My sons have always told me that was trouble. I've been reading Chris the Crook's proposed fix for the financial system and it's hard to figure out where to start. So I've thought about it and decided that I'm not going to start,; I'm going to finish and wait until we see what come out of Barney and friends and what gets resolved. This is how I would finish by asking you to think about a simple scenario.
Suppose a young man by the name of Warren Buffett Jr. walked up to you, wise banker that you are, and asked you to lend him a million dollars. Now, I suspect you would begin by inquiring as to the purpose of this loan, it's term, method of repayment and for Mr. Buffett's financial statement. You get all of those things and they look ok, but perhaps not for the amount in question and not for the extremely fine rate for which young Warren is asking. You are about to term him down when in walks Pops and says something to the effect, "This is my beloved son in whom I am well pleased." Whoa! A mind changer? Maybe not because you ask pops, "Do you mean you are going to guarantee his loan?" And pops says, "No, but I stand behind him." Waddaya do?
Believe it or not, back in the good old days when relationships in banking meant something, business was often done on this basis in transactions involving parent companies and subsidiaries and formalized by what what were called "support letters" or some variation of the same. For a variety of reasons, a parent often couldn't issue a guarantee but bankers provided financing on the basis of the relationship with the parent (Damn GOOD!) and the belief that, for a variety of reasons the parent could never allow the subsidiary to default. Most often that was the result. The bank got a good piece of business and the near certainty that more goodies would come its way.
Now I know some of you are saying that's a really risky thing for a bank to be doing. Yep, but ask yourself have you ever owned a security issued by Fanny or Freddie and if you have did you ever look at and analyze their balance sheets? Bet you didn't. Why not, well because they had a big Uncle...the BIGGEST uncle in the world who would take care of them if anything happened. The entire world of bankers (yes Mr Little Guy you were a banker to them) believed that. And Fan and Fred, borrowed and borrowed and borrowed at rates far below at which a truly private company could borrow while their executives cooked the books, collected hundreds of millions of dollars of bonuses and assembled the most God-awful portfolio ever seen by mankind. But did you care? Of course not, you had Uncle standing right behind them with not even a support letter much less a guarantee. And guess what? You were right! You won and the taxpayers of the U.s Of A paid you out...or will. (If you're an equity holder, sorry 'bout that).
The world's banking system is pretty much another example of the same process which has become to be known as Too Big To Fail. As a result of what we have witnessed, every knuckle head on Capital Hill and in the news rooms of the world has ranted and raved about how we can never again allow an institution to become TBTF. The answer? More oversight and regulation and now something called resolution authority which is a political euphemism for the bankruptcy of a bank. Chris the Crook has even decided that somebody should have the authority to decide what businesses in which a bank can compete and if that somebody doesn't like what that business is somebody should have the authority to terminate the business, sell it, downsize it or whatever, irrespective of the rights, concerns or interests of the shareholders. Not only that, Chris is going to tell you which institutions are going to be subject to such "oversight" and create an orderly process in the almost impossible case something goes wrong because with government oversight, I mean, how could it?
What this proposed monumental piece of stupidity does, therefore, is to create 35 Fanny and Freddies for the whole world to see, or to put it another way, 35 institution that are TOO BIG TO FAIL all of which, being deemed to be under the strict oversight of the Government of the United States, will always pay their creditors as it would be simply impossible for the government to stiff anyone. If it did, would you invest in government bonds? Of course not which is why we will pay, and pay and pay every dime Fan and Fred owes forever. Now I wouldn't mind running one of these shops because you KNOW your funding costs are going to lower than any of the poor slobs with whom Uncle isn't in bed. And if I were a lender, guess who my preferred borrowers would be. Lend on MacDuff, and damned be him that first cries, HOLD, ENOUGH!
Fear: "The undiscovered country from whose born no traveler returns..." is that which takes the stupidity out of banking. Not always, but far better it is for this government and it's central bank, rather than putting together 1000 pages of crap to simply announce that in the future, it shall be our policy that no institution should be deemed to be Too Big To Fail. Lend at your own risk. You may get lucky but then again you probably will not.
Think about it...I'm finished.
Prince of Denmark was talking about death. Fearful of what, your banking job? Think of the millions of people that have lost jobs due to this banking fiasco. They had nothing to do with it. A third of homes have no mortgages,yet they are suffering with lost equity.
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