Tackling the big blow-ups

Δημοσιεύθηκε: 25 Μαρτίου 2009 - 22:50

Technical terms mask the crux of an issue. So when the US Treasury asks for "resolution authority" to deal with large "non-bank financial institutions" it is worth asking what exactly is at stake. Put this piece of the puzzle together with the Treasury's bank stress tests and its plans to buy bad assets. Selling loans and securities to public-private funds is likely to force banks to crystallise large losses. Meanwhile, stress tests could force thinly capitalised banks to top up with government funds. Should these in combination reveal any bank to be in real trouble, the authorities are (belatedly) seeking powers to take the required action. The Treasury and the Federal Deposit Insurance Corporation want to be able to support, restructure or wind down a large financial firm. Not limited to the likes of AIG, these powers would also cover bank holding companies. The government wants the authority to deal with a big, complicated bank, a Citigroup, for example. The FDIC's existing powers over "banks" extend only to deposit taking subsidiaries, not holding companies. That is a problem when much of banks' funding and derivatives contracts are stuck at the holding company level. Equally, the failure of one subsidiary may prove fatal for other parts of a financial outfit. The new authority would allow the government to control a company's demise, to renegotiate contracts or potentially impose haircuts on creditors or counterparties. All these moves suggest some method behind the madness. Certainly, the administration's output is notably more nuanced and better thought out than its predecessor's. President Barack Obama has even poured cold water on the loopy notion of punitive taxes on bonuses. Still uncertain, however, is whether the final element is in place to push these pieces together: the political guts to nationalise those banks that at the end of all this prove themselves insolvent. BACKGROUND NEWS The Obama administration joined forces with Ben Bernanke on Tuesday to press Congress for powers that would enable regulators to seize control of troubled financial groups including "non-banks" such as insurer AIG. The Fed chairman said the AIG case highlighted the "urgent need" for a new resolution authority modelled on the Federal Deposit Insurance Corporation, which protects depositors when banks fail.

To e-mail the Lex team confidentially click here OR To post public comments click here

The Lex column is now on Twitter. To receive our daily line-up and links to Lex notes via Twitter, click here

_________________________________________

Lex is the FT's agenda-setting column, giving an authoritative view on corporate and financial matters. It is also one of the few parts of FT.com available only to Premium subscribers. This article is provided for free as an example. A Premium subscription gives you unlimited access to all FT content, including all Lex articles and the FT mobile Newsreader.

Subscribe now

If you have questions or comments, please e-mail [email protected] or call:

US and Canada: +1 800 628 8088 Asia: +852 2905 5555 UK, Europe and rest of the world: +44 (0)20 7775 6248

© The Financial Times Limited 2009. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation