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Big Bank Bankruptcy Court In The Works; The Beginning Of The End Of TBTF, Or Just Less Competition For Goldman?
Could the gridlock of dealing with massively underwater big banks (yes, the CRE problem is not going away on its own) be coming to an end? A report from Dow Jones indicates that things may finally be moving in the right direction: "Key members of the Senate Banking Committee are in discussions to create a special bankruptcy court for "too-big-to-fail" banks, according to people familiar with discussions on the panel." Reading between the lines, however, one can not help but be skeptical about the ultimate outcome. And is the motive just a little more sinister courtesy of various tentacles reaching deep in the legislative apparatus: is Goldman preparing to take down some more competitors in its quest to becoming the one and only go-to bank for any and every financial transaction? It worked miracles for FICC revenue post Bear and Lehman, is it time for Goldman to get a little more active in all other verticals?
More from Dow Jones:
The court would work in tandem with a process to dismantle a Lehman Brothers-like failing super-sized bank in a way that doesn't cause collateral damage to the markets.
Lawmakers in the committee are working to see if they can create a broad bipartisan bank-reform bill in response to the financial system's near collapse in 2008. Sens. Mark Warner (D-Va.), and Bob Corker (R-Tenn.), two Senate Banking Committee members, have been charged with reaching a bipartisan deal on systemic risk issues.
Public Citizen policy analyst Graham Steele said a newly formed special bankruptcy court could act as a gatekeeper to decide whether traditional bankruptcy or a resolution process would take place.
Presumably the new proposal would take taxpayers off the hook. Which is precisely why we are rather convinced this is merely more chatter, that will result in no firm implementation whatsoever:
The process would allow the FDIC to use taxpayer funds to make payouts to counterparties and creditors of the failing institution so that they don't fail as well. After that, the costs of those payouts would be recouped by fees charged to financial institutions with more than $10 billion in assets.
However, Corker and Warner are looking at creating a special bankruptcy court that could decide whether the institution should go through a traditional bankruptcy process or be subjected to the FDIC's dismantling approach, also known as a "resolution process," according to people familiar with the panel.
With this approach, if U.S. government bank regulators agree a resolution process makes sense, they would need to file that decision to the court, which would make the final decision about whether it made sense to use the resolution process.
In summary, the bankruptcy court will be merely a figurehead with the final bill as always coming straight out of the already empty pockets of US citizens:
Two people familiar with the discussions said the panel is basing their discussions, in part, on a section in a report released last year by a bipartisan Pew Institute task force for regulatory reform.
The report calls for a new Federal Financial Institutions Bankruptcy Court that would have the sole jurisdiction to resolve failing super-sized banks.
The report also said the bankruptcy code should be amended so that bankruptcy can be the default process for managing failing mega-financial institutions; however, it added that a resolution process should be set up for failing big banks to be used in "exceptional occasions when bankruptcy poses unacceptable systemic risk."
The time before this proposal results in anything actionable will likely be many years, and long after the next collapse, and subsequent second round of bailouts, is a fact. But at least our politicians can mark the fact that they are actively "considering" alternatives to the aboslute lack of change in the system since the last collapse.
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dog and pony show.
summers and geithner will come up with some kick-ass stuff to, um, never mind.
Make sure those counterparties are paid.
What's wrong with eliminating the competition, nothin' wrong with a new age of Robber Barons running the system.
If it wasn't the kleptocrats at GS it would be some other set of pricks at some other Wall Street criminal syndicate.
Now we know what the sack stands for in Goldman Sachs.
Surely the first step is to break up the TBTF monsters into manageable chunks?
After that you can look at controlled and stage-managed bankruptcy meltdowns, funded and insured by the industry.
Damn right.
the dimon's in the details
"The process would allow the FDIC to use taxpayer funds to make payouts to counterparties and creditors of the failing institution so that they don't fail as well."
Well,that defeat the whole purpose. Why is it that other businesses treated the same way?. And what about all those CDSs and interest swaps?. If for example,any of these big banx that have written a couple of trillions in interst swaps on Chinese interest rate for example,and it failed yesterday,just imagine how much it would have cost the FDIC. So more or less,it is the same delima,except it is with a different approach...
A smart congress would take MS and GS's banking charters away from them. They are not banks, have no branches, take no retail deposits...provide no good to society that should be protected by taxpayer money. In effect the taxpayer is guaranteeing shareholders and employee bonuses for the exclusive purpose of gambling. It would be like me saying I want to go to Vegas but first I want to borrow money from the taxpayer at very, very cheap rates and use it for the gambling. If I lose I will just shove that loss on to the taxpayer and go to the taxpayer again for another round. It is completely insane……..
Spot on. Not only should GS not be allowed to be a bank, it should not even be allowed to be a public company. The 'bonus pool' steals ownership reward from shareholders that risk their capital and gives it to the prior partners who used to risk their capital but no longer do.
People are fed up with the incumbent political majority pandering to big banks, and will probably vote in the "other guys" next couple of elections. But they will be disappointed if they expect self-styled fiscal conservatives to actively oppose Big Finance interests. That's not what they're about.
This has potential to be a real kicker if they follow through on it. At the time the Fed announced that it would be targeting monetary aggregates instead of interest rates (late 1979), everyone scoffed - but that's what happened, and double-digit inflation vanished.
Suffice it to say that bailout speculation is risky enough as it is. I think it's going to get riskier.
Kill Wall Street Bonuses or Tax 'em to Death, MIT's Simon Johnson Says
Simon Johnson, professor at MIT's Sloan School of Management and former chief economist of the IMF, says there's a simple solution to this seemingly complex problem: "People working at our largest banks - say over $100 billion in total assets - should get zero bonus for 2009."
Looking back, all the big firms were saved by the various government programs, including Goldman Sachs and Morgan Stanley were allowed to convert to bank holding company status in 2008, Johnson says. "There were unconditional bailouts for all our big banks - it was a decision made on the fly in the crisis. Let's not second-guess," he says. "But no way that strategy implies, requires, or is consistent with the banks then paying all that money out to their employees."
By contrast, when the government instituted a similar "recapitalization" strategy for banks after the Latin America debt crisis of the early 1980s, the banks retained the money to help rebuild their balance sheets, he recalls. "In this case they're going to pay out 40% [of profits] - that's not good economic policy."
http://tinyurl.com/yap7k25
Can I ask, why would a single bank failure hurt the markets? and so what if it did, and even if you had a separate court, preventing collateral damage will never be guarenteed anyway. Every bankruptcy has a potential to effect its segment, depending on the circumstances. This is business as usual. Each investor must decide how the event may impact holdings.
Private bankruptcy is not a concern of the government. Any endemic problem with the banking system, that is, systemic risk for Bank Holding Companies, is the responsibility of the Federal Reserve. You do not need to waste money on a special court.
Never have the FDIC compensate creditors up front, fund the program first and then enable the program.
I do not like the new FDIC approach to wasting tax payer money to find dead bank buyers. The FDIC should only insure deposits, and not provide compensation of bad debt from a failing bank transfer.
Mark Beck
Eh... more kabuki theater. No one goes to jail and everyone gets their bonus or golden parachute.
Let them ALL go broke. Otherwise you'll get the same CDS nightmare all over again as one party tries to kill off another in order to collect the insurance.
Yes, the CDSs should get the kibosh straight away, since this is part of the problem--essentially unlimited "insurance policies" where (metaphorically) 10 parties are collecting on my house burning down. No way. As per any bankruptcy, you may be first in line, but there should be NO guarantees as far as your bonds being worth a floor value of X.
I really like the operations of the State Bank of N.Dakota, this is the ideal scene we need to get to for all true banks. GS et al are not banks, they are a giant fluke worm sucking the life out of anything it can get its fangs into. "Platyhelminthes you can believe in!"
This idea simply makes no sense. What is it about the bankruptcy court or the Bankruptcy Code that led to an undesirable result with Lehman (or others)? Nothing that I can think of. The problems ... well, the problems are far too numerous to get into. But the one that comes closest to being relevant is simply that Lehman was given no preparation time for its bankruptcy filing. Had Treasury not insisted on an immediate bankruptcy filing, the the counterparty damage could have been mitigated, and the system risk reduced considerably. There still would have been fallout, but that's going to be true no matter what. There's simply no way "to dismantle a Lehman Brothers-like failing super-sized bank in a way that doesn't cause collateral damage to the markets."