Obama Pushes New Bank Regulations

[DGuller]

We don't need more regulation, we just need to break up the huge ones into merely big ones.

I think that's precisely wrong.  Systemic over-leverage is going to lead a cluterfuck regardless of how big the biggest financial institutions are.  The more leveraged everyone is in a financial system, the more correlated the fortunes of everyone are.  The solution to that is restriction of leverage, which is a regulation territory.

[MadImmortalMan]

Have we not already added more restriction on leverage?

[The Minsky Moment]

Modest proposal for the banking sector:

Instead of mandating all sort of complex leverage regulations and adding more levels of supervision, why not simply forbid financial institutions from using the corporate form (perhaps with limited exceptions for "narrow banks")?  Nothing like unlimited liability for imposing capital discipline.

This would also have the virtue of encouraging more rational comp practices.

[Barrister]

Modest proposal for the banking sector:

[Admiral Yi]

I am confused.  There is no question the the actions of the Treasury and Fed were of enormous benefit to banks individually and as an industry.  The fact that there was a more general benefit to avoiding a general financial collapse does not change that fact, it only reinforces the point about what would have happened in the absence of government action.

My point is that if all the parties who benefitted from TARP should be paying for it that's all of us.

[Neil]

Modest proposal for the banking sector:

Instead of mandating all sort of complex leverage regulations and adding more levels of supervision, why not simply forbid financial institutions from using the corporate form (perhaps with limited exceptions for "narrow banks")?  Nothing like unlimited liability for imposing capital discipline.

This would also have the virtue of encouraging more rational comp practices.

Does the United States have something like Alberta's Unlimited Liability Corporations?

""The liability of each of the shareholders of a corporation incorporated under the Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.""

[alfred russel]

I was saying over a year ago that overleverage would be less of a problem if the people enabling leverage (the debt holders) were made to pick up the tab. I guess the Obama administration doesn't read my posts.

[DGuller]

I was saying over a year ago that overleverage would be less of a problem if the people enabling leverage (the debt holders) were made to pick up the tab. I guess the Obama administration doesn't read my posts.

IMO, that wouldn't solve it.  The reason we didn't make debt holders pay is because doing so would blow up the system.  Sure, in theory, we can say: "Ok, we're serious this time, we won't bail you out again, we'll go into depression if we have to", but the credibility of such game-of-chicken threat would be dubious.  It also requires rational thinking on the part of debt holders, which unfortunately is in short supply during speculative manias.

[Hansmeister]

I was wondering why the market was tanking today.

I'm still befuddled by that tax to pay for the loans that were paid back.  Is JP Morgan supposed to pay for the money the Treasury will lose on AIG and GM?

The problem is that the "tax" is a bill of Attainder and clearly unconstitutional.  if only the president had studied constitutional law at an Ivy league university and taught constitutional law at the university level he might know that. 

[Faeelin]

The British Conservative Party, a group known for being advocates of the proletariat, apparently support Obama's proposal. 

[alfred russel]

IMO, that wouldn't solve it.  The reason we didn't make debt holders pay is because doing so would blow up the system.  Sure, in theory, we can say: "Ok, we're serious this time, we won't bail you out again, we'll go into depression if we have to", but the credibility of such game-of-chicken threat would be dubious.  It also requires rational thinking on the part of debt holders, which unfortunately is in short supply during speculative manias.

A main reason we couldn't let the financials go bankrupt is that going through an ordinary bankruptcy proceeding would have destroyed the value of the institution. A financial company has to present a strong balance sheet or other parties can't entrust it with their assets. There is also the problem that a lot of the derivative contracts are very difficult to unwind (and credit unworthiness can unhedge another party destroying their balance sheet) and a lot of assets are illiquid.

Why not empower regulators to nationalize banks that are "too big to fail", which would wipe out equity holders but still allow the company to function and not ruin counterparties, and then allocate any government loss to debt holders? Add in some regulations of more dubious derivative instruments for good measure.

Right now it seems like a win-win for anyone holding the debt of a "to big to fail" financial institution, as they get bailed out if the company goes bust. So if you are a lender, why not lend as much as the institutions will take on? Trying to keep the financial institutions from taking on debt that is functionally subsidized and insured by the US government--seems destined to fail due to the ease you can move financial assets and liabilities out of the country and the multitude of ways you can take on liabilities (including some that are off balance sheet).

[Admiral Yi]

One thing to keep in mind in the whole too big to fail debate is that closing down banks through the normal FDIC procedure is not free.  People don't normally buy failed banks with negative assets out of the goodness of their hearts and sense of civic duty.

[The Minsky Moment]

Does the United States have something like Alberta's Unlimited Liability Corporations?

""The liability of each of the shareholders of a corporation incorporated under the Act as an unlimited liability corporation for any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.""

Not that I know of - although each of the 50 states has their own corporation laws so there might be one out there.

[The Minsky Moment]

I am confused.  There is no question the the actions of the Treasury and Fed were of enormous benefit to banks individually and as an industry.  The fact that there was a more general benefit to avoiding a general financial collapse does not change that fact, it only reinforces the point about what would have happened in the absence of government action.

My point is that if all the parties who benefitted from TARP should be paying for it that's all of us.

I get that; I don't get the logic of the premise.  The only way in which non-banks benefitted from TARP is that the horrible mistakes made in the financial sector were blocked from sinking the entire economy. 

[The Minsky Moment]

The problem is that the "tax" is a bill of Attainder and clearly unconstitutional.  if only the president had studied constitutional law at an Ivy league university and taught constitutional law at the university level he might know that. 

This is just too funny - Hans is now aligning himself with the his constitutional lawyers friends at ACORN:

http://lawprofessors.typepad.com/conlaw/2009/12/acorn-defunding-is-a-bill-of-attainder-court-enjoins-the-continuining-appropriate-resolution-barring.html