A Proposal for the Resolution of Systemically Important Assets and ...

model.Inthewakeofthenextbankingcrisisafterthepanicof1907,namely,intheearlyyears
of the Great Depression of 1929 and before the establishment of the FDIC in 1933, Senator
Carter Glass – the then chairman of the Senate Banking Committee and a coauthor of the
FederalReserveActof1933–proposedmorerapidpaymenttodepositorsatfailedbanksasa
superior alternative to deposit insurance, which he opposed (Kaufman, 2004). As quoted by
Kaufman (2004), Willis and Chapman (1934, pp. 6567) describe the objective of the Glass
proposalasfollows:
“Recognizingthatinbankfailuresthesourceofdifficultyandlossisnotprimarilyfound
in lack of assets, but … that the resources of depositors are tied up and rendered
unavailable for long periods … liquidation power and not guaranty was demanded …
insuring an almost immediate settlement within a short time upon the basis of the
estimated worth of the [failed] bank’s assets … This plan was considered by the
[Banking]Committeeentirelyadequatetotheprotectionofthebankdepositoragainst
mostoftheevilstowhichhehadbeensubject,whileleavinghimstillwithameasureof
individualresponsibilityfortheprotectionofhisclaimsthroughtheselectionofawell
qualifiedbank.”
The Glass proposal called for the establishment of a Federal Government Liquidating
Corporation(FGLC)toestimateabank’srecoveryvalueimmediatelyuponitsfailure,quicklysell
the bank as a whole or in parts, and quickly pay the proceeds to the receiver for speedy
disbursement to the depositors (Kaufman, 2004). Despite the differences, the similarities
between our repo resolution proposal and the proposal of Senator Glass are astounding.
Althoughwedonotpromotequicklysellingthe“repobanks”asawholeorinparts–except
theirhighlyliquidrepocollateralssuchasTreasuries,andperhapsagencybackedsecurities–
forreasonswehavearguedatlength,wealsocallforaliquidatingagency(ourreporesolution
authority) to “estimate a (repo) bank’s recovery value immediately upon its failure, … and
quicklypay…thereceiverforspeedydisbursementtothedepositors(repofinanciers).”Inthe
firstregard,ourreporesolutionauthorityresemblestheOrderlyLiquidationAuthorityofthe
DoddFrankActmorethantheFederalGovernmentLiquidatingCorporationthatSenatorGlass
proposed,sinceweareconcernedalsowiththeorderlyliquidationofpotentiallyilliquidand
risky repo collaterals such as the MBSs. In the second regard, our repo resolution authority
resemblestheFGLCoftheGlassproposalmorethantheOLAoftheDoddFrankActbecauseof
ourcallforpayingtherepofinanciersofriskyrepocollateralsarecoveryamountthatisbased
onaconservativevalueassessmentofthecollateralbya“reporesolutionfund.”
Intheend,theGlassproposalwasfoundtoodifficulttoimplement,primarilybecause
manybelievedthatitrequiredmoreaccurateestimatesofthemarketvalueofthefailedbank’s
assets than possible at the time (Kaufman, 2004). This is another similarity between our
proposal and the Glassproposal. Many may argue that our proposal requiresmore accurate
estimatesofthemarketvalueoftheriskyandilliquidrepocollateralsthanpossibleatourtime.
Yet,theadvantagesoftheschemeproposedbySenatorGlasshadalsobeenseenbyothers.
32