By Mary Kate Cary, Thomas Jefferson Street blog
The phrase for today: Too Big To Fail. It applies to banks, insurance giants, and maybe even former government officials.
Following up on comments made yesterday by President Obama which hinted that a banking clean-up plan could be ready by April, Fed Chairman Ben Bernanke used the term in a speech this morning, saying that a regulatory overhaul in banking would address the issue of what to do with Too Big To Fail institutions, calling for Congress to enact a model similar to the one set up for the FDIC, which handles smaller bank failures:
"Government rescues of too-big-to fail firms can be costly to taxpayers, as we have seen recently," Bernanke said. "Indeed in the present crisis, the too-big-to-fail issue has emerged as an enormous problem."
One of the most enormous Too Big To Fails is insurance giant AIG, and the Washington Post has a chilling article about a "strictly confidential" 21-page briefing paper sent to government officials that was prepared by AIG leaders, laying out what happens when a Too Big To Fail actually fails:
AIG warned that its failure could provoke a "run on the bank" from its 74 million insurance customers around the world, causing other insurance firms to fail and leading to massive unemployment in numerous countries. It could also put "retirement savings significantly at risk" and cause "a loss of confidence in the private pension system in the U.S."
That's only a small excerpt from a long list of horribles detailed in the memo.
As Bernanke mentioned, the FDIC handles smaller bank failures in an orderly and proven way. Yesterday, the head of the independent FDIC, Sheila Bair—who, by the way, was appointed by President Bush #43—sat down with newspaper editors and explained a plan for handling toxic assets. Click here to read the first easily understandable and reassuring explanation of dealing with toxic assets I've seen. There's also a good graphic for those of us who are not economists.
AIG and Fannie Mae may be Too Big To Fail, but Secretary Geithner is not. And while some don't mind automakers and mortgage companies failing, very few of us want the administration to fail when it comes to rescuing banks. FDIC Chairman Bair warns that the costly toxic assets plan will take courage to enact, and there doesn't seem to be a whole lot of that these days. So David Smick—in an otherwise doom-and-gloom opinion piece—proposes an interesting solution. The White House should name a team of "proven, world-class problem solvers" from outside Wall Street to direct the bank workouts. James Baker, former Republican Secretary of State and Treasury Secretary, is his first pick. He also suggests former Senators Bill Bradley (where is he now?) and George Mitchell, but I think Mitchell's too busy bringing peace to the Middle East.
Here's a suggestion: go even bigger. Ask President Bush #41 and President Clinton to spearhead the effort. They both dealt successfully with the late 1980s-early 1990s S&L bailout, back in the day; they did a terrific job galvanizing global public support for the humanitarian Tsunami relief efforts; and they send a much-needed message of bipartisan cooperation to the American people. Because neither one of them is getting any younger (and Mrs. Bush is still recuperating from her surgery), they could ask a team of their former Cabinet members to do the heavy lifting: people like James Baker, Madeleine Albright, Colin Powell and others who can quickly marshall a team of their long-time aides whom they've stayed in touch with, highly competent people who are motivated by both public service and crisis management.
I'd say that's an idea that's Too Big To Fail.
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