One of the key points of debate over financial institution regulation reform is how many different bank regulators there should be and the extent of their respective bailiwicks. Some argue that the number of regulators is a secondary issue. It's not. It's a first tier concern. A critical flaw of our banking regulation system is the ability of financial institutions to engage in regulatory arbitrage, which has a corrosive effect on the quality of bank regulation. As long as there are multiple federal banking regulators supervising essentially equivalent financial institutions there will be regulatory arbitrage, which will inevitably undermine whatever statutory framework Congress sets forth for financial institution regulation.
Tag: FDIC
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Whatever Happened to Bankruptcy?
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It's hard to remember in the midst of the bailout craze, but the United States does have legal mechanisms for dealing with insolvency. We have the FDIC system for banks and bankruptcy for everyone else just about. These are well-established institutions. There's a wealth of experience and caselaw about both. We know how they work, and both are reasonably transparent and fair. While they have some limitations, they have served the country well for years.
And yet there has been a marked resistance in both the Bush and Obama administrations to putting banks into FDIC receivership and non-banks into the Chapter. To be sure we had WaMu, Wachovia, and IndyMac cycled through the FDIC, and Lehman is wending its way through bankruptcy. But the list of companies we haven't required to go through the ringer is equally impressive: AIG, Citi, Bank of America, Bear Stearns, GM, Chrysler (and probably many of the financial institutions that took TARP funds).
All of this raises a couple important questions: why have some institutions been allowed to go through the established legal regimes, while others have received ad hoc treatment? Is there something about the FDIC process or bankruptcy that the Bush and Obama administrations think doesn't work? If so, what is it? (And let's fix it if it's a problem.) Or is it a matter of whose ox would get gored in these processes, but not in an ad hoc treatment? Consider–the bonuses that were specially protected per Geithner's request in the EESA would just be general unsecured claims in bankruptcy or FDIC proceedings. And implicit recourse to banks by investors in off-balance sheet entities (like SIVs) wouldn't stand a chance in FDIC proceedings because of the O'Doench doctrine (FDIC not bound by secret deals).I'm bothered by the apparent lack of rhyme or reason for when we will use FDIC/Bankruptcy and when we won't. It'd be nice to see the administration articulate why FDIC/bankruptcy aren't good options. It can't just be a matter of funding–I'd much rather see the government as DIP lender than as the vulnerable preferred (or common) shareholder, bailing out bondholders.[Hat tip to Stephen Lubben for inspiring these thoughts.] -
Senate Bailout Bill: Just a 451-Page Version of Paulson’s Two-and-a-Half Pages
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For all the ink spilled about the bailout bill over the past week or so, there has been strikingly little media coverage paid to the actual terms of the bailout bill. A tremendous amount of attention has been paid to the politics of the bill, but it just doesn’t make a lot of sense to talk about the politics of the bill without looking at the substance of the bill. Legislation can be technical and it can be hard for reporters to know the significance of legislative provisions, but I’ve just read too many articles that regurgitate the blandishments about the revised (and rerevised) bill imposing oversight, limits on executive pay, help for homeowners, and now the FDIC deposit cap drivel. Any consideration of the substantive provisions shows that there’s a lot of verbiage and very, very little in substance. Once one realizes this, the politics of the bill are even more bizarre and more fascinating.
The bill has been bloated up to 451 pages in the Senate version. The additional 341 pages in the Senate version have nothing to do with the bailout per se, but instead are an energy bill and a tax bill. In short, the Senate version is the same as the failed House version, but with the addition of (1) the irrelevant FDIC provision, and (2) other unrelated legislation. And the House version was just a 110-page expansion of the Paulson’s original two-and-a-half page proposal that had lots of extra window-dressing, but little in the way of new substantive provisions that are actually mandatory, enforceable, and monitorable. This means that the Senate version of the bailout bill has the same flaws as the original Paulson bill. (Gotta hand it to Hank–he’s concise.)
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$250K FDIC Caps: Nice, but Irrelevant
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I haven’t seen the rerevised bailout bill yet, but if its major improvement is raising the FDIC insurance cap, to $250,000 that’s a huge yawn. Such a move is helpful, but largely irrelevant to the current crisis.
Sure, it’s ridiculous that FDIC caps haven’t been inflation indexed, but this crisis is not about lack of FDIC insurance. The current cap is $100,000/depositor/institution. But there just aren’t that many Americans with more than $100K sitting in their bank accounts. The Federal Reserve’s 2004 Survey of Consumer Finances indicates (on p. 14) that of the top 10% of Americans in terms of wealth, the median amount held in accounts that could be FDIC insured was $58,000. Most Americans have nowhere close to $100K sitting around in the bank, much less $250K. And if you’re super rich, you don’t just park hundreds of thousands of dollars in your savings account–you either spread it out over several institutions or, more likely put it into higher-yielding investments.
So what is the $250K about?