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2009 > May

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A Better Way To Restore The Banking System ::

Dr. Thomas Hoenig, President of the Kansas City Federal Reserve, wrote in the Financial Times: Troubled banks must be allowed a way to fail:

Non-viable institutions would be allowed to fail and be placed into a negotiated conservatorship or a bridge institution, with the bad assets liquidated while the remainder of the firm is operated under new management and re-privatised as soon as is feasible. This plan is similar to what was done in Sweden in the 1990s and in the US with the failure of Continental Illinois in the 1980s.

This plan has many advantages, including that management and shareholders bear the costs for their actions before taxpayer funds are committed. This process also is equitable across all firms; is similar to what is currently done with smaller banks; and provides a definitive process that should reduce market uncertainty. These are important reasons to implement this kind of resolution process.

Now there’s some refreshing common sense from the Midwest! He goes on to argue persuasively against the government’s approach to date.

I wonder, is there Big Money on the losing end of the credit default swaps of these institutions? Who are the bondholders who would get wiped out if Citi, B of A, or Wells Fargo were to fail?

[via Calculated Risk]

<< A yen for uplift

2009 > May

Condi's Conspiracy Confession >>

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