All We Are Saying ...

Tue, 23 Jun 2009 20:27:17 +0000

David Skeel takes on the conventional wisdom regarding the bailout of Bear Stearns, with the benefit of 15 months of hindsight, and questions the wisdom of now institutionalizing "bailout in lieu of bankruptcy:"

But the bailouts [of Mexico and LTCM] are remembered as successes. The lesson Geithner learned is that bailouts are always the best response when a large institution or country is in trouble. This lesson lies at the heart of the Treasury's proposals for reforming U.S. financial regulation. In addition to requiring hedge fund advisers to register with the SEC, imposing disclosure requirements for derivatives, and expanding the Fed's systemic risk authority, the proposals authorize bank regulators to step in and take over "systemically important" nonbank financial institutions, as the FDIC already does with commercial banks (that is, banks that take deposits). By taking resolution authority away from the bankruptcy courts and giving it to bank regulators, this proposal extends and institutionalizes the bailout policy of the past year. If the proposals pass, large financial institutions will have the same incentives that Bear Stearns, Lehman, and AIG had: to make sure a default would be as messy as possible, and count on negotiating a bailout with banking regulators if things go sour.

As he says, give bankruptcy a chance, and keep the other two branches of government out of it. (h/t John Carney)