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Why Does the Media Say That Congress Would Need to Appropriate Money to Take Over Bankrupt Banks?
The media abandoned any pretense of objectivity in pushing the original TARP back in the fall. They eagerly pushed the story that the economy would collapse if the TARP did not pass.
The media never told the public that the Fed had the ability to takeover the banks in the event of a national emergency and it had plans to do exactly this back in the early 80s debt crisis.
The media also never bothered to tell the public that the Fed had the authority to buy the commercial paper of non-financial corporations (a process it initiated immediately after Congress approved the TARP). This meant that Fed Chairman Ben Bernanke's claims that this market had shut down and therefore companies couldn't pay their bills, was irrelevant to the passage of TARP.
The new line that being pushed to argue that there is no alternative to the Geithner plan is the claim that Obama would need congressional authorization to have the FDIC take over bankrupt banks.
Is that so? It's not clear why. The law authorizes the FDIC to take over bankrupt banks. Under the law passed by Congress, the FDIC is supposed to take over Citigroup, Bank of America and other zombie banks.
It's likely that the FDIC would not have enough money to pay for cleaning up these zombies, especially if it pays off the banks' bondholders. (It has no legal or moral obligation to pay these bondholders, unlike FDIC insured deposits.)
The Fed could almost certainly lend the FDIC the necessary money, as it is doing under the Geithner plan. The Fed can pretty much do whatever it wants so it is not clear why anyone would think it could give money to subsidize banks through the Geithner plan, but not to clean up the banks' mess.
Of course the other story is interesting also. Suppose that the FDIC seized the bankrupt banks and lacked the funds to clean up the mess. Would the Republicans allow the banks' bondholders to get cleaned out? That doesn't seem likely, but it might be fun to watch.
The fact is that the banks and their political allies have lied to the public continuously throughout this crisis to get more taxpayer money for their pockets. It is irresponsible to take anything these people say at face value at this point.
--Dean Baker
COMMENTS (10)
The claim is that the FDIC could seize banks but not bank holding companies. So it could seize Citibank, but not Citigroup, and that Citigroup blowing up in a regular bankruptcy would be a Lehman Brothers type disaster.
Posted by: fusion | March 28, 2009 6:51 PM
This information is in a blog post of Dean's, and I have seen it nowhere else. This is also the first time I have seen this posted anywhere - whether MSM or bloggers. Why has this information not been put anywhere else?
(IANAE - I am not an economist)
Posted by: vv111y | March 28, 2009 11:28 PM
Where there's subterfuge, generally there's fire. And the "Geithner plan" is nothing if not an astonishingly convoluted attempt to conceal the biggest bailout fiasco yet. So instead of taking over zombie banks, we're subsidizing further hedge fund and bank speculation in repackaged real estate sludge: heads they win. Tails, the taxpayers lose.
I'm not sure whether to be horrified by the press's ineptitude here or terrified by its complicity. Obama is siding largely with the monied interests rather than the electorate in this, and that is seriously disheartening.
Posted by: srla | March 29, 2009 12:11 AM
vv111y, The Nation's William Greider presented much the same information in even greater detail on this week's Bill Moyers Journal (available online). If anything, his take was even more unsettling.
Posted by: srla | March 29, 2009 12:15 AM
My question is whether "fusion" is correct? This is not about the amount of money, but the authority to seize the bank holding companies. Is that right? Look back to the seizure of the steel industry by Truman in the 1950s. The Supreme Court ruled it unconstitutional because he lacked specific legislative authority. If this case still holds, makes sense that Obama is going to Congress for specific authority to seize the big banks.
Posted by: Toby Higbie | March 29, 2009 12:39 AM
Well, the FDIC is not supposed to take over brokerages etc, as its role is to protect depositors at the lowest cost. So the argument made by some is that we need the PPIP because we need to bailout not just the banking bits in Citigroup, but the non banking bits.
But in that case it is even worse: the federal government does not have any authority to do that. There is no statutory charter for a Federal Shadow Banking Insurance Corporation...
Anyhow DeanB as to the FDIC source of funds, Sheila Blair said that the law authorizes the FDIC to size if necessary the entire capital of all depository banks as insurance fees, if that is necessary. That is, insured banks have unlimited liability to the FDIC. Conversely there is no authority to grant (as opposed to loan) state money to the FDIC, which is supposed to be entirely self-financing.
Posted by: Blissex | March 29, 2009 9:02 AM
Carl Icahn (!) has an interesting op-ed in the NYT times today. He correctly points out that corporate law has been rigged to prevent any real stockholder influence. But his claim that the federal government now has no legal way to exercise control (over AIG for example) is false, as Dean has explained. The real problem is not legal, but that those in charge of the bailouts are determined to retain the current management.
Icahn thinks that corporate law should be changed to give real control to stockholders, but obviously if government is going to be ultimately responsible for any corporate debt, government must also have some authority in the running of such corporations before a crisis is reached.
Posted by: skeponomist | March 29, 2009 10:53 AM
Dean said:
"It's likely that the FDIC would not have enough money to pay for cleaning up these zombies, especially if it pays off the banks' bondholders."
Why are the bondholders sacred? Why can't they take the losses they legally obligated themselves to take when they entered into their bond contracts? Why isn't this situation just a question of how to, in an orderly fashion, allocate the losses to those legally obligated to suffer those losses?
Sure, a billion here or there from the government to ease the process, but why is the government supposed to take all these losses?
I think I'm agreeing with Dean here. If so, he should add this to his short list of themes he hammers away at (quite effectively).
Posted by: Terry | March 29, 2009 11:58 AM
Simon Johnson says that the cost to taxpayers of nationalization (ie taking over banks) would be $1.5T.
I assume that means paying back the bondholders.
Where is that money going to come from again?
Posted by: babar | April 3, 2009 1:58 PM
This post is a joke, right? It's "not clear why" the FDIC has no authority to seize Citigroup? It's clear to anyone who has a minimal knowledge of the US banking system: because Citigroup is a bank holding company, and the FDIC has no legal authority to seize bank holding companies. See Title 12 of the U.S. Code.
Really, this is very basic stuff. I shudder to think what else you don't know about the banking system.
Posted by: Nick | April 7, 2009 1:28 AM