Tuesday, March 24, 2009

Treasury vs. Judicial Wind Downs of Amok Financial Firms

Treasury Chief Tim Geithner proposed new rules allowing the government to wind down large nonbank financial institutions outside of bankruptcy. Having the Executive Department take over institutions "run amok" provides the same benefits of bankruptcy. Tim sold the plan as allowing incentive compensation to be changed and creditors to be crammed down.

The Board of Directors can change incentive compensation. It's already within their power. The Treasury doesn't need to take over. Justice Department resolution, i.e. bankruptcy, allows all parties to be crammed down.

Treasury's proposal is a shift in power to the Executive Department vs. the Judicial. It's also a sign that "too big to fail" won't be challenged anytime soon. Mega-financial institutions want to be global giga-financial houses. Global shadow bankers (PEU's, SWF's, and hedge funds) are slated to save commercial bankers, with some seriously sweet terms. (PEU = private equity underwriter, SWF is sovereign wealth fund).

Break up the giga-houses, regulate the shadow bankers and let irresponsible financial firms fail via bankruptcy. Stop the endless cycle of taxpayer funded corporafornication.