Frank changes mind, now favors pre-funding

October 30, 2009

From Alison Vekshin:

Barney Frank, chairman of the U.S. House Financial Services Committee, reversed course and will support requiring financial firms to prepay into a fund the government will use to unwind large firms after they fail.

If Frank’s legislation passes, there will be an explicit taxpayer guarantee backing the high risk activities of the big banks.

Why? Because there’s no way banks could fund the cost of even one systemic resolution. How much has AIG set back taxpayers? $182 billion so far. And we’ve promised $200 billion each for Fannie and Freddie. Banks complained about the $5.6 billion special assessment on FDIC. We expect them to pre-fund sufficient scarol to fund the next AIG?

David Reilly made this point very cogently a couple days ago.

Will creditors and shareholders actually have to absorb meaningful losses? As reader Ralph DG points out the creditors and counterparties of the banks are … other banks and insurance companies, systemically-important themselves.

Losses can’t be forced on them without causing the kind of systemic “domino effect” this whole scheme is trying to prevent.

Bottom line: when the bill comes due, taxpayers will pay it.

In the meantime, banks will benefit from their new protected status.


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The “white house” would have us believe a lot of things. Since the president was elected, very little truth has come out and who knows what is truth and what isn’t. There are only a few people in the media who get to the truth and that DOES NOT include the “white house”.I treat what they say the same way the media does. If I can’t verify it from trust worthy sources, I don’t accept it. The president, seemingly, doesn know what the worl “truth” means! Therefore, I don’t believe him nor his representatives, whomever they might be!!!Every time they say jobs have been created or saved, they are telling us what we need to hear, which means there is no truth to it! No one can count saved jobs, so that’s a bunch of hooooy! They are doing nothing to help the SBA, so I would like to know where all the jobs were crated at. The small businesses are laying off, not hiring!

Posted by hankster6 | Report as abusive

Now the banks should come out with something to make it up to all of us. I know – free checking for every American with no minimum balance!

Posted by CB | Report as abusive

There was a time when banks were responsible for maintaining the value of the currency. By making it a public responsibility with the creation of the Fed, they created the foundation of socialized risk and privatized rewards. Unfortunately for their future, it is a situation which will not last much longer and we will have to go to a public banking system. This would would entail local banks as a function of local government. These would then be shareholders in regional consortiums and this would provide the oversight for a national bank that would be responsible for a national currency.The fact is that capital is subject to the laws of supply and demand and since the supply is potentially infinite, it is demand, ie. viable lending, which determines savings. Credit bubbles are a function of unsustainable demand being used to inflate supply. If people understand money is actually a form of public utility/drawing rights on community productivity, they would be more hesitant to drain value out of society and the environment to put in a bank, which would be healthy for both and maintain a moderate capital base. Money is similar to roads. We all like having roads, but their is little inclination to pave more than is necessary. The same should apply to monetizing our lives.As a drawing right, notational wealth has no intrinsic value, but is a contract with the larger society. To the extent the financial sector has been turned into a gigantic sting, it is likely that society will renege on its contractual obligations to those operating that sting. Which is to say that Goldman Sachs and company are playing with fire.

Posted by John Merryman | Report as abusive

This proposal reminds me a lot of a set of proposals put forth by Ricardo Caballero, all based on the idea of insuring against systemic risk in some way. He mooted one proposal on Real Time Economics:  /2009/02/17/caballero-on-an-insurance-c omplement-to-tarp-ii/He’s a smart guy, but I disagreed with him:“we focus on the whole system and on the role played by uncertainty””I’m still wondering how we price this crisis insurance. It seems that either the premiums will be onerous, or they will be seen to be insufficient. It seems to add uncertainty, since no one knows for sure how much will actually be covered. Unless you’re assuming that the government will cover everything in the end anyway. What am I missing?”I think that this point is akin to your point here:”If Frank’s legislation passes, there will be an explicit taxpayer guarantee backing the high risk activities of the big banks.Why? Because there’s no way banks could fund the cost of even one systemic resolution.”I do think that if we had Narrow/Limited/Utility Banking as a foundation, we might well want to ask certain risky financial concerns to self-insure against a meltdown. But,it’s real purpose would be to have enough insurance to allow an orderly unwinding of positions, and avoid a spiral or panic. If it could do that, then the govt might well not have to get involved.On the other hand, if we ever face a panic or spiral again, I’m confident that the govt will intervene. Hence, Narrow Banking. There’s no way to wring Moral Hazard out of our financial system, because many people believe, as I do, that the govt cannot stand idly by in a panic or spiral.

Posted by Don the libertarian Democrat | Report as abusive

“…prepay into a fund the government will use to unwind large firms AFTER they fail.”Why does this not give me comfort?

Posted by StevenKs | Report as abusive

9 more banks down tonight.Looks like I have a chance of collecting my bet on 150+ this year.

Posted by StevenKs | Report as abusive

Why on earth are we being lead into this trap,to support the powers to be I assume because all the politicians are in the pockets of all these corporations. I am a small business and I’ll relate my relationship with BOA. 1st they pull my line $50,000.00 balance 17,500.00, then they increase my interest rate on business credit card 8.99% to 19.99% $25,000.00 line of credit. I called asked why, told because of the economy at present is not looking good we are readjusting each customers credit lines and interest rates, complained, given a credit manager, asked some questions about my business, could have looked this up, put on hold,told nothing we can do at this time, went off on credit manager, next day line pulled on credit card to balance $4,500.00. Pay my bills, pay my help, pay my insurance, pay my taxes, pay my vendors, make a little money, still in business. Customer with BOA from 1986 Bank of Boston/Fleet banks/BOA. I would rather deal with Paulie Walnuts from the North End

Posted by paul Small Business Owner | Report as abusive

Can you say corruption?

Posted by jason | Report as abusive

“creditors and counterparties of the banks are … other banks and insurance companies, systemically-important themselves.”:-Banking and corporate insurance are flat top trapeziums, with risks being passed around like a hot potatoe, if only they were pyramid schemes, which they most probably are: the two faces of international finance.

Posted by Casper | Report as abusive

At some point it will dawn,too late, on the corrupt fools in government, that the Taxpayers, the American workers are systemically too important to fail. The US government and their banking controllers are now a country within themselves. The rest of us just exist to support their insatiable greed for money and power. This will be the downfall of the USA as it was for Rome, and the time is short.

Posted by TWM | Report as abusive

One more time-the worldwide banking system aka free enterprise capitalism failed.The primary causes were greed and corruption and a legal basis for the actions e.g. the repeal of the Glass Stegal act.A secondary and major cause is “white collar crime GREED-is not illegal.Until we pass laws making the acts that have occurred and continue to occur “economic treason” ;nothing is going to change.A Einstein “Stupidity is repeating the same experiment over and over and expecting a different result”The American people are economically stupid ergo powerless unless they organize in a “Sensible Center”.To further that goal I am founding a web based political base named the “Sensible Center which all people in democratic countries can use as a model for action.These are dangerous time and immediate action is required Banking is too important to be left to bankers

Posted by Frank Lipsky | Report as abusive