We need new legislation to provide for a quick route out of bankruptcy for these financial institutions. Regulators should be able to declare a bank insolvent then -- overnight -- wipe out shareholder equity, convert debt and top up tier 1 capital.
For these institutions, a bankruptcy plan should be required like a fire escape plan is required.
It's interesting you suggest that considering the credit card holder bankruptcy legislation the banks pushed through preventing this very thing for consumers of their products.
No, I think bankruptcy is little better than failure unless the gov. will pump in funds as well. Take AIG for instance, which backs debt at various levels. Clearing the books of that juggernaut would still send ripples through the system, likely freeze up credit markets, and wreak stock market havoc. I think Greenspan is right about breaking up such institutions.
No, I think bankruptcy is little better than failure unless the gov. will pump in funds as well.
That is what topping up tier 1 capital is about. The bankrupt bank may end up being temporarily partially or wholly owned by the government.
Clearing the books of that juggernaut would still send ripples through the system, likely freeze up credit markets, and wreak stock market havoc. I think Greenspan is right about breaking up such institutions.
I suspect you would then have 100 bankrupt companies instead of one. More careful derivatives regulation is obviously prudent, specifically there really ought to be ring-fenced capital backing up derivative instruments (like is required for proper insurance).
I'm sorry, but your strategy makes no sense to me. You're proposing a plan basically equivalent to the gov. standing ready to pump more (taxpayer) money into GM in case they get into trouble?
I suspect you would then have 100 bankrupt companies instead of one.
You suspect we would have 100 grossly mismanaged companies - that all fail at the same time - instead of one? I don't think so.
No, not all global banks, and not even all the banks in the U.S. failed. Many smaller banks failed, and some large ones were failing as well, but each case was different and it was all due to system wide chain reactions. Many U.S. banks were fine and even refused to take TARP funds. The difference is that the FDIC is poised to counter small banks failing, but not behemoths like AIG, where (taxpayer) gov. funds are the only answer.
For these institutions, a bankruptcy plan should be required like a fire escape plan is required.