Sunday, October 14, 2012

The Missed Opportunity In The Bank Bailout Program

This article reviews a new book by Sheila Blair who was "present at the creation" of the Wall Street bank bailout program at the onset of the financial crisis.  Blair was chairperson of the FDIC which insures the deposits at depository banks. All depository banks pay premiums to insure their deposits.  Most of them are small banks that had little to do with the financial crisis that was engineered by Wall Street investment banks that do not pay premiums to the FDIC and whose liabilities are not insured by the FDIC.

In her book she describes a meeting with the triumvirate who helped to enable the financial crisis, and who wanted to make sure that the Wall Street banks would be supported by the FDIC.  The trio included Paulson, the former CEO of Goldman Sachs who was Treasury secretary, Bernanke, the chairman of the Fed, and Geithner (via phone) who was the president of the NY Fed. They handed her a script that would have required the FDIC to guarantee all of the liabilities of the Wall Street banks.  She objected to the use of FDIC funds, that were provided by all of the small depository banks, to save the Wall Street banks which were regarded as too big to fail.  In other words, the cost of the bailout would be shifted from big banks to smaller banks and the taxpayer.  This exposed the love affair that politicians claim to have about small businesses.  They primarily serve the interests of their big business clients, while pretending to serve small businesses by protecting them from government. This helps to win their votes but it only makes it more difficult from them to compete in a market dominated by giants.

Blair had several problems with the bailout.  The management that caused the crisis was not replaced, and banks like Citigroup were allowed to pay bonuses to the failed executives, and to pay dividends while government risked taking loses on the toxic assets that it had guaranteed.  She was also critical of the Office of the Comptroller of the Currency (OCC) which reports to Treasury,  and the NY Fed. They were the main supervisors of the Wall Street banks.  They did a poor job of supervising and they claimed that Citigroup was healthy enough to pay dividends.  Smaller depository banks, that are supervised by the FDIC would have been treated much differently.

Blair also believes that government has not taken the steps necessary to prevent the the next financial crisis that is bound to have its origins on Wall Street.  They have successfully diluted bills that were intended to limit their risky behavior.  They will make risky bets to earn outsized bonuses as long as they can depend upon the next government rescue package that they will have a hand in developing.

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