Taunter Media

Obama was on TV addressing the Administration’s request for more authority to take over non-bank financial institutions (begin at 6:15):

The new meme seems to be that there is some regulatory impediment to resolving a large bank holding company such as Citigroup or, for that matter, AIG.  Even James Kwak at Baseline is wondering about this.

Thing is, there is no there there.  The Fed has authority over Citigroup (bank holding company) and the FDIC regulates Citibank (banking subsidiary that accepts demand deposits), but in every important respect it is only a matter of trivia.  Sort of like the fact the Fed is technically owned by no one.  Suppose the FDIC decided tomorrow that Citibank is undercapitalized and it is taking the bank into receivership.  Does it matter what happens to the rest of Citigroup?  By definition, there are no depositors left.  It is not obvious that Citigroup would need to go bankrupt – perhaps it could shed assets quickly enough to keep its debt holders at bay, perhaps its non-bank businesses generate enough cash flow to service the debt – but if it did, so what?  Once it is not a bank, our need to move heaven and earth to keep it alive disappears.  Would we intervene to keep Blackrock or PIMCO alive?

This brings us back to the AIG question.  Obama may wish to deflect responsibility for our ongoing support of the firm by saying we don’t have authority to amend contracts.  But the bankruptcy judge does, and would be doing exactly this if we had only allowed the firm to file.  The only reason AIG is honoring previously agreed contracts is that it has not gone through the very restructuring process the President wishes it had gone through.

Again, “bankruptcy” or “going under” – Chapter 11 – do not mean “liquidation” – Chapter 7.  If AIG were to file on Friday, the US government could buy and/or seize (since it would breach all sorts of regulatory requirements) the domestic insurance business and operate it on Monday completely unaffected.

Well, there is one catch.  You see, AIG is levered…actually, we don’t really know how much it is levered, but it is astronomical.  Far more than any regulated bank.  It is the threat of restructuring these liabilities and dinging beloved Goldman Sachs that keeps the government throwing money down the well, not any lack of legal authority.