If Liz were Queen

Big Wall Street Investment Banks can be compared to rich people.  Like rich people, they don’t have to follow the same rules of our “democracy” that ordinary Americans do.

Most of these big banks, like Bank of America and Citigroup are in effect, bankrupt. If our government were playing by the LAW for the banks–which require shutting down banks with inadequate capital–most of the Wall Street investment banks would have been shut down last fall.  If any of these were one of your local community banks, its doors would have been closed LONG AGO.

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Queen’s Comment: I just read a great article by Stiglitz in THE NATION.  A Bank Bailout that Works.

To quote from Joseph Stiglitz:  “.  .  .  long experience has taught us that when banks are at risk of failure, their managers engage in behaviors that risk losing even more taxpayer money. They may, for instance, undertake big bets: if they win, they keep the proceeds; if they lose, so what?–they would have died anyway. That’s why we have laws that say when a bank’s capital is low, it should be shut down. We don’t wait for the till to be empty. Because the government is on the hook for so much money, it has to take an active role in managing the restructuring; even in the case of airline bankruptcy, courts typically appoint someone to oversee the restructuring to make sure that the claimants’ interests are served.

Usually, the process is done smoothly. The government finds a healthy bank to take over the failed bank. To get the healthy bank to do this, it often has to “fill in the hole,” making up for the difference between the value of what the bank owes depositors and the value of the bank’s assets. It’s no different from an ordinary takeover or merger, except the government facilitates the process. Typically, in the process, shareholders get wiped out, and often the government and/or private investors may put in additional money.

Occasionally, the government can’t find a healthy bank to take over the failed bank. Then it has to take over the failed bank itself. Usually, it restructures the bank, shutting down many of the branches and lending departments with particularly bad track records. Then it sells the bank. We can call this “temporary nationalization” if we want. But whatever we call it, it’s no big deal. Not surprisingly, the banks are trying to scare us into believing that it would be the end of the world as we know it. Of course, it can be done badly (Lehman Brothers, for example). But there are far more examples of it being done well.