Banks Need Restructuring, Not Bailouts

by James Parks, Apr 15, 2009

The Treasury Department’s bank bailout plan is built on the faulty assumption that the financial crisis is the result of a temporary lack of a market for current financial products—and presumes the losses can be made up after confidence in the system is restored. The reality is that the entire financial services industry needs to be restructured and the sooner, the better, two experts said recently.

Writing at the Campaign for America’s Future website, Susan Ozawa points out that during a recent conference, Damon Silvers, vice chairman of the Congressional Oversight Panel (COP), and economist Robert Kuttner said broader and deeper changes need to be made than the Treasury plan envisions. They spoke April 8 at the “Lifting the TARP: Is a Reconstruction Finance Corporation a Better Way to Restore the Banking System?” conference sponsored by Demos in Washington, D.C.

Click here to see what CEOs of companies that received the Troubled Assest Relief Program (TARP) funds pocketed in pay on our 2009 AFL-CIO Executive PayWatch site.

Silvers, AFL-CIO associate general counsel, said the Treasury’s plan denies how deeply the financial crisis runs. He cites COP’s latest oversight report, which says Treasury’s approach of propping up the companies that suffered the biggest losses

possibly fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.

Kuttner, a distinguished senior fellow at the public policy group Demos and co-editor of The American Prospect, said trying to restore the previous system is antithetical to rebuilding a sound economy. Instead, he says, we should be winding down these sectors that failed to return to a straight-forward pre-1975 banking system when troubled assets such as mortgage-based derivatives did not exist. Thus the bailout efforts that stem from a fundamentally misguided assumption will continue to be misguided, Kuttner added.

The COP report focuses on historical examples of financial crises handled correctly. Silvers outlined the steps successful interventions share in common:

• New management replaces the old in failing institutions, not for moral reasons, but because of the difficultly in objectively evaluating the mess we’ve just made.
• The true value portfolios must be made.
• After the gap between the real value of assets and the stated value are established, equity is wiped out.
• For the remaining fixed obligations, there is some flexibility in resolution with different scenarios possible for debt holders.
• In this process, the more taxpayers participate in funding the restructuring of these failed entities, the more upside should be sought for the taxpayer once these entities are restored.

As Silvers notes, every moment holds the potential for correction, but with every moment that passes, the more costly it becomes to address the problems.

Click here to read Ozawa’s entire article, “TARP Or Reconstruction? No Contest.”

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