"Death panels" for institutions "too big to fail" sounds like a good idea to me. The concept was voiced by Barney Frank in describing what Congress has in store for the financial services industry. We should have remembered the last experiment with unfettered free markets when we deregulated the Savings and Loan industry. Over 3,500 executives went to prison.Â Fortune magazine ran a hilarious two-page spread with hundreds of tiny mug shots.
This time out, the problem is not so much criminal as just plain stupid. When leverage limits were lifted in 2004, most financial institutions went right to the thirty to one limit of borrowed money for each dollar of cash. Just a 3 percent gain (net over the cost of borrowed money) created a 100 percent profit. Any executive not following that herd at the time would have lost his or her job. While leverage works both ways, Wall Street's "IBG" factor was at work. "IBG" stands for, "I'll be gone."
Fifty-year- old banking regulations spawned during the great depression helped to keep greed and stupidity at bay. A ban against interstate banking and a prohibition against banks selling securities were both done for a reason. Regional banks with limited footprints were largely kept in line by threat of embarrassment. Community leaders running banks were more concerned with their long-term reputation than with the size of their annual bonus. Allowing companies to combine several financial functions into a single organization, like AIG, meant that they could use the insurance arm's credit rating to design hopelessly short-sighted investment products that pretended the 20% housing downturn of 1992 had never happened.
Moreover, the entire conglomerate was regulated by the government's thrift industry regulators because tucked somewhere in the bowels of AIG was a thrift institution handling Christmas club savings accounts.
An interview of former Treasury Secretary Henry Paulson by Todd Purdum in Vanity Fair sheds some light on where we will go from here and offers some reasons for optimism. Our situation today would be much worse if it hadn't been for the actions of a bird-watching, non-drinking, non-smoking, devout Christian Scientist and former Goldman Sachs Chairman who is still worth over $500 million after having given over $100 million to environmental causes. By letting four major "too big to fail" institutions walk the plank, he managed to stabilize what was left of the world's financial underpinnings.
I still have an issue with companies that benefited from our AIG bailout, such as Goldman who received $12.5 billion, but solving that problem can be step two of the process. We still have the power to sanction and tax.
What give me feelings of eternal hope are the comments Mr. Paulson made regarding Barney Frank with whom he worked closely during the crisis. "This is the guy that's got the intellect, he's got the energy, he cares, he wants to legislate, knows how to legislate. I wish he were a Republican and we all shared the same policy principles and you'd cut a wide swath."
I know that about Mr. Frank. Forty-three years ago I used to be part of a standing-room-only crowd that would listen to his lectures on political science at Harvard for their sheer brilliance and entertainment value. I wasn't even taking his class.
But if that wasn't enough, Hank Paulson then goes on to sing the praises of Nancy Pelosi and her command performance during the meltdown. "She was engaged, she was decisive, and she was really willing to just get involved with all her people on a hands-on basis." Bottom line: we have some competent people in Washington who are capable of engineering a "Back to the Future" chapter of our financial services sector.