May 22, 2010

Compounding Unfair Advantages for Bad Banks

Today we read...

WASHINGTON (AP) -- The Treasury Department indicated Friday it expects taxpayers will lose billions less from the financial bailouts than earlier estimated. The problem is, its revised forecast assumes Treasury's shares of bailed-out companies are gaining value despite this week's plunge in stock prices.

Below the surface of this story is another. It's a story of conflicts of interest that could lead to further unfair preferential treatment of bad-actor banks at the cost of banks that played by the rules.

The US Treasury Department has a clear interest in promoting the stock price of the banks it bailed out. This creates pressures for Treasury to set policies and make decisions for the benefit of these bad-actor banks, improving their balance sheets, regardless of merit. A bank could be a crappy business, and Treasury would still want it's stock price to increase.

Given that these bad-actor banks compete in some ways with other banks that didn't have to be bailed out, being propped up in this way by Treasury has the effect of creating an unfair advantage. This unfair advantage merely adds to the more blatant unfair advantage of the original bailout; huge banks that could have been allowed to fail and naturally break up were, instead, propped up or forced into being bought by other banks resulting in fewer, larger banks.

This situation cries out for anti-trust action by the Government; these huge banks need to be broken up. This is justified for technical reasons of avoiding avoiding too-big-to-fail crises in the future and creating a more fair competitive market for good banks. It's also justified on basic principles of fairness.


Associated Press, Lower bailout estimate assumes higher stock prices, May 22, 2010.


1 comment:

libhom said...

The Fed's bailout is even bigger and has the conflict of interest issues you mention. But, the secrecy is keeping people from scrutinizing it in the same way you are with TARP.

Good on you for blogging on an issue I've been a bit too overwhelmed to focus on.