The Political Problem with Resolution Authority

The administration is putting a lot of eggs in the resolution authority basket — the idea that, if it gets the power from Congress, it can take over large banks and wind them down, sell them off, or run them temporarily without taking the financial system down. I agree that taking over Citi last winter would have been preferable to what did happen. But I wrote somewhere (sorry, can’t find it now) that resolution authority has a political problem — if, say, JPMorgan Chase runs into trouble five years from now, how much confidence do we have that the government would actually invoke the power and take over the bank when push comes to shove? Even if a Democratic administration were in place, the executives at JPMorgan would scream bloody murder, as would the Republican Party, and the administration would have to decide if it wants to fight that political battle (“Socialism!!!”) before pulling the trigger.

Adam Levitin has a more thought out variant on this concern that I just found. Here’s his bottom line:

“[I]n most failures of too-big-to-fail institutions, the government will have to provide funding for the resolution, and this makes the resolution a political issue.  For this reason alone, I think we are kidding ourselves if we believe that we can regularize the resolution of systemically important institutions.  It would be great if we could regularize too-big-to-fail resolution, but I don’t think it is possible to come up with any set of rules that we won’t break at the first sign of them creating distributional results that we do not like. “

I’m not saying the government shouldn’t have resolution authority; I’m just saying we shouldn’t assume that it will solve our problems.

By James Kwak

30 responses to “The Political Problem with Resolution Authority

  1. Resolution is the best option we have now, until bank executives can learn to be responsible.

    Until resolution becomes necessity, investment banks and commercial (retail) banks need to be separated. Also credit default swaps should be made ILLEGAL. I could go on……….

  2. Levitin is right; this kind of regulation, like any other allegedly to be imposed on powerful rackets, cannot work.

    Sanders has the right idea, and the only idea, unless we want to be serfs for these rackets for the rest of American history.

  3. It is patently absurd to think that such resolution authority would ever be used. And everyone knows it, including those proposing it.

    In short, it is a transparent attempt to give the appearance of doing something without actually doing anything. I am not sure why something so expected still disappoints me.

  4. Nemo,
    There is some truth in what you say, but don’t you think you’re being a little extreme??? I think they might still use resolution, although I have to say, I really really was disappointed with the GMAC thing. I mean that GMAC bailout is like twisting the knife, pulling it out and then rubbing salt into it. That’s where I just feel President Obama has no idea what is going on, when they bailout GMAC. GMAC’s bailout is the type of thing that will lose Obama my vote.

    But the FDIC has done more good than bad with their resolutions. I mean we need to start letting them go bankrupt and after bankruptcy what other option is there than Resolution??

    Really like your blog by the way.

  5. This resolution authority is supposedly for “too big to fail” institutions. For the reasons James (and Adam) cite, I believe there is zero possibility it would ever be invoked.

    The FDIC intervenes successfully in smaller banks because it is not controlled by those banks. This is why we must break up — and not simply “regulate” — the largest financial firms.

    Thank you for the kind words re: my blog. Wish I had more time for it.

  6. Never say never. They would have used it with Bear, and they would have used it with Lehman, and they would have used it with AIG. They would have used it with Fannie and Freddie. They should use it with GMAC. I’m not discounting the political problems James cites, I just dispute that we all know it will “never” be used.

    When it comes down to it in the middle of the night when the hounds are at the door, they will use it.

  7. It’s becoming ever more clear that the only solution is to let them go bust. Asking bank executives to “learn to be responsible,” as Ted suggests, is ridiculous. That’s not what they’re paid for, and besides, most of them think they are responsible already–that’s the worst part of the problem.

    As for Obama’s losing Ted’s vote, then who does that vote go to? Sarah Palin? I’m very unhappy with Obama’s policy of hiring the idiots who caused the problem to fix it, not to mention his continuing to follow the Cheney policy in Afghanistan and Iraq, but I don’t see a better alternative I might vote for–except Sanders. Somehow I don’t think he’d win.

  8. I like listening to Hugh Hendry he seems intelligent, but what was the deal with the eye contact?? I about died laughing. It was like he was having a conversation with a mustard stain on his shirt.

  9. As long as the resolution authority comes with a no bailout clause, it will be used. The voters hate bailouts.

  10. IMO, it should come with a no buyout clause, as well. One reason we have banks that are too big to fail is that the gov’t has gotten big banks to buy out failing financial institutions.

  11. If there is a nasty damage part to the law (e.g. failure to promptly break up the offending trust shall constitute an overt act as specified by Article 3, Section 3 of The Constitution), then it gives the breaker-in-chief incentive to do the deed, while at the same time offering political cover to do so without delay.

  12. Window dressing. Nothing will ever be done to rein in those scumbags, short of revolution. They own us, they own the government. Any “legislation” will be a joke.
    Do you really believe for a millisecond that any of our dirtbag elected officials(including the POTUS) would ever do ANYTHING that might cut off the money spigot?
    I have absolutely no faith at all that any legislation with real teeth will get passed. We’ll have a dog and pony show and they’ll pretend that they’ve done something.
    I am so thoroughly sickened by what they have done to our economy, that I believe that we should release the DC sniper, give back his gun, and tell him to go thin the herd on Wall St.

  13. Calvin Trillin does it again. Magnificent. From The Nation magazine. Scroll down to the poem after the jump.

    http://www.thenation.com/doc/20091116/trillin

  14. The chances that the Congress would enact any really effective resolution authority is miniscule. If it were to be enacted, it must provide for external funding (ala FDIC) imposed as a regular charge on the TBTF institutions, so that funding, if it does happen would be a non-issue. Second, in order to avoid the issue all together, obviously a reinstatement of Glass-Steagall would be required to separate normal banking from investment banking. Additionally, obviously, the reserve requirements should be strengthened sufficiently to make the resolution essentially unnecessary. Of course, none of this will happen, because the oligarchs won’t permit it. End of story!!!!

  15. Perhaps this is a naive question, but can’t they write the law to trigger an automatic takeover if a bank fails some agreed-upon metric? Capital reserves below a certain ratio, or something like that?

  16. Spot on. So there are three possible solutions I can see:
    1. prevent institutions from becoming TBTF via some set of rules
    or
    2. remove from Congress the power to bail them out when they (inevitably) fail
    or
    3. impose TBTF insurance
    Number 1 doesn’t seem very likely given our current crop of regulators.
    Number 2 will never happen.
    Number 3… maybe?
    Any other ideas?

  17. Make credit default swaps illegal.

  18. see my post above – Article 3 Section 3 of the Constitution deals with TREASON and is a capital offense as specified in that section. Messing with the solvency of the Nation should be treason, and it should be incentive enough to force action AND give political cover.
    Extreme, sure, but it would guarantee action. Put a few regulators and conspiring bankers to DEATH and they’ll comply faster than you can say “credit default swaps are neither gambling nor insurance”.

  19. Its about discretion vs. rules. Before a crisis you want rules to mitigae moral hazard…

    http://www.pewfr.org/task_force_reports_detail?id=0016

    Dudinrg a crisis you want discretion to prevent spillovers….

    http://www.pewfr.org/task_force_reports_detail?id=0027

  20. Red,

    You are absolutely right. What they did WAS treason.
    What they did was compromise national security by their reckless behavior. In China they would be put to death, and rightly so.

  21. It’s still going on, so it IS treason.

  22. To clarify, I’m not as bloodthirsty as I might be coming across. I don’t wish violent death upon bankers, regulators, and/or politicians – maybe by disease when I’m daydreaming, but not murder or execution. However, I see this as a political crisis between democracy and fascism. If the intent of the fascis- er bankers is to loot the US treasury for their own benefit, that is treason IMO and should be treated as such. The penalty for treason includes death.

  23. this is exactly the same power that was supposed to be TARP (in my opinion) and the FDIC. the gov’t is supposed to step in and take over these institutions. but last year it didn’t happen because they didn’t have the political “balls” to do it.
    I think we miss one point that inhibits President Obama from actually taking any kind of serious action; a damn if he do, a damn if he don’t. if the president tries to pass new banking regulation, the lobbyist dump all their money into the republican party and the democrats lose every seat they have up for election. and by doing nothing we are screwed as a country at the mercy of the bankers. I don’t blame the republicans; i blame the lobbyists.

  24. Red,

    Maybe you’re not bloodthirsty, but I am. Those guys are despicable. The banksters made pots of cash as the bubble expanded, then after it popped they came to us hat in hand and ripped us off for the largest heist in all of history. 13 TRILLION dollars. That money could have PAID off every mortgage that exists. Where did the money go? I’m willing to bet that we’ve minted some billionaires from the bailouts. Millions out of work, losing their homes, losing their pensions, misery and suffering countrywide….and NOTHING has been done. No investigations, no perp walks, no indictments, no jail time for anybody!
    What a time to be a banker-crook! They kill the dollar as the world’s reserve currency, cause the demise of the petro dollar trade, unseat us as the premier power on earth, and NOTHING IS DONE ABOUT IT.
    These people are common thieves and deserve our contempt. You are 100% right, and don’t back down. It is treason, and treason is punishable by death.

  25. I’m not backing down, I’m just making sure that I’m not threatening anyone with physical harm. I want to see these people in jail, but not join them.

    If convicted of treason, which I believe the TBTF crooks should be tried for, the maximum penalty is death. Personally, I’d be just as happy if their enormous wealth was confiscated and they were subject to public humiliation and/or banishment. I would, however, offer my services to participate in or (better yet) command the firing squad if called for.

    I do take exception to your assessment of these people as common thieves. They are anything but common – I would say they are exceptional and therefore deserve exceptional punishments. Deliberately bankrupting the United States, or conspiring to do so, is IMO Treason if they are US citizens, or should constitute an act of war if foreign nationals. Either way, there’s this oath I took to defend the aforementioned Old Document against both foreign and domestic enemies, and I stand ready to do so.

    I’m waiting for the Encyclopedia Galactica to time warp to the Earth from the future, so I can read that these people “were the first against the wall when the revolution came.” (D. Adams)

  26. I’m with you all the way man. I don’t think that Homeland Security will knock on your door for general and righteous anger. Maybe if you dissed the POTUS that would be something they’d be interested in, but EVERYBODY with half a brain hates Wall St.
    You’re right, they’re exceptional thieves and they should fry in exceptionally hot electric chairs. People think I’m kidding, but I’m quite serious; treason is punishable by death.

  27. Why Does Wall-Street Prefer The Fed as Regulator (Administration Plan) Over Non-Fed Regulator (Senate Plan)?

    Sen. Christopher Dodd,the chairman of the Senate Banking Committee, a Connecticut Democrat,on Tuesday unveiled a plan to take most oversight of banks away from the Federal Reserve and gives it to a new bank regulator.

    By a 2-to-1 margin, a WSJ poll of 43 “..economists said the U.S. shouldn’t’t adopt a system where financial regulation is separate from the central bank.”http://blogs.wsj.com/economics/2009/11/10/economists-say-dodd-plan-to-split-fed-powers-is-mistake

    Perhaps the reasons are related to the following:

    Wall-Street prefers a single regulator: a single regulator is more easily influenced than multiple competing agencies.

    Although the Fed is technically independent, there policies are usually aligned with administration goals. The administration of the day could more easily affect regulatory changes; a separate regulator would likely be subject to more congressional oversight; its a matter of checks and balances.

    The Fed ‘s primary goals are employment and price stability. There are inherent conflicts between these goals and regulation; credit expansion and innovative financial products sometimes clash with the goals of regulation . The Fed has stated in the past that regulation should be viewed through the lens of promoting economic growth. When push comes to shove, the Fed will err on the side of its “dual mandate”

    The Fed is a cheerleader, a regulator is a cop. The Fed aims to be popular, to be a friend to all. The Fed does not have the stomach to be a regulator. There is some evidence the Fed does not wish to a regulator; the Fed has produced surprisingly little research over the years on the systematic risk of financial institutions, and how to manage that risk. More recently, Fed Vice-Chairman Kohn said “..that he does not want a mission for financial stability added to the same part of the Fed’s legal mandate that charges it with promoting price stability and maximum sustainable growth.”

    http://blogs.wsj.com/economics/2009/10/23/kohn-warns-against-rushing-reform

    An institution that is not enthused about it’s mission, is unlikely to do a good job; this would not be a problem for Wall-Street.

  28. Red,

    Funny coincidence about my comment to you that everybody hates Wall St.
    I just left the supermarket and my words are echoed on the cover of Time Magazine, “Why Main St. hates Wall St.”
    So, rail all you want, you’re in good company, and don’t worry that the CIA will come knocking at your door…the CIA has to be concerned with AN ENTIRE POPULACE THAT IS READY TO REVOLT.

  29. I don’t see a revolt. However, I do see the potential for a new era in politics (meaning a new political party or two).
    I think that a revolt will be much more likely if the health care bill as it currently exists (mandating private coverage) becomes reality. But I don’t see an armed revolt arising from the people, nor do I think that is the answer. If anger within the general population gets to some critical mass (I don’t know what that mass is), I believe that the self-serving politicians will throw the oligarchs under the bus and claim that they intended to do so all along.
    And I think that many (if not most) people would believe them. This would still be an improvement, even if it doesn’t cure the disease.

    An actual revolt would turn the current circus into a monumental cluster **** (c.f. 1930-1945) where the outcome would be unpredictable, except that nearly all of the outcomes I can envision would be worse than the status quo.

  30. Why Does Wall-Street Prefer The Fed as Regulator (Administration Plan) Over Non-Fed Regulator (Senate Plan)?

    Sen. Christopher Dodd,the chairman of the Senate Banking Committee, a Connecticut Democrat,on Tuesday unveiled a plan to take most oversight of banks away from the Federal Reserve and gives it to a new bank regulator.

    By a 2-to-1 margin, a WSJ poll of 43 “..economists said the U.S. shouldn’t adopt a system where financial regulation is separate from the central
    bank.”http://blogs.wsj.com/economics/2009/11/10/economists-say-dodd-plan-to-split-fed-powers-is-mistake

    Perhaps the reasons are related to the following:

    Wall-Street prefers a single regulator: a single regulator is more easily influenced than multiple competing agencies.

    Although the Fed is technically independent, their policies are usually aligned with administration goals. The administration of the day could more
    easily affect regulatory changes; a separate regulator would likely be subject to more congressional oversight; its a matter of checks and balances.

    The Fed’s primary goals are employment and price stability. There are inherent conflicts between these goals and regulation; credit expansion and innovative financial products sometimes clash with the goals of regulation . The Fed has stated in the past that regulation should be viewed through the lens of promoting economic growth. When push comes to shove, the Fed will err on the side of its “dual mandate”.

    The Fed is a cheerleader, a regulator is a cop. The Fed aims to be popular, to be a friend to all. The Fed does not have the stomach to be a regulator. There is some evidence the Fed does not wish to a regulator; the Fed has produced surprisingly little research over the years on the systematic risk of
    financial institutions, and how to manage that risk. More recently, Fed Vice-Chairman Kohn said “..that he does not want a mission for financial stability added to the same part of the Fed’s legal mandate that charges it with promoting price stability and maximum sustainable growth.”http://blogs.wsj.com/economics/2009/10/23/kohn-warns-against-rushing-reform

    An institution that is not enthused about it’s mission, is unlikely to do a good job; this would not be a problem for Wall-Street.