I may be solvent someday, but if I stop making my mortgage payments today, they take my house away. The difference with the banks (citi bofa wells etc) is they are politically well connected.
Our elected leadership doesn’t even bother to lay out the case of WHY allowing these banks to either go bankrupt, or be taken under poses a systemic risk.
There is no free lunch davelj.
Josh[/quote]
Have any of the big banks stopped making payments to creditors or depositors? Even without the TARP funds they would still be current on such payments, although dramatically undercapitalized. My point is that your analogy is a poor one. (Although, yes, they are politically well-connected.)
I could argue that the bankruptcy of these Big Uglies would pose a systemic risk but I won’t. Because I don’t really care that much. My issue as a taxpayer and bank customer is that I want the least costly resolution to these huge problem banks…
…which gets to your issue of there being no free lunch. I agree completely. Your preference is to shut the Big Uglies down and liquidate them ASAP. This would, of course, cause a HUGE loss to the FDIC insurance fund which is, of course, backed by the Treasury (that is, We the People). Ultimately the taxpayers and bank customers (via higher rates and fees) would eat these massive losses making the depositors whole (although the taxpayers would get paid back… some day). And the PE (and like) firms would make a fortune buying assets from the FDIC. If that sounds attractive to you, then by all means you’re on the right track. As you point out, there’s no free lunch.
Personally, I’d rather have these banks shrink and earn their way out of their self-imposed holes. That way, in essence, the bank’s investors – debt and equity holders – would pay the price. And taxpayers would be spared to the greatest degree possible. I WANT to zombify these Big Uglies and keep them focused on digging out of their holes. You want to liquidate ASAP, thereby screwing bank customers and taxpayers (including that middle class you talk about), and enriching the folks buying assets from the FDIC.
Don’t get me wrong, most of the few-hundred smaller banks that are in trouble can’t earn their way out of it. And they are not systemically important. They should be shut down ASAP. And eventually the Big Uglies should face new regulations regarding capital and concentrations, but… as a taxpayer I’d like to impose these new restrictions a few years down the road. Either way, the common equity holders (and potentially the preferred holders as well) are basically screwed.
