Tuesday, October 6, 2009

What to do with TBTF banks?

Stimulating piece in today's Financial Times by Harvard Business School professor Niall Ferguson (also has an appointment in the history department) about TBTF (too big to fail) banks. Professor Ferguson is quite disappointed with the proposals on the table (in both the US and Europe) to deal with these institutions. "Very strong government oversight" is needed, says Treasury Secretary Geithner -- but what does that mean and weren't we already supposed to have that before all of the bailouts? Ferguson's take:

This is moral hazard run mad – a system in which a few giant banks get to operate as hedge funds with a government guarantee that if they blow up, their losses will be socialised.

Ferguson's solution: make a credible commitment that in the future bondholders as well as stockholders will be wiped out the next time a big bank goes belly up. But can the Obama (or any) administration pull this off? How often does "this time we really, really mean it" work in other settings?

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