It’s Not a Bailout — It’s a Funeral

The following guest post was contributed by Jennifer S. Taub, a Lecturer and Coordinator of the Business Law Program within the Isenberg School of Management at the University of Massachusetts, Amherst (SSRN page here).  Previously, she was an Associate General Counsel for Fidelity Investments in Boston and Assistant Vice President for the Fidelity Fixed Income Funds.

In poetry and politics, metaphor matters. Expect some fighting figures of speech on Thursday, when the conference committee takes up the topic of the Orderly Liquidation Fund or “OLF.” Under the proposed financial reform legislation, the OLF is the facility that would hold the money needed by the FDIC to shut down a systemically important, insolvent financial institution before its failure can contaminate other firms and the broader economy. In other words, one purpose of the resolution authority and OLF is to avoid repeating the disorder and disruption of either the Lehman bankruptcy or the AIG bailout.

To be clear, many question whether regulators will have the courage to invoke this provision and pull the plug on a dying bank. Accordingly, the “prevention” measures under discussion in the legislation are critical — these included the swaps desk spinoff, hard leverage caps on financial firms, regulatory oversight over shadow banks and inclusion of off-balance sheet transactions in capital standards, among others.

One of the hottest debates concerning funding the OLF is over who should pay into the fund and when should they pay. On the question of “who,” the choices have been framed as either industry or taxpayers. And the “when” options are described as in advance of or after a failure. Many, including the House majority in its bill and FDIC Chairman Sheila Bair, support an up-front assessment on industry. Those who oppose an industry pre-fund have tried to damn the OLF as a “bailout fund” and at times the financial reform legislation as a “bailout bill.”

It’s laughable that big-bank-boosters only characterize it as a “bailout fund” when the banks pay in advance, but not when taxpayers front the money. It’s tragic, though, when we fall for this propaganda, disseminated by some truth-twisting Republican political strategists. But that’s exactly what happened when that fiction effectively killed the industry pre-fund in the Senate bill. As Paul Krugman noted, politicians continue to repeat these twisted talking points because they hope that if they slap the “bailout” label on any provision of the bill that gets tough on big banks, we will be fooled into backing down.

But we cannot be fooled. The proposed legislation is not a bailout. It is a funeral. A bailout involves using money to revive a failing business so that it can continue operations. In contrast, under both the House and Senate versions of the legislation, the FDIC is given the power to dismantle, shut down and liquidate failing firms. Liquidation means the end of the enterprise. Liquidation requires the valuation and sale of eligible assets, including healthy subsidiaries. It’s a funeral.

That’s good. But, unfortunately, under the Senate version of bill, the taxpayers front the funeral expenses. Let me repeat. The taxpayers front the funeral expenses of the failed firm. The FDIC can borrow from Treasury who can then issue debt. It’s true. And it’s very important. The reason is that funding is needed to process a liquidation. Depending upon the number of firms collapsing, this could be in the hundreds of billions of dollars.

The money is needed to avoid a sudden halt of business that causes the financial firm’s viable assets (such as the remaining enterprise value of a healthy subsidiary) to plummet in value. Funds would allow the firm to keep functioning so that an orderly liquidation can occur. The money would be used to put the failing firm into a bridge entity, then manage it and wind it down. The proceeds of the sale of eligible assets and functioning subsidiaries would be used first to replenish the OLF. With the Senate version, any proceeds would be used first toward paying back the loan from Treasury. Of course, not all assets are eligible to be sold. Creditors with security interests (and otherwise given special protection) can pull their assets away from the receivership. To protect against this, the House version allows the FDIC to require these secured creditors to leave behind 10 percent of their collateral. Known as the “secured creditor haircut,” this mechanism does not exist in the Senate version; it should, particularly given that it would be a good resource to pay back the taxpayers.

While the debate has been framed as either a pre-fund or a post-fund, this is a false dichotomy. There will have to be money available when the failing firm is taken into receivership. There will be pre-funding, period. So, the true story is that if the banks do not pay in advance, we will, and then the only questions becomes who will pay us back and when.

Now is the time to address this issue. While taxpayers should support the House industry-pays-in-advance-for-its-own-funerals, version, given the strange power of doublethink, we are in danger that the Senate taxpayer-fronted-funeral process will survive conference committee and make it into the final law.

The House model requires financial institutions to pay $150 billion in advance into the OLF (called the Systemic Dissolution fund in the House version). An industry pre-funded facility has precedent. The FDIC relies upon bank assessments to fill the deposit insurance fund (the “DIF”). The DIF is most well known for insuring the money bank account holders have on deposit. It also, however, is used to pay the various expenses associated with the liquidation of covered banks. Another precedent is the Pension Benefit Guarantee Corporation. Pension plan sponsors provide funding through an assessment. The resulting fund is used to pay certain employee pension benefits in the event the employer firm goes into bankruptcy.

The Senate bill requires taxpayers to front the costs of liquidating failing firms. The amount FDIC can borrow from treasury is capped by a “Maximum Obligation Limit” calculation. This is in two parts. In the first 30 days of receivership, the FDIC can borrow from Treasury up to 10% of the “total consolidated assets” of the failing firm based upon the most recent financial statement available. So, for a bank with about $800 billion in assets, the FDIC could borrow from Treasury $80 billion in that 30 day window.

Then, in part two, after examining the firm and better determining the value of its assets (and what funding will be needed for orderly liquidation), the FDIC can borrow from Treasury up to 90% of the fair market value of total consolidated assets “available for repayment.”  It’s important to note that there may be very few assets if any available for repayment — if, as noted above, secured creditors pull their collateral — so these will not be eligible.

The FDIC is required to pay back the Treasury within 60 months (five years), using the proceeds of the sale of assets, if there are enough. If the firm is so broke that the assets are not sufficient to pay back the FDIC, then the FDIC is supposed to claw back extra amounts paid to certain creditors, and if that doesn’t work out, an ex-post industry assessment on “eligible financial institutions” is permitted.

Thus the taxpayers may be “out-of-pocket” for up to five years or beyond. Given that one of the greatest objections to the Bush Bailout of 2008 was the burden on taxpayers, how did this happen? Opponents of the bank pre-fund claim that the existence of a fund would encourage banks to take high risks because they know that they will be bailed out. This ignores the fact that both the House and Senate bills would impose stricter standards on these institutions, requiring them to have more capital cushions in the event that the assets they own decline in value (a common part of the business cycle). Thus, the risk-taking will be monitored and minimized. In addition, given that firms will be liquidated not rescued, this argument is silly.

Perhaps there’s a third option, an industry paid “Just-in-Time” mechanism. Just-in-Time mean would mean assessing “eligible financial institutions” at the moment of FDIC receivership. And, instead of leaving the allocation formula as a mystery until some future date, the legislation could require the new council of regulators (the Financial Stability Oversight Council) to come up with a methodology that would be transparent to each firm.

Of course, there are plenty of arguments against this approach. One argument is that it is unworkable because the assessments come too late. I agree that it is better to collect “rainy day” resources on a sunny day. And, I support the House’s $150 billion pre-fund approach. Representative Luis Gutierrez, from Illinois’s 4th District, is going to lead this charge on the House side during conference on Thursday. If we can convince the Congress to do that, terrific. But, that is not the message some conference committee members are signaling.

Some might also worry that such a Just-in-Time assessment on industry would be difficult to collect if there were a massive failure a la September 2008. Implicit in this argument is that the liquidation of one firm means a full blown financial crisis has hit. This is not necessarily the case. An FDIC-run liquidation could be a Bear Stearns (March 2008) moment, not a Lehman (September 2008) moment, or even a single, stand alone troubled firm. And, even if it is the Lehman moment, recall that the weekend before Lehman filed for bankruptcy, industry rivals were assembled together ready to buy up its bad assets so that Barclays might buy the good ones. While this transaction fell apart when the UK regulators reasonably insisted that shareholders at Barclays get to vote on the deal, the point is that the top financial institutions were prepared to help.

However, the Just-in-Time language could be drafted in such a way that a firm’s condition could be considered before deciding upon the amount of the up-front assessment. If a firm is too unhealthy to pay in, it could be granted a deferred assessment. In the case of a “one-off” failure, with a fairly isolated insolvency and many healthy firms, it would be a good time to avoid moral hazard and show industry that they, instead of the taxpayers must front the costs of the liquidation. In other words, suggesting the firms won’t have the money when a firm goes into receivership is only a hypothesis. Another hypothesis is that many will. Congress should prepare for both so that passing the hat around to industry happens before we are asked to pinch our pennies and pitch in.

The bottom line is, when a behemoth bank burns the candle at both ends and then goes belly up, it’s polite to pay our respects, but it’s ridiculous to pay the bill.

40 responses to “It’s Not a Bailout — It’s a Funeral

  1. The “small people” always pay. After we have paid for their folly, the elites / Ubers / Major Corps preen and claim that we are insignificant. Never mind that they take advantage of every tax loophole to avoid paying taxes, receive billions of tax dollars in bailouts and government contracts, buy politicians with campaign contributions, engage in regulatory capture, employ lobbyists to make sure the law does not apply to them, force us to pay for their pollution and other externalities and still complain that they are over regulated, over taxed and that they create all of the jobs.

    Some will never be satisfied.

  2. “One of the hottest debates concerning funding the OLF is over who should pay into the fund and when should they pay. On the question of “who,” the choices have been framed as either industry or taxpayers. And the “when” options are described as in advance of or after a failure.”

    “Who” is easy: the industry. “When” is also easy: in advance. Afterwards means that only those who got bailouts this time will pay for (hopefully) a long time. “How” is the question. How about a progressive assessment based upon the volume of business (or other measure of systemic risk)? The point being that, as firms approach becoming TBTF they pay a greater percentage of their revenue into the fund. (Income should not be the criterion. You can lose money and still pose systemic risk.)

  3. Why should there be a burden of “collective responsibility” among the financial firms when one or another of them does something stupid. Probably the stupid behavior was permitted by “regulatory forebearance” anyway. And the firm itself should bear the burden of its own stupid behavior. Perhaps it was Lincoln who observed that the prospect of his hanging wonderfully concentrates a man’s mind. Letting Lehman go belly up similarly concentrated some minds, and should have also been the case with the moribund part of AIG and a few other Wall Street players. A bailout is a bailout, and will usually end up coming out of the pockets of the taxpayers and the customers, in one combination or another. It is so sad that these simple lessons do not sink in.

  4. ‘But we cannot be fooled.’

    It’s Not a Bailout, It’s Not a Funeral – It’s Super Imperialism.

    http://michael-hudson.com/wp-content/uploads/2010/03/superimperialism.pdf

    Super Imperialism
    The Economic Strategy of American Empire
    Michael Hudson
    2nd edition 2003

    (1st edition 1972)
    PLUTO PRESS RELEASE 25 11 2002………………………………………………………………………………………..3
    HOW AMERICA WILL GET EUROPE TO FINANCE ITS 2002-03 OIL WAR WITH IRAQ…….3
    WHAT MAKES TODAY’S SUPER IMPERIALISM DIFFERENT FROM PAST “PRIVATE ENTERPRISE”
    IMPERIALISM …………………………………………………………………………………………………………………………..3
    HOW THE UNITED STATES MAKES OTHER COUNTRIES PAY FOR ITS WARS………………………………………..4
    AMERICA’S FREE LUNCH AS EUROPE’S AND ASIA’S EXPENSE…………………………………………………………5
    PREFACE TO THE SECOND EDITION (2002)…………………………………………………………………………7
    INTRODUCTION……………………………………………………………………………………………………………………15
    THE DILEMMA OF AMERICAN ECONOMIC DIPLOMACY IN THE INTERWAR YEARS …………………………….16
    AMERICAN PLANS FOR A POSTWAR “FREE-TRADE IMPERIALISM” ………………………………………………….19
    AMERICA EMBARKS ON A COLD WAR THAT PUSHES ITS BALANCE OF PAYMENTS INTO DEFICIT………..23
    THE NEW CHARACTERISTICS OF AMERICAN FINANCIAL IMPERIALISM……………………………………………25
    HOW AMERICA’S PAYMENTS DEFICIT BECAME A SOURCE OF STRENGTH, NOT WEAKNESS………………..30
    IMPLICATIONS FOR THE THEORY OF IMPERIALISM……………………………………………………………………….31
    TODAY’S SOURCE OF FINANCIAL INSTABILITY AS COMPARED TO THAT OF THE 1920S……………………..33
    THE WORLD’S NEED FOR FINANCIAL AUTONOMY FROM DOLLARIZATION……………………………………….37
    CHAPTER 1: ORIGINS OF INTER-GOVERNMENTAL DEBT, 1917-1921…………………………….41
    CHAPTER 2: BREAKDOWN OF WORLD BALANCE, 1921-33………………………………………………56
    CHAPTER 3: AMERICA SPURNS WORLD LEADERSHIP ……………………………………………………75
    ROOSEVELT MEETS WITH HOOVER TO DISCUSS THE DEBT PROBLEM ……………………………………………..78
    FRANCE DEFAULTS AND BRITAIN PAYS ONLY A TOKEN AMOUNT ………………………………………………….81
    MACDONALD AND HERRIOT VISIT WASHINGTON……………………………………………………………………….86
    PREPARING FOR LONDON…………………………………………………………………………………………………………89
    ROOSEVELT’S “BOMBSHELL” BREAKS UP THE LONDON ECONOMIC CONFERENCE ………………………….91
    CHAPTER 4: LEND-LEASE AND FRACTURING OF THE BRITISH EMPIRE, 1941-45………108
    CHAPTER 5: BRETTON WOODS: THE TRIUMPH OF U.S. GOVERNMENT FINANCE
    CAPITAL ……………………………………………………………………………………………………………………………..119
    CHAPTER 6: ISOLATING THE COMMUNIST BLOC………………………………………………………….141
    CHAPTER 7: AMERICAN STRATEGY WITHIN THE WORLD BANK……………………………….155
    THE BANK’S TRANSITION FROM RECONSTRUCTION TO DEVELOPMENT LENDING…………………………..160
    HOW WORLD BANK OPERATIONS ARE BIASED TO AID THE UNITED STATES………………………………….169
    CHAPTER 8: THE IMPERIALISM OF U.S. FOREIGN AID………………………………………………….187
    THE MILITARIZATION OF U.S. FOREIGN AID………………………………………………………………………………190
    THE ROLE OF AID RECIPIENTS IN AMERICA’S BALANCE OF TRADE AND PAYMENTS………………………..193
    2
    HOW AMERICA’S MILITARY SPENDING DERANGED ITS INTERNATIONAL PAYMENTS AND AID PROGRAMS
    ………………………………………………………………………………………………………………………………………….194
    HOW FOOD AID PROMOTES AGRICULTURAL DEPENDENCY………………………………………………………….196
    HOW FOOD AID HAS HELPED THE U.S. BALANCE OF PAYMENTS…………………………………………………..199
    FOREIGN AID AND COLD WAR GEOPOLITICS …………………………………………………………………………….202
    THE THIRD WORLD’S DOLLAR-DEBT PROBLEMS……………………………………………………………………….206
    CHAPTER 9: GATT AND THE DOUBLE STANDARD …………………………………………………………213
    CHAPTER 10: DOLLAR DOMINATION THROUGH THE IMF, 1945-1946 ………………………….227
    HOW BRITAIN WAS RUINED ……………………………………………………………………………………………………229
    STABILIZING CURRENCIES TO PROTECT AGAINST COMPETITIVE DEVALUATIONS …………………………..233
    HOW FIXED CURRENCY PARITIES LED TO STERLING’S OVERVALUATION………………………………………237
    HOW THE UNITED STATES SET THE QUOTAS……………………………………………………………………………..238
    THE MARGINAL CHARACTER OF EARLY IMF LOAN OPERATIONS …………………………………………………241
    ADD-ON FOR CHAPTER 10………………………………………………………………………………………………………244
    CHAPTER 11: FINANCING AMERICA’S WARS WITH OTHER NATIONS’ RESOURCES,
    1964-1968 ………………………………………………………………………………………………………………………………248
    CHAPTER 12: POWER THROUGH BANKRUPTCY, 1968-1970 …………………………………………..263
    CHAPTER 13: PERFECTING EMPIRE THROUGH MONETARY CRISIS, 1970-1972………….279
    AMERICA’S ILLEGAL TEXTILE QUOTAS SPUR FOREIGN RETALIATION …………………………………………..279
    EUROPE’S THREATS OF FINANCIAL AND TRADE RETALIATION …………………………………………………….281
    THE SUMMER 1971 DOLLAR CRISIS FORCES UP EUROPE’S EXCHANGE RATES………………………………..283
    AUGUST 15 AND ITS AFTERMATH…………………………………………………………………………………………….289
    EUROPE’S AUTUMN 1971 COLLAPSE………………………………………………………………………………………..292
    CHAPTER 14: THE MONETARY OFFENSIVE OF SPRING 1973 ………………………………………..297
    U.S.-SOVIET CONDOMINIUM? …………………………………………………………………………………………………317
    CHAPTER 15: MONETARY IMPERIALISM………………………………………………………………………..324
    U.S. “FOOD IMPERIALISM” VS. A NEW INTERNATIONAL ECONOMIC ORDER………………………………….326
    THE MONETARY IMPERIALISM IMPLICIT IN THE U.S. TREASURY-BILL STANDARD …………………………328
    EPILOGUE …………………………………………………………………………………………………………………………..333

  5. Discussion occurring in a context assuming the legitimacy of current financial structures is tragically misplaced. Failure to recognize Greenspan’s securitization experiment was doomed to fail, has failed, and must be wiped out completely right from the get-go in the charge to enact “financial reform” reflects commentary otherwise venturing an exercise in sophistry.

  6. Bingo!

  7. Thanks. I didn’t know that was online. I’ll be printing it out.

  8. So how are people going to be made “whole” again?!

    The “experiment” worked exactly as planned and benefited those who planned just as they planed it would!

    Meanwhile, the “policies” of the “experiment” and turned the ENTIRE country into one predatory Criminal Inc. enterprise.

    This man-made financial disaster is even WORSE than the BP disaster in so many ways. One can make the case for the BP disaster being avoidable if the economic structures were not structured the way they are structured.

  9. Brad Thrasher

    As a bank customer who is also a taxpayer, this debate seems moot to me. If the banks finance the fund I pay through higher service fees. If it’s the government’s liability I pay through higher taxes, higher interest rates, inflation which is a stealth tax.

    As the proverbial “little guy” at the table, why I do care?

  10. Brad Thrasher

    Errata: last line in the above post should read, “Why should I care?”

  11. TonyForesta

    We do not live in America. We inhabit an Oligarchy, wherein the rich relentlessly and repeatedly break the law, ruthlessly rob and pillage the poor and middleclass, and payoff (bribe) our socalled politicians to cloak and bailout FAILURE, MALFEASANCE, and PERFIDY at the taxpayers, (the poor and middleclass) expense.

    Either we right these wrongs, and force the “den of vipers and thieves” on Wall Street to play by the rules, pay their debts, and suffer for their trangressions, – or we don’t. If we do, then there may be some hope for America. If not, we’re doomed, because the oligarchs will have free reign to rob and pillage the resources of the nation for the benefit of the predatorclass, – thefew, – the superrich.

    Sharpen you’re pitchforks. Get locked, cocked, and ready to rock. Put your trays in the upright and fixed position, – we’re about to enter some turbulence.

  12. TonyForesta

    One more point that the right honorable Mr. Kwak touches upon is the the naked LYING systemic in the gop propaganda and disinformation covens and their evil sisters in the gop congressional leadership. The gop are pathological liars, perniciously turning TRUTH into LIE and LIE into TRUTH. Examine Goebles and the NAZI disinformation and propaganda covens machinations for a frightening peek into just how insidious and nefarious the gop has grown. These pathological liars brute naked lies, supposedly blessed by thebabyjesus, as truth, – when in fact and reality – a LIE is, and always will be nothing more than a LIE>.

    Pimping laws that would curb constrain the bandit capitalist proclivities the predatorclass and benefit the poor and middleclass as bailouts” is indeed absurd, and more directly a patent naked LIE!!!!

  13. Another nonesense policy response from a group of males. Why do nations find it so difficult to establish financial policy think-tanks ‘light on’ female thoughts and contributions ?

  14. Well, at the risk of inciting giggles, I think there are more than you think. Quite a few. Not a lot that pop into mind right now, but I think Alice Rivlin, Laura Tyson, and Christina Romer immediately come to mind, and that Hebrew one from the San Fran Fed–Yellen??? More than you imagine. I can get more with some net searches.

  15. I think this is one of the best posts we’ve ever had on this site, and I would even go so far to say the best guest post Baselinescenario has ever had. I think the site is very fortunate to have Miss Taub’s contributions and I think Mr. Kwak and Mr. Johnson deserve kudos for having getting to write here. Terrific stuff.

    I can’t really comment intelligently on this post right now because I need to let it ferment in my mind a little, but the general message conveyed by Miss Taub’s writing is dead on accurate.

    I think this deserves better than only a drab (and I mean the number is drab, not the comments themselves) fourteen responses. We should say sorry to Miss Taub, and her efforts deserve more response than that.

  16. Thanks for the excellent overview of this portion of the bill. The failure this time was systemic, and the amount of money we had, and still have, to shovel into this thing reaches into the trillions. So there’s no reason in the world to enact legislation that assumes banks will fail one by one, or very calmly. This provision is either abjectly stupid, or it reflects complete fealty to the bankers. Either way it stinks.

    If the bill passes in this form it only guarantees, as Simon Johnson and James Kwak have made clear in their book, that the next conflagration will be bigger and badder.

  17. One last thing—Kobe and the Lakers make me want to puke. Seems sometime after Phil Jackson wrote the book about Native American religion his mind turned to poo. Memo to Phil: lose some weight, bring the beard back and lose the pompous expression.

  18. Sooner or later thinking people must realize that all ‘reform’ legislation in the current political environment is bogus. The best we can hope for is an absence of violent civil disorder.

  19. Yes, you are right Ted. Good post.

    But honestly, what else needs to be posted? What kind of information do we need to read tomorrow, next week, month… year? How sexy will the next guest poster be? Yes, my year on this blog has been informative, it even has been fun, sometimes.

    But other than being addicted to information and getting therapeutic effects out of this blog, what are we doing here?

    ‘The great aim of education is not knowledge but action.’
    - Herbert Spencer

  20. Eureka! …just slipped into my mind, I am going to write a book!

    And the people will be even more informed than they already are. Simultaneously, I will start my own blog and people from all over the world will be reading what I and my guest posters have to say. We will be having a ball and draw a huge crowd and we will be famous and have our pictures in the papers (tongue-in-cheeck).

    Underneath, you will find my favourite stand-up comedian. If you feel offended by the word God in this context, instead of “God”, you can replace God with another authoritative figure.

  21. I highly appreciate the work from Simon Johnson and James Kwak. And hopefully it will contribute towards the peaceful and pervasive change that we all desperately need.

  22. You don’t have to remain a bank customer, plenty of credit unions that do pretty much everything a commercial bank does.

  23. Just the GOP? Sorry but Wall Street money soaks the roots of both the ‘major’ parties.

  24. (Agreeing…)

    I guess in terms of the concerns that it might “encourage banks to take high risks”, I don’t see how an implicit guarantee from the government to wind down a bank paid for by the taxpayer is worse than an implicit guarantee from the government paid for by a industry financed “fund”? They’re still both guarantees.

    Secondly, as you note, in terms of a “just in time” assessment against the industry for a failure has enormous risk if you have a situation, like in 2008, where all of the major banks were are at risk. Leveraging a sort of “bank tax” at that time could further destabilize those hanging by a thread and cause the need for further wind downs.

    Correct me if I’m missing something.

    Unfortunately, and it isn’t only Republicans, the fact that Congress is working for the corpratocracy rather than the people has become so evidently transparent that I don’t see how anyone can ignore it at this point.

  25. @Jake Chase

    “reform” generally speaking, though not always, is code for “making it worse”. It is that odd case that we hold out hope for, just as every time we elect a president we have a fantasy that this one will be the “promised one”.

    Unfortunately in both cases the system is rigged so that is almost entirely implausible.

  26. “The bottom line is, when a behemoth bank burns the candle at both ends and then goes belly up, it’s polite to pay our respects, but it’s ridiculous to pay the bill.”

    The candles are still burning at both ends……

    Citigroup Looking Past Volcker May Seek $3 Billion for Funds

    June 18 (Bloomberg) — “Citigroup Inc. plans to raise more than $3 billion for its private-equity and hedge funds, even as U.S. lawmakers consider banning banks from owning and investing in so-called alternative funds, people with direct knowledge of the plan said.

    Even if the Volcker rule becomes law, full implementation may take as many as six years.” – excerpt

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aFwyocuhTJro&pos=1#

  27. Re: @ rene___We live in a violent Universe – We share this planet on earth with others…unfortunately for mankind…he too must be violent in order to survive. Paradoxically it is our very innate biological inertia, garnered with predisposed instincts of survival, stubbornly refusing the very fact that our energy/spirit to survival depends on violence – feeding off this carrion flesh we call mankind – we are not a closed system as is the Universe. Ironically it too feeds off the energy of the unknown whether it be violence perceived, or a peaceful alliance incomprehensible. Is it the media we thrive in ,or the spiritual energy of dark matter that confuses our thought regarding the magnificence of the creator’s genius to allow us in such trivial matters to indulge in our insignificant existence of selfishness,and denial? Perhaps this is just another stage in our quest too meld into the next afterlife with orderly meaning! Without pain, sorrow, laughter, love, birth ,and death – life in my opinion would be meaningless.

  28. I don’t think that it will be possible to do that.

    Best to focus on the “sides” – those who started a fight to avoid paying the bar tab

    and those who know that that is what’s is going on…

    Hedge hogs continuing to “short” is how they’re going to make sure the bar owner goes out of business…

    THE WRECKING CREW behind the “muscle”…they NEED how much more for Afghanistan by July 4th…?

    There is no way to avoid being a victim of HATEronics MadeOff CHOSE the particularly slavish brown-nosers to rip off and he also ruined all those who did not brown nose…

    yes, yes, it’s a different moral and cultural value system – brown nosing is actually “normal” dog behaviour…right? Wonder if the hedge hogs female viagra will get women into it…?

    “Teleostei – a group of numerous fishes having bony skeletons and rayed fins”

    :-)

    That’s the genius of HATEronics – no end to the creativity that can be employed against the person in favor of THE MONEY…

    Have a great weekend!

    Btw, lost in the bowels of worked over history is the FACT that at one point in time, homoeconomicus invented “regulation” as a nod to the fact that the LOVE of MONEY will destroy any HUMAN IDEAL every time.

    As usual, bassackward – that “event” is always in play and “regulation” mitigated the “risk”.

  29. Kliment Voroshilov

    “So how are people going to be made “whole” again?!”

    That won’t be possible until strikes and massive public demonstrations have restored the peoples’ democracy. Then, after the arrest, interrogation and public trial of those in the ruling clique and of their immediate families, one might look, I suppose, to the confiscation of the wealth of these reactionary lice and to its redistribution first to the unmemployed and to the dispossessed that have suffered the most from their thieving and depredations. An authentic future can be erected only on the basis of a peoples’ justice lest we sink once again into the cesspool that is our present political life. We can never again tolerate the corruption and its supporting structures that have so disfigured things.

  30. You are wrong. They don’t create jobs. The MNCs are first to implement the latest technologies and kick out humans. For the rest I completely agree with you. So from the nasty neo-liberal/neo-conservative ideology they are forcing you to live with, it turns out there is nothing true. Everything is a lie. Everything.

  31. What is intriguing about the liquidation process is that a successful model for how and when to do it is apoptosis:the orderly winding down of a defective, infected or damaged cell in a way that keeps the cells around it and the system as a whole healthy while extracting reusable resources and making them available for other cells. Apoptosis involves built in processes in the cell itself and an external, digestive activity. The equivalent to failures which threaten the entire system is necrosis.

    Too big to fail companies are those which can’t reliably be wound down using their liabilities and resources used to nourish other companies.

    Some proactive steps equivalent to those which biology uses to improve the average health of cells and organisms:

    1. Term limit corporations to no more than 70 years, with a required apoptosis process in the last decade of their lifes. No contractual commitments may exceed the term limits of the companies. (Initially corporations were limited to 21 years after which assets were sold off and funds returned to stockholders)

    2. Increase FDIC insurance rates on large corporations to correspond to the increasing costs and risks of being able to wind them down in an orderly fashion. This would provide one soft impediment to becoming a dominant player in the financial market.

    3. Other soft barriers should also be added such as preventing further growth through mergers and acquisitions once a financial institution constitutes 2-3% of the national market.

  32. Ockham’s razor comes to mind. Make the banks smaller and reduce their inter-connectedness. Then if they fail let them. It won’t matter.

  33. Jennifer Taub’s post is excellent just as with her previous posts. However, the length of her post only reflects the stupidity that has become the legislative process of the U.S. Congress. We have an excellent model for winding down banking/financial companies, which is the FDIC process. The FDIC process has been used for over 70 years and is based on assessments of member banks, which means FDIC banks pay into a fund BEFORE any bank fails. The law must be written such that banks/financial companies pay into a resolution fund on an on going basis is a no brainer. Just copy what the FDIC has done successfully for over 70 years. That’s how simple it is! But, Taub’s post is excellent none the less.

  34. From 13 Bankers:

    In the panic of 1907, the industry (led by J. P. Morgan himself) pooled capital to ring-fence and protect the stronger banks, at the expense of the weakest banks which were forced out of business.

    In the crisis of 2008, taxpayers fronted their cash to protect the biggest banks, at the expense of smaller banks which are being forced out of business by the FDIC, using – you guessed it – more taxpayer cash, every Friday since then.

    Like the author of the post said: it is polite to pay our respects when a big bank dies, but it is ridiculous to pay the bill. What a difference 103 years can make, that this self-evident point needs a 3,000 word article in its support….

  35. While I agree with most of what you said, the problem with the behemoths is that they are so big that there isn’t a realistic way to redistribute their assets and liabilities among smaller insitutions, and distributing them to the larger ones simply kicks the can down the road…and not very far. See my earlier comment on the apoptosis and necrosis processes in biology. The FDIC conducts an apoptosis process on smaller banks with the help of a host of healthier institutions, not by itself.

  36. It’s going to be a great weekend for getting treasures at the “flea market”! Long term unemployment is great – you can bet on it and always win.

    What’s left of “housing” is finally at the flea market (or swap meet – different regions of USA call it different things) – of course, if you died a winner, Sotheby’s will “auction” it…

    Just when you think science was helping things along, here we catch a whiff of new age bio-alchemy – through the micro-management of apoptosis, toxic assets must avoid necrosis in order to be made whole…

    I’ll leave the whole riotously funny “hedgehogging – the ultimate identity theft scam” for a less polite “forum” :-))

    But seriously, a decent forum overall for PBS Moyers fans…except Moyers did “religion” better :-) but at least this forum is smart enough to know it wasn’t going to be good at “religion”…

  37. tippygolden wrote:

    “Ockham’s razor comes to mind. Make the banks smaller and reduce their inter-connectedness. Then if they fail let them. It won’t matter.”

    That may take a while. :-)

    “JPMorgan Sends Mining Team To Afghanistan”

    June 17, 2010 – NT Times

    http://www.nytimes.com/2010/06/18/world/asia/18mines.html

  38. On thing I have noticed about this recently (it’s been true a long time, but it only dawned on me maybe the last 6 weeks or so) is people like to attack the SEC for not doing their jobs (especially brokerage houses and financial institutions like to criticize the SEC under the guise that they actually want the SEC to perform their duties). Well it is obvious to everyone the SEC is not doing their job. Even the financial industry cannot deny they get away with murder with the current SEC and keep themselves from laughing. But what we never hear people talk about (including Zerohedge blog which likes to take cheap shots at the SEC) is the fact that FINRA (a self-regulating association of securities dealers and brokerages) has never done anything to protect investors from harm.

    Now FINRA is policing trades on the New York Stock Exchange (NYSE). My question is, why does FINRA escape any and all criticism of all the lies and proprietary behavior of banks and brokerages??? The abusive behavior which FINRA is in part responsible to “self-regulate”. Can the investor trust a self-regulating association of securities dealers with policing of trades on the New York Stock Exchange????

    Now, in fairness to her, I haven’t read Yves Smith’s blog in awhile, but I do not remember Yves (who is supposed to be one of the bulldogs on this “police beat” of Econ/finance blogs) ever attacking FINRA, I only remember her attacking the SEC, and that goes double for Tyler Durden. If I’m wrong on that criticism of Durden and Yves Smith, I’m more than happy to be corrected on that, but I doubt am wrong.

    I would love to see Jennifer Taub or one of her cohorts in the academic research such as Lauren Cohen, E. Han Kim, Gerald F. Davis etc… do some detailed work on:
    1—The amounts of punishment/enforcement FINRA has handed out over the years on a timeline, how FINRA’s timeline of enforcement actions compares with the SEC’s enforcement action timeline.
    2—What internal controls does FINRA have to make certain that the people at FINRA are not just a rubber stamp for investment banks and brokerages houses to abuse clients and investors any way they see fit??

  39. tippygolden

    I’m not an expert. (I’m not even and American.) But the debate over whether it is a Funeral or a Bailout strikes me as a red herring. The real issue is does TBTF — serve any real economic purpose? — The vast majority who follow this debate understand TBTF is a Frankenstein-like creation. These large banks are insolvent and continue to function because their losses have been socialized.

  40. Yes, a bailout is a bailout. But a liquidation is not a bailout. Too complicated for you?