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Wednesday, January 14, 2009

Too Big Not To Break Up

I'm just catching up with this news:

Here We Go Again..., by James Kwak: The Wall Street Journal (...shorter Bloomberg article here) is reporting that Bank of America will receive billions of dollars more in government aid, probably in a deal that looks something like the second Citigroup bailout, ostensibly to help absorb losses incurred by Merrill Lynch since the acquisition was negotiated in September but more generally to shore up B of A’s increasingly shaky balance sheet. At least someone involved knows how this looks: the reports say the deal will be announced on January 20 - yes, the day of Barack Obama’s inauguration - thereby keeping it from being the main story of the day.

It looks bad for all sorts of reasons:

  • Wasn’t B of A supposed to be a healthy bank? Isn’t Ken Lewis (CEO) the person who told Henry Paulson he didn’t need the first round of TARP money, but he would take it to show solidarity and for the public good?
  • The money is going to finance an acquisition? Isn’t that the thing that (according to most people) banks aren’t supposed to be doing with their bailout money?
  • The B of A-Merrill deal closed on January 1. So it looks like - as the WSJ is reporting - the deal only closed because Treasury gave B of A a verbal commitment to supply the needed bailout money later.
  • Isn’t this more policy by deal?

That said, I think some sort of deal has to be done. Even Yves Smith at naked capitalism (one of the most consistent and sharp critics of the way TARP has been implemented), who says this deal “stinks to high heaven,” says that “Merrill is a systemically important player” and “letting the deal with BofA ‘fail’ is a non-starter.” But I predict that when the terms are announced I will think they are too generous...

[O]ne price we are paying in these bailouts is the creation of a new tier of mega-banks that, because they are Too Big To Fail, have the competitive advantage of being essentially government-guaranteed. What we really need as a condition on TARP money is a new regulatory structure to make sure that these mega-banks do not abuse the oligopolistic position we have just handed them, and perhaps a commitment to break them up when economic circumstances allow. That would be considerably more valuable than a cap on executive salaries and corporate jets. But it will also be a lot more difficult to define and to agree on.

One thing, I would take the word "perhaps" of "What we really need as a condition on TARP money is ... perhaps a commitment to break them up when economic circumstances allow." These banks are too big not to break up, so unless there are very good reasons to allow them to remain so large, and I haven't heard them, then they need to be downsized. (And if such arguments do exist, these institutions need to be regulated much more than they have been in the past, much as we do - or ought to do - with other non-competitive markets.)

    Posted by on Wednesday, January 14, 2009 at 07:56 PM in Economics, Financial System, Market Failure | Permalink  TrackBack (0)  Comments (15)


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