No coin nor oath required. For personal study only.
This Shadow Financial Regulatory Committee has noted repeatedly that taxpayers are apt to lose when regulators gamble that the government can efficiently nurse an insolvent enterprise back to health. This policy affords a pretext for refusing to impose losses on uninsured depositors in failing institutions. Experience with thrift institutions insured by the FSLIC has shown that programs of capital forbearance and government management increase rather than reduce taxpayer losses.
Despite this unfavorable experience, in late January the FDIC rejected private bids for CrossLand Savings FSB, choosing instead to nationalize this firm "temporarily." FDIC Chairman William Taylor euphemistically characterized this action as the beginnings of a federal "hospitalization program" for failing depository institutions. This approach undermines the major reforms achieved by the FDIC Improvement Act that Congress passed less than three months ago.
It is possible that temporary nationalization might, in some cases, be the least-cost method for resolving an individual bank failure. But taxpayers have good reason to doubt that their interests are being well represented when "hospitalization" decisions are made. As amply demonstrated in the FSLIC fiasco, public managers are seldom as efficient as private ones, and regulatory authorities face serious conflicts of interest that can bias them against promptly reprivatizing a failed bank or thrift.
Prior to implementation, FDIC officials should have issued a public notice that fully articulated the tests and criteria by which they proposed to govern their nationalization program. The FD1C Improvement Act of 1991 favors imposing losses on uninsured creditors and undertaking a prompt privatization of risks. Given this intent of Congress, FDIC officials should have set up a reporting framework that would expose their decisions to informed outside examination. This entails releasing to the public a detailed and reproducible analysis of the costs and benefits the FDIC Board found and upon which it based its decision. General Accounting Office review of these findings as required by the 1991 Act is also essential for establishing the integrity of the Board's conclusions.
Complete accountability requires further that a timetable be established for reexamining every quarter the costs and benefits of each deposit-institution nationalization. Each nationalization should be kept to the shortest term feasible, with repeated public review. The process might usefully be modeled as an expedited bankruptcy action. This would mean establishing a receivership at the start of the process, and then, as quickly as possible, proceeding with a corporate reorganization or a liquidation. Either alternative would imply pro rata losses to uninsured creditors.
Rejecting private bids for an insolvent institution is dangerous from the standpoint of taxpayers because it has the effect of avoiding a writedown of assets to the market values that informed bidder valuations clearly imply. Taking a lesser writedown enables the agency to report a stronger balance sheet and higher operating income than it would otherwise have to reveal.
📜 SIMILAR VOLUMES