it - either a bank meets the required capital requirements or it doesn't. The failed bank may have a coke machine in the lobby, but that coke machine should be sold off by the FDIC (even if the coke machine is the primary source of bank profits ;) If you didn't want your coke machine subject to FDIC takeover, you should have established a separate coke machine corporation.
What (in detail) makes Citi or BoA particular different from other banks?
Capital requirements aren't the final word
I don't get it - either a bank meets the required capital requirements or it doesn't.
It's not that simple at all.
As the Hempton piece I pointed to before explains, the purpose of capital requirments is to give a bank a "buffer" that preserves its solvency when bad things happen, so it doesn't have to be dissolved. Thus, liquidating a bank only because it fails to meets the capital requirements after a bad thing happens to it defeats the purpose of capital requirements.
(At that point other things should happen, like dividends should be suspended, new capital should be raised, etc.)
Hempton goes through five different meaningful measures of solvency with credible estimated numbers for them, e.g. estimating that by "regulatory capital" tests the banking system has bad shortages, (no secret!); but as to "positive net value under GAAP rules" ... "the banks almost certainly collectively pass"; etc.
With five different answers possible for one bank, there can be a real judgment call involved.
citi and bofa are bank
citi and bofa are bank holding companies. which is different from being a plain vanilla bank. unfortunately.
Obama Unfair?
My favorite part:
----------quote-------------
Let's go back to the rate that existed under Ronald Reagan. People are still going to be able to make charitable contributions. It just means, if you give $100 and you're in this tax bracket, at a certain point, instead of being able to write off 36 percent or 39 percent, you're writing off 28 percent.
....And so this provision would affect about 1 percent of the American people. They would still get deductions. It's just that they wouldn't be able to write off 39 percent.
In that sense, what it would do is it would equalize -- when I give $100, I'd get the same amount of deduction as when some -- a bus driver who's making $50,000 a year, or $40,000 a year, gives that same $100. Right now, he gets 28 percent -- he gets to write off 28 percent. I get to write off 39 percent. I don't think that's fair.
---------endquote--------
Could there be any clearer evidence--he doesn't understand progressive marginal tax rates--that this guy is in completely over his head?
Since Bush already spent it...
The taxes have to come from someone, sometime. Obama chooses rich people. Bush chose working stiffs. Obama won.
Then we allow "too big to fail" companies to engage in morally hazardous behavior and have to put out their fires so they don't burn down our houses...costing more money...again, you've got to get it from someone.
I understand that all the Republicans have gotten the "He's in over his head" memo...but you can't be serious. This BS to sell a tax is no more egregious than "Death taxes" (as if dead people paid taxes) which was republican's favorite phrase 10 years ago...
Speaking of not being serious
Under Bush's tax cuts the high income earners ended up paying a greater share of the taxes.
Transparency is key. The
Transparency is key. The lack of regulation is what allowed the structure to crumble. We had regulation in place since the Great Depression, however it has been lobbied away. I hope we can get some oversight back. Think back to the RTC, we need to look at that model.