Commodity Trade Mantra

This Could Finally End The TBTF – “Too Big to Fail”

This Could Finally End The TBTF - "Too Big to Fail"

This Could Finally End The TBTF – “Too Big to Fail”

TBTF – The Too Big to Fail Banks

Last December, Senators David Vitter (R-LA) and Sherrod Brown (D-OH) got the Senate to pass legislation (the House never took it up) to get the General Accountability Office (GAO) to examine the government “subsidy” too-big-to-fail banks enjoy.

Thankfully, the GAO, a government watchdog group, agreed to the task.

Now we’re about to get their report.

It’s coming in two parts – a “backgrounder” due out in a few weeks and the hard number calculations coming in early 2014.

I’m telling you about this now because we all need to be watching for it. While I’m sure the report won’t draw conclusions or offer solutions, let’s hope it gives the world the ammunition it needs to shoot down to size (to what would preferably be mid-tier regional bank size) the TBTF banks… so our free markets can be free at last.

The GAO report will attempt to calculate, among other benefits, the annual dollar amount the big banks “earn” as a result of government and taxpayer backstopping. Simply put, these banks are so big they would never be allowed to fail and, therefore, are considered by most depositors the safest place to park their money.

TBTF banks benefit hugely from that.

The banks use all that money to conduct their businesses, buy Congress, wage their bets, manipulate markets, pay themselves huge bonuses, pay their fines, and still have billions left over to pay shareholders fat dividends.

Bloomberg, drawing on a study by two IMF economists, determined that the “subsidy” amounts to $83 billion a year. The GAO study will attempt to do its own calculations on the annual subsidy. We’ll see.

According to GAO spokesman Charles Young, the coming report will also “look at government support and economic benefits that banks and bank holding companies received from emergency government actions during the crisis, how recent financial reforms changed government safety nets for banks and bank holding companies, and factors that could impact the effectiveness of these changes.”

There are lots of ways to look at the subsidy issue and lots of ways to calculate benefits and costs.

Professor Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy, said this about the GAO report in an American Banker article Tuesday: “Taxpayers already have been required to open up their wallets to keep these financial giants in business to prevent catastrophic collapse. They should not also have to foot the bill for the operating costs of the business model these financial firms have chosen. In other words, the GAO should focus on the gross benefit of being TBTF, not the benefit net of fines, penalties and regulatory burdens.”

The professor’s suggested approach to the TBTF subsidy issue is, “Have the insurance industry tell us what it would cost each major bank to insure itself against criminal charges. The cost of those insurance premiums may not be the final answer regarding the economic value of criminal immunity, but it would be much closer to the truth than zero.”

That’s a scholarly approach. It uses the free market (letting insurance risk models determine premium costs) to determine “the economic value of criminal immunity.”

Me, I’m not a scholar.

I have a different approach to ending the TBTF subsidy.

I say, first of all, apply criminal statutes to what are being characterized as civil crimes.

Calculate the amount of losses that result from banks schemes in terms of fraud and theft and hand out jail sentences (to all directors and all the top executives who can be placed at the scene of the crimes) commensurate with what criminals like Bernie Madoff face… a lifetime behind bars.

Second, fine the Hell out of crooks and make them have insurance policies to pay those fines. At least there will be less of a direct burden on shareholders, who foot the bill for fines, on account of it being cheaper to foot the premium bills for directors and officers and executives and traders, than just reaching into the equity pile to pay fines.

Third, don’t allow fines to be deducted as operating costs. Establish them on the balance sheet as a liability to be paid out of future compensation. That way, there won’t be any bonus pools for years and years and no incentive pool for coming up with criminal schemes.

Do you think that could work?

 

Courtesy: Shah

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