Europe's tough new banking rules passed their first test. Too bad lawmakers and President Trump want to repeal our protection from banksters.
Yes, you read that headline right. Something remarkable happened overnight when failing Banco Popular was bought by Santander for one euro. No bailout. Shareholders and some debt-holders ate the losses.
Consider it a victory for the European Union’s Single Resolution Board, an authority created after the financial crisis with the power to deal with institutions in trouble. This was its first test, and it appears to have passed. Shareholders are on notice: You’ll lose if you don’t insist on strong corporate governance.
Taxpayers’ bank bailouts in the United States and Europe during the Panic of 2008 set up what economists call “moral hazard.” Particularly because no major kingpins behind the crisis went to prison or even had to give up their lavish compensation — based on taking big risks — the banksters assume they could expect a rescue again.
We got no 21st century Glass-Steagall Act, but Dodd-Frank was passed to make the system safer. Bank lobbyists relentlessly worked to water the legislation down and slow or stymie rule-making, especially for highly profitable and risky exotic derivatives. But, especially with tougher capital requirements, Dodd-Frank has succeeded. To be sure, it hasn’t been tested in battle. This is especially true of its controversial resolution authority, which would give regulators the power to wind down a failing bank.
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Title II of Dodd-Frank explicitly states that shareholders and creditors would bear the losses of an institution that was taken over under the legislation’s Orderly Liquidation Authority. But the overall process is complex, untested and subject to the integrity and guts of regulators.
Would they have the guts and political backing to manage the “orderly” bankruptcy and liquidation of a too-big-to-fail bank?
We may never know. With total power in D.C., Republicans are committed to repealing Dodd-Frank, which they contend is holding back lending. We’d be back in the “deregulation” mode (read regulatory capture by banks) that played such a big role in causing the Great Recession.
As with climate, the EU is showing a more reality-based approach.
I would be remiss if I didn’t add an important footnote. Washington Mutual shareholders and many bondholders were wiped out in its September 2008 failure. JPMorgan Chase obtained the “good bank” within WaMu’s house of cards for fire-sale prices. Many have speculated that the House of Morgan helped cause WaMu’s slow bank run that fall, and bondholders sued with that allegation and failed.
There’s no question that a more politically connected WaMu could have gained a bailout and would still be standing. Indeed, Tim Geithner, then president of the New York Fed and later Treasury Secretary, demanded there be “no more WaMu’s!” in a contentious meeting during the panic. And there were not — taxpayer money saved the TBTFs. So WaMu was not a test case. That would come if a big, politically potent institution got in trouble.
Today’s Econ Haiku:
All eyes on Comey
While at the Don’s businesses
It’s blind thievery