If my recollection is correct, when this was happening The Economist magazine was also in favor of it. And one of the reasons they gave was that a more diverse business will make bankruptcy less likely.
And logically I have to agree with that. It also seems to me, that is not what caused the crisis.
I think the core of the problem is
A) Too much risk was taken on because there was huge incentive to maximize profit, and very little disincentive to minimize risk. People were gambling with other people's money.
B) Companies that were allowed to get too big to fail.
So I think we can keep mark to market, and naked short selling and even the repeal of Glass-Steagall as long as we have legislation in place to prevent systemic risk.
Something like monopoly laws, but instead of monopoly, companies would be charged with being too big to fail.
If the courts convict them of being systemic risk, they have to find a way to split into at least two parts, but they can do it while preserving as much share holder value
as possible.
And then no more bailouts!
I am not sure how Glass-Steagall eliminates systemic risk and the too big to fail scenario? It makes it less likely but does it eliminate it?
You do realize that the popular catchphrase "Too Big To Fail" is politician-speak for "We know these guys are crooks and we know they committed fraud on a massive scale, but won't indict them because it would bare our own corruption and failure to enforce existing laws because we really wanted our friends to make more money and donate to the campaign!"
I kind of agree with that, but it's also oversimplifying.
Putting banks into receivership doesn't just happen magically, there's laws for it. There are no equivalent laws for international behemoth insurers like AIG. The government can't just make up laws as it goes along.
As to a disorderly unwinding like Lehman, well that basically caused a run on the banks.
The government can't just make up laws as it goes along.
You are right, and I'm glad you are saying it :)
But didn't the Fed fail in it's regulatory role over the commercial banks to whom AIG was counterparty on swaps, when they allowed valuation of Tier Capital assets based on the 'quality' provided by swaps from AIG and friends? With any due diligence whatsoever the banks would have known that AIG didn't have the capital to pay those contracts. From that angle it looks like some or all of: The Fed was asleep, AIG misrepresented itself to CDS customers, or banks were complicit in the misrepresentation (or they didn't care because they could hedge the CDS with short CDS from a different counterparty -- now that is systemic risk). Go a step further -- the Fed accepted these CDS-wrapped assets as collateral for TSLF/TALF loans -- so the same statements about banks could be applied to the Fed, they either didn't do the due diligence on the collateral or they are complicit in breaking the law. Right?
Edit: for God's sake, I despise economics. I just want to get back to work and create stuff!
Absolutely, regulators failed all over the damn place.
But I'm not sure how to fix that. It seems they will be merged into one giant super regulator, I'm not sure that helps. Perhaps making the head of the super regulator an elected office?
And sorry about keeping you from work :) I'm in a cubicle farm... but won't be there for long.
"Too big to fail" is also an euphemism for "too big to obey the law."
> Because this didn't start on November 5th, 1999. This started on April 6th, 1998, a year and a half before Gramm-Leach-Bliley passed, and it started with one man telling the federal government that he just plain wasn't going to obey the law, and that man's name was Sanford I. "Sandy" Weill. Sandy Weill's purchase of Citibank, as CEO of the brokerage and insurance company Travelers Group, was euphemistically called a merger, but it was Weill who was calling the shots, and he was open from day one as to what he was doing: intentionally violating Glass-Steagall, the law that prohibited banks from owning brokerages and vice versa. He didn't agree with the law, he wanted it changed, he believed that banks should be able to gamble on more risky assets, and he intended to get even richer doing so. Under the terms of Glass-Steagall, on April 6th, 1998 a two-year countdown clock to the destruction of Citibank automatically began. If he was going to obey the law, he had until then to announce a plan to spin off all of the departments that Glass-Steagall said a bank couldn't own, and then another three years after that to complete the sales, or else surrender his banking license to the FDIC. Instead, he said, in effect, "come and pry it out of my cold, dead hands. Go ahead, kill off the single largest and most important bank in the world for being a scofflaw. I dare you," in terms almost that blunt.
> Congress blinked. On almost the last possible day they could do so, they revoked the FDIC's permission to yank his banking license. Why? Because Citibank was too big to fail. And that meant that it was too big to be forced to obey US law. And to the right-wing Democrats in the White House, and the Republicans in Congress, that was just okay with them. Only a few "far-left" "radicals" and "extremists" thought otherwise. Who were the American people supposed to believe, a tiny minority of "far-left" "radical" "extremist" "socialist" nobodies, or "historians," "economists," "financial experts," college professors from "top universities," "successful entrepreneurs," senior spokesmen for both parties, and the President's own Treasury Secretary?
> And I'm sure if you ask President Obama about any of this, he'll put on the usual basset-hound expression that he wears when you ask questions about prior misconduct, and give his usual stern speech about "looking forward, not backwards" (when refusing to look backwards is exactly what got us into this mess in the first place).
I agree on your point B, I think that companies can get to a point where they are like a cancer, they themselves thrive (for a while) but they can end up destabilizing the host organism. Not a perfect analogy, and I worry about giving the government the power to declare that a company is "too big" because historically such powers are abused. IF such size could be pre-defined on purely objective measures, perhaps there is a way it could work.
I think the rules can be fairly simple, if you have more than 5 billion a year (inflation adjusted starting now) in revenue and control more than 33% of the market you should be treated like a monopoly. That way small / midsized markets can be dominated by a single company which can be extremely efficient but no single company can become "to big to fail".
And logically I have to agree with that. It also seems to me, that is not what caused the crisis.
I think the core of the problem is
A) Too much risk was taken on because there was huge incentive to maximize profit, and very little disincentive to minimize risk. People were gambling with other people's money.
B) Companies that were allowed to get too big to fail.
So I think we can keep mark to market, and naked short selling and even the repeal of Glass-Steagall as long as we have legislation in place to prevent systemic risk.
Something like monopoly laws, but instead of monopoly, companies would be charged with being too big to fail.
If the courts convict them of being systemic risk, they have to find a way to split into at least two parts, but they can do it while preserving as much share holder value as possible.
And then no more bailouts!
I am not sure how Glass-Steagall eliminates systemic risk and the too big to fail scenario? It makes it less likely but does it eliminate it?