Tuesday, July 22, 2008 at 11:25 am
Can Paulson really do anything about 'too big to fail'?
Hank Paulson's Build-Confidence-Without-Saying-Anything-That-Will-Sound-Dimwittedly-Pollyannaish-a-Year-From-Now Tour continued with a speech in New York this morning. It's actually pretty good, as these things go. But this paragraph struck me as problematic:
Looking beyond today's market challenges, we need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail. Essential to this objective is improved market infrastructure and operating practices to increase transparency and efficiency, especially in the OTC derivatives market and the tri-party repo system. Improved infrastructure will add to market stability and mitigate the likelihood that a failing institution can spur a systemic event. We also need additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system.
Great, in theory. But the reality in a downturn like this is that big financial institutions get bigger as they, with encouragement from regulators, acquire troubled competitors (as JP Morgan Chase and Bank of America have done this year). Meaning that they're even more likely to be "perceived to be too big or too interconnected to fail" in the future, right?
5 Comments to “Can Paulson really do anything about 'too big to fail'?”
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Tuesday, July 22, 2008 at 1:04 pm
Isn't the controversy over interconnectedness or being "too big to fail" a bit beside the point? Isn't the real problem that risk taking is disproportionately rewarded, and failure not sufficiently punished? And given that these are areas under the purview of the CEO and the Board, isn't that precisely where the responsibility and remedy lie?
Tuesday, July 22, 2008 at 1:23 pm
Well yeah. But if an institution is too big to fail, the cost of the problem ends up being borne partly by taxpayers.
Tuesday, July 22, 2008 at 1:43 pm
True enough that taxpayers end up bearing a part of the cost. And corporations have clearly demonstrated that they cannot, on their own, insure a viable financial system. Shouldn't the taxpayers, as stakeholders (which, by the way, they are even in the absence of a crisis) insist on additional appropriate regulations?
Tuesday, July 22, 2008 at 5:59 pm
Shouldn't the taxpayers, as stakeholders (which, by the way, they are even in the absence of a crisis) insist on additional appropriate regulations?
The problem is that we replaced human underwriting standards, with a computer. The computer was fairly easy to trick into giving out loans it shouldn't have. Even "full doc" loans weren't full doc because many times the computer didn't require verification of income.
The biggest problem is that out of everyone responsible for decent lending standards (borrowers, brokers and lenders) none had any skin in the game. I think that the most useful policy would allow the government to sue executives/managers for their bonuses/salary due to poor lending practices ending in a government bailout. If they knew they could be on the hook for poor loans, they'd never have let it happen.
Wednesday, October 15, 2008 at 2:38 am
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