Counterparties: Too Global To Fail

December 10, 2012

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The thing about Too Big to Fail financial firms is that they tend to be Too Big to Fail in several countries at once. Hence, the “shared strategy” laid out in a new joint paper from of the FDIC and the Bank of England that aims to protect taxpayers from paying for the rescue of gigantic multinational corporations.

Even if it’s just a set of principles, any sort of action on cross-border resolution has been a long time coming. As Simon Johnson has pointed out, the IMF has been pushing for at least a decade for some method of unwinding international financial firms.

The new strategy, summarized in this FT op-ed, has some clear improvements over crisis-era handling of TBTF firms. The company’s home regulator would take control of the firm (lucky them), shareholders and unsecured creditors would be forced to take losses (slow clap), and senior management would be removed (rousing applause). Liquidity would be parceled out by regulators to newly spun-off divisions and any taxpayer losses could be recovered from the financial sector — though it’s not quite clear how.

The FDIC-BoE approach — like this 2010 IMF proposal — also calls for something like a Pause button for derivatives contracts; a “stay of termination rights” would temporarily prevent counterparties from being paid out after a TBTF firm fails.

Regulators are taking another welcome step to protect taxpayers from TBTF: enforcing existing regulations on foreign companies. Shahien Nasiripour and Brooke Masters pick up on a recent speech by the Fed’s Daniel Tarullo which suggests regulators may soon force foreign subsidiaries to actually obey local capital requirements. The idea is to keep banks’ subsidiaries from posing a risk to domestic taxpayers. Larry Fink, the CEO of BlackRock, apparently isn’t happy about this:

 “If that is the new strategy among regulators, it really throws into question this whole globalisation of these firms,” he said at a conference last week. “It also means each country for themselves. I wouldn’t call it a trade war, but I would certainly call it a high level of protectionism.”

None of this is going to be easy, especially if more than one TBTF firm fails at once. As one former Fed regulator said last year: “Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems”. Try resolving that in the middle of a crisis. — Ryan McCarthy

On to today’s links:

Liebor
The EU is expected to accuse multiple banks of fixing LIBOR’s “lesser known cousin” – WSJ

Tax Arcana
Google saves about $2 billion per year using Bermuda tax shelters – Jesse Drucker

Billionaire Whimsy
3 people say Bloomberg is pondering buying the “bisque-colored” FT – NYT

The Singularity
The Robot Economy and the new rentier class – Izabella Kazminska

Hard Landings
China is the world’s new Rust Belt as it faces “decades of de-industrialization” – Forbes
On the other hand, China’s factory output just hit an 8-month high – Reuters

Wonks
Goldman’s top economist talks about the coming US rebound – Joe Weisenthal

Failure
The world’s deadliest road got even worse when the World Bank stepped in – Guardian

Your Retirement Plans
“Work is wage slavery and…retirement is freedom” – Stumbling and Mumbling

Cartography
Where the pirates are – Business Insider

Awesome
Paul Krugman on Isaac Asimov and the promise of social science – Guardian

Wonks
Chinese corruption in a (US) historical context – Tyler Cowen

Old Normal
When the US Army settled labor disputes – Bloomberg

Alpha
“The best-case scenario for bonds is the worst-case scenario for stocks” – Whitebox Advisors

Charts
The labor force is shrinking because of demographics – Calculated Risk

New Normal
“Sperm counts are plummeting across the industrialised world” – Economist

Apple
Apple’s new map system sends travelers to Australian National Park instead of city – Victoria Police News

Revealed
The secret sex of cheese – Molecular Love

2 comments

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The ‘Northern Rock Solution’ was one of the earliest interventions in the current cycle, and it accomplished most of all of the stated ‘wish list’ – it just need far braoder application. But alas, bank managements hated it – end of discussion.

Posted by MrRFox | Report as abusive

“which suggests regulators may soon force foreign subsidiaries to actually obey local capital requirements”

This isn’t right. Foreign subsidiaries in the USA already have to obey local capital requirements and always have. Tarullo’s speech floated the idea that as well as obeying the capital requirements on a standalone basis, foreign banks running subsidiaries in the USA should be required to operate a separately capitalised top level holding company to own them.

Posted by dsquared | Report as abusive