Banks can get away with murder
Yesterday, I expected to submit an article entitled "In business, bigger is not necessarily better" for American Thinker. The ink wasn't dry on my article before the government took bids on First Republic Bank (FRB). JPMorgan Chase, the largest bank in the U.S., was the winner. The biggest gets bigger.
What? Does the Fed have the legal right to put a distressed bank on the market and effectively sell it to the highest bidder? In doing this, isn't the Fed playing favorites with the bank leadership that created the problem in the first place? Have FRB bank leaders been selling their FRB stock the way Silicon Valley Bank leaders did?
Since when has it become law that banks cannot go bankrupt? Troubled banks can be auctioned off, instead of going through bankruptcy like all other small, medium, and big companies.
Bankruptcy is a healthy thing. Using the court system, the debtor is responsible for developing a reorganization plan within 120 days. The plan includes how creditors will be repaid using assets and other items of value in the company. Often, the company can remain viable after bankruptcy, although much reduced in size. The plan must be approved by the court and the creditors.
Many large companies have gone through bankruptcy, including Delta Airlines. Why should banks be different?
In the 1970s, the U.S. Congress passed legislation encouraging financing for affordable housing. Then, in 1999, parts of the Glass-Steagall legislation in 1933 were repealed, which allowed financial institutions to commingle their commercial (risk-averse) and proprietary trading (risk-taking) operations. This led many banks to make loans with little or no down payments to homeowners. Within seven years, the portfolios of many large banks were overstated as many mortgages defaulted and banks left these assets overstated. Banks most affected were primarily investment banks.
To better understand the greed present in investment banks, I recommend reading Too Big to Fail by Andrew Ross Sorkin. This should be a good eye-opener on how the government always makes decisions on a short-term basis.
After the 2007–2008 banking crisis, the Fed, for the first time, pitched in $50 billion to settle the markets. And yet the Fed indirectly caused the crisis! More short-term thinking.
So where are we today? My take: If you are a bank, take all the risk you want. Do not worry. Uncle Sam will save you — up until there is only one bank left to buy up the spoils!
Dann E. Kroeger is a long-term thinker.
Image: pasja1000 via Pixabay, Pixabay License.