By Cliff Montgomery – May 23rd, 2009
There is discussion in the White House and on Capitol Hill of extending taxpayer-funded bailouts to a host ofother huge financial institutions, under the argument that they too are “too big or interconnected to fail.”
The American Spark below quotes major sections of a Congressional Research Service report released inApril, 2009, which puts forward this position:
“Congress [now is dealing…] with the question of how best to handle the failure of Systemically SignificantFinancial Companies (SSFCs).
“In the United States, the insolvencies of depository institutions (i.e., banks and thrifts with deposits insured bythe Federal Deposit Insurance Corporation (FDIC) ) are not handled according to the procedures of the U.S.Bankruptcy Code. Instead, they and their subsidiaries are subject to a separate regime prescribed in federallaw, called a conservatorship or receivership.
“The basic difference between a conservatorship and a receivership is that a conservatorship involvesoperating the institution as a going concern to protect its assets until it stabilizes or is closed and a receiverappointed. A receiver is charged with liquidating the institution and winding up its affairs. A conservatorshipmay indicate that the FDIC aims to restore the institution to solvency or that the FDIC had to act quicklywithout the usual lead time for investigation. In either case, a conservatorship may be followed by areceivership if a determination is made that the institution is not viable.
“Under this regime, the conservator or receiver, which generally is the FDIC, is provided substantial authority todeal with virtually every aspect of the insolvency. However, the failure of most other financial institutions withinbank, thrift, and financial holding company umbrellas (including the holding companies themselves) generallyare dealt with under the Bankruptcy Code.
“In March of 2009, Treasury Secretary Timothy Geithner proposed legislation that would impose aconservatorship/receivership regime, much like that for depository institutions, on [other] insolvent financialinstitutions that are deemed systemically significant. […]
“It is argued that the pivotal role banks and thrifts play in mainstream economic life exceeds that of most othercommercial firms, thus justifying a special regime designed specifically for bank and thrift insolvencies. […]
“This raises the question: Do SSFCs, as a result of their inherent traits, warrant a special insolvency regimemodeled after that of depositories? While SSFCs do not hold insured deposits, it is entirely possible that largeportions of individuals’ wealth could be held by these institutions in other forms.
“While non-deposit financial products may not be explicitly insured like deposits, financial firms that are trulysystemically significant arguably have an implicit backing by the federal government, which considers them toobig or interconnected to fail [italics added], and thus would warrant federal financial investment to avoid theirfailure (at least under the current insolvency process).”
We at the American Spark here feel the need to offer the alternative voice of the grass-roots group A NewWay Forward, which perhaps proclaims a more straightforward, sensible approach to the “Big Bank” problem:
“As Wall St. corporations grew bigger and bigger until they were ‘too big to fail,’ they also became so politically powerful that they led to distorted and unfair policies that served companies, not citizens.
“The bailouts [therefore] are widening the gap between the rich and poor. Our government has spent trillions of our dollars to prop up a banking system that has failed the country. Wall St. needs to be stopped. We demand that our government break up the insolvent banks and never again let them get so big that they distort our politics and corrupt the economy.
“During the week of June 8th, Americans will host national video screenings and town hall forums to learn about the crisis and begin working on restoring our economy and democracy.”
