Opinion

Felix Salmon

Why is Treasury denying its TBTF guarantee?

By Felix Salmon
March 5, 2010

Simon Johnson is right to be dismayed about this:

There is no U.S. government guarantee to protect the largest financial firms, a Treasury Department official said, as a congressional watchdog criticized the $45 billion in government aid provided to Citigroup Inc.

Herbert Allison, who oversees the Treasury’s $700 billion financial-rescue plan, disagreed with members of a congressional oversight panel that some financial firms benefit from the assumption that the government would step in to prevent their failure.

“There is no too-big-to-fail guarantee on the part of the U.S. government,” Mr. Allison said.

The weird thing here is that Treasury itself has made it explicit that there are too-big-to-fail institutions in the US: it even created an official bureaucratic acronym for them: Tier 1 FHCs. These are the banks and other financial institutions which are so big and interconnected that they’re going to need extra levels of capital and prudential regulation in an attempt to minimize the chances of their ever coming close to failure.

But there’s only one reason why the government should carefully regulate a set of companies so as to ensure that they don’t fail. And we all know what that reason is: if they were ever to fail, the government would be forced to step in and bail them out.

It’s also simply false for Allison to assert deny that TBTF banks “benefit from the assumption that the government would step in to prevent their failure”. Even if he’s right that the guarantee doesn’t exist (and he’s wrong about that, just as Treasury was wrong every time it said there wasn’t a US government guarantee of Fannie and Freddie), the fact remains that the markets believe that the guarantee exists, and that the cost of funds at TBTF banks is lower as a result. That’s undeniable.

So why is Allison peddling fiction in front of the Congressional Oversight Panel? Johnson puts it well:

If Mr. Allison was sticking to his talking points, as seems likely, let us find out exactly who is responsible for sharing arrant and self-defeating nonsense with Congress.

It’s a good question. Is this Geithner’s doing? Is Treasury now even more captured by America’s biggest banks than it was in the initial months of the Obama administration? Or is this simply an admission that financial reform is going nowhere, and that we’re going to return to the status quo ante of Treasury refusing to admit that it will ever bail out anybody, and then going ahead and doing that anyway?

Comments
4 comments so far | RSS Comments RSS

> But there’s only one reason why the government should carefully regulate a set of companies so as to ensure that they don’t fail. And we all know what that reason is: if they were ever to fail, the government would be forced to step in and bail them out.

I wish there more general agreement on this.

Incidentally, the paragraph following the one I pulled makes a lot more sense when it’s clear that you’ve said exactly the opposite of what you meant. It’s false for Allison to disagree that TBTF banks “benefit from the assumption that the government would step in to prevent their failure” — as he did, according to the article.

I can imagine people wanting to pretend that we’re not going to backstop these large institutions, but I think there’s more upside than downside to adding clarity as to who we’re going to backstop and how, rather than make everyone who disbelieves false assurances guess who exactly is allowed to fail how badly and in what way.

Posted by dWj | Report as abusive
 

Hey Felix, please check it out:
Historically, TBTF was a misnomer, says Prof. Bill Black. “In this crisis, however, regulators have twisted the term into immunity”, so Black in a must-read essay in naked capitalism.

Posted by CEZMI-DISPINAR | Report as abusive
 

why do you think that the treasury has the authority to guarantee an institution with a private charter?

Posted by q_is_too_short | Report as abusive
 

This last financial debacle has completely destroyed my and many other Americans respect for capitalism.

There is a bank robber in Denver Colorado named the Limping Latex Bandit who has over the past few months robbed multiple banks and I find myself CHEERING him on! I have decided to join the unlimited number of American citizens who appear to have an endless tolerance for individuals or institutions to steal from them.

I wish anyone the best of luck (as long as no one is physically harmed) who decides to go into any financial institution and take as much us treasury currency as they feel they have a right or need of and hand back to that institution a piece of paper with the sum that you’ve rightfully received written on it…after all, its all fungible.

Posted by csodak | Report as abusive
 

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