Big Banks

The official policy of the AWCP would be that there is no such thing as a bank too big to fail. If any bank were to become insolvent the FDIC would step in and clean up things as much as possible under the existing laws and regulations. The only way the federal government would inject any capitol into an insolvent bank would be in return for sufficient equity in the bank to give the government control of the bank.¹

Once the government had control of the bank it would not operate the bank but it would fire all of the top management and then break the bank up into three to five regional banks which would be prohibited from becoming part of any nationwide bank in the future.

Another reason for making it official policy that there was no such thing as a bank to big to fail is that I read a while back that there were companies with links to the banks such that if the bank failed the company would fail. It is tempting to think that the CEOs of any such companies were incompetent, but I suspect that the bank gave them a financial incentive to do so, all the while assuring them that the government considered them to be a bank too big to fail. By stating this policy in advance the government would be encouraging the companies to break any such links they have to the banks.

Any administration that would implement such a policy would have to consider the possibility that the companies with links the the big banks would not sever those       links but that rather that the companies and banks would present a united front basically saying that if the bank goes bankrupt the companies go bankrupt.

Obviously an administration cannot either buy out or bail out a bank unless Congress appropriates sufficient money. There are four things Congress could do:

  1. Congress could do nothing, that is Congress would not allocate any money for either buying out the bank or bailing out the big bank. This would not be the ideal solution but it would be acceptable. It may well cause financial chaos, but it would rid the country of a bank too big to fail.
  2. Congress could allocate money only for buying out the bank. This would be the ideal solution.
  3. Congress could allocate money and leave it up to the President whether to buy out the bank or bail out the bank. On a practical basis this would be the same as #2 above.
  4. Congress could allocate money but specify that it can only be used to bail out the bank. You might think that this would force an adminstration’s hand but that is most probably not true. When Congress passes a bill and sends it to the President he has ten days to either sign the bill or veto it. This means that a president could wait until the tenth day before vetoing the bill and sending it back to Congress. Since there is no such thing as a slow-motion financial crisis this would have the effect of being the same as #1 above.

As you can see an administration that wants to rid the country of banks too big to fail would be in control in the event of a financial crisis. Note that in the event of a financial crisis not all of the big banks would fail at exactly the same time. This would mean that a President who stood his ground when the first bank failed would be in a much stronger position vis-a-vis Congress when the other big banks failed.

¹ I am assuming that the process of buying out a bank would consist of buying a majority of the shares on the open market.