Wednesday, March 6, 2013

Eric Holder admits that TBTF is Too Big to Jail, only way to fix situation is transparency

As reported by Bloomberg, the US Attorney General, Eric Holder, admitted to Congress that the Too Big to Fail banks are Too Big to Jail because they are so large and interconnected that prosecuting them risks creating an economic crisis.

This as a restatement of the policy of financial failure containment and its corollary, the Geithner Doctrine (do not doing anything that will hurt the profits or reputation of big or politically connected banks).

Implementing this policy has freed the banks and the bankers from regulatory or judicial restraint on their activities.

At the same time, the banks are also free from market discipline because current disclosure practices leave them resembling 'black boxes'.

Regular readers know that the first step to restoring restraint on the banks is to require them to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

With this disclosure, the banks become subject to market discipline.  Sunshine that acts as the best disinfectant of bad banker behavior.

Market discipline that links the cost of a bank's funding to the risk the bank is taking.  With funding no longer subsidized by opacity and investors' inability to accurately assess the risks the banks are taking, pressure will be exerted on the banks to shrink and reduce their risk.

As the banks shrink, they become less interconnected.  This makes them more susceptible to being subjected to the rule of law.
The size of the largest financial institutions has made it difficult for the U.S. Justice Department to bring criminal charges when there’s wrongdoing, Attorney General Eric Holder said. 
Criminal charges against a bank -- something that could threaten its existence -- may also endanger the national or global economies in the case of the largest ones, because of their size and interconnectedness. That has “made it difficult for us to prosecute” some of those institutions, Holder said today at a Senate Judiciary Committee hearing. 
“That is a function of the fact that some of these institutions have become too large,” Holder told lawmakers. “It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate.”

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