What Tim Geithner -- And Financial Markets -- Know About Bank Bailouts
Give TARP watchdog Neil Barofsky a stick and he's bound to poke someone in the eye with it. Thank goodness. The government Special Inspector General, who is doing yeoman's work overseeing the bank bailout program, completely perforates the idea that financial reform has solved the "too big to fail" problem.
How can you tell? For one, because Tim Geithner admits as much, according to Barofsky's latest report to Congress. The U.S. Treasury chief recently conceded that Dodd-Frank, the new law Obama administration officials claim will obviate the need for future bank rescues, does no such thing. The report states:
Secretary Geithner, in a December 2010 interview with SIGTARP, likewise acknowledged that despite the "better tools" provided by the Dodd-Frank Act, "[i]n the future we may have to do exceptional things again" if we face a crisis as large as the last one. To the extent that those "exceptional things" include taxpayer-supported bailouts, his acknowledgment serves as an important reminder that TARP's price tag goes far beyond dollars and cents, and that the ultimate cost of TARP will remain unknown until the next financial crisis occurs.If Geithner loathed Barofsky before -- and it's hard to imagine he doesn't judging from the White House's attempted hatchet job on the SIG's credibility -- then the Treasury chief must now despise him even more. (I say they settle this like men -- with a Dance Revolution showdown.)
Barofsky's report points to a number of reasons why Dodd-Frank doesn't end the era of TBTF:
- Banks are getting bigger. After TARP, the five largest U.S. financial institutions are 20 percent larger than before the financial crisis. They control $8.6 trillion in financial assets, or nearly 60 percent of GDP. As long as the government fears that a collapse by any of these companies could cause a financial panic, then the risk of a bailout persists.
- Different countries have different financial rules. TBTF banks operate around the world, and Dodd-Frank alone doesn't provide a global regulatory framework for shutting them down.
- Identifying "systemically risky" firms is hard. Risks change as the financial landscape evolves and as global economic conditions shift. As a result, regulators typically struggle to identify TBTF firms until a crisis actually hits (think AIG).
- Financial markets lack faith in Dodd-Frank. Investors, credit rating agencies and other market participants still believe that the government will have to bail out large financial institutions. That confers enormous competitive advantages on TBTF firms, boosting their growth and cementing their importance to the financial system.
We believe that banking crises will happen again. We expect this pattern of banking sector boom and bust and government support to repeat itself in some fashion, regardless of governments' recent and emerging policy response.In short, TBTF lives. How to kill it? The solutions are, if politically daunting, simple in principle: There are two basic -- and not mutually exclusive -- ways to go about it: 1) Create a system under which market players are certain that the government will allow big financial firms to fail; and 2) Make TBTF firms smaller.
But Geithner doesn't need Barofsky to tell him that.
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