Thursday, March 19, 2009
Too Big Has Failed
The head of the FDIC says that the "too big to fail' strategy must end.
Similarly, Senator Leahy said "If a company is too big to fail, it is too big to exist."
And Kansas City Fed President and veteran Fed official Thomas Hoenig says:
Too big has failed....
Many of the [government's current policy revolves around the idea of] "too big to fail" .... History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger. ...So it should be obvious that the "too big to fail" idea is wrong.
Even large banks can be dealt with in a way in a manner which imposes market discipline on management and stockholders, while controlling taxpayer losses....
Banking regulators need to be willing to write down losses, bring in new managers and sell off businesses if institutions can’t survive on their own, no matter what their size.
Too Big To Bail
Instead of too big to fail, the proper concept is "too big to bail".
Financial giants that are so big that bailing them out would impoverish taxpayers or bankrupt America should be allowed to go bankrupt.
Not Too Big To Jail
Moreover, a lot of the top guys at the giant financial companies should be in jail.
It is clear that many of these guys cooked their books and made fraudulent promises to investors.
And "at least 13 firms receiving billions of dollars in bailout money owe a total of more than $220 million in unpaid federal taxes". These guys should be in jail for non-payment of taxes (that's how they got Al Capone).
And remember that - in certain cases - too big can itself be illegal.
Specifically, criminal penalties can be imposed on companies which have violated anti-trust laws, and used their size and power to manipulate the market.
Corporations engaging in unlawful restraints of trade by price fixing, bid rigging, customer and territorial allocation agreements or other blatantly anti-competitive acts can be prosecuted for criminal violations of the Sherman Act, and can be punished by up to a $100 million dollar fine. Indeed, individuals found guilty of criminal violations under the Sherman Act can be sentenced to up to 10 years in jail and up to a $1 million dollar fine.
I am 100% certain that the biggest financial players engaged in anti-competitive conduct. It would only take one aggressive prosecutor to prove it.
Clean up Wall Street, or the boys will keep breaking laws - in bigger and more destructive ways - in the future.
These giants may be too big to bail, but they are not too big to jail.