Basic Points - The Globe and Mail

The ObamaMama Bear Market?
Adam Smith warned of the perils of a society where businessmen made too much
money from trading—as opposed to creating real industrial and commercial
progress. Even in nightmares, he could not have imagined such cupidity and
stupidity.
Adam Smith warned of
the perils of a society
where businessmen
made too much money
from trading...
It’s too late to avert the Wall Street implosion. It’s not too late to ensure that no
more taxpayer money goes to continuing the process.
James Baker, Reagan’s Treasury Secretary who knew a thing or two about
bailouts, writing in the Financial Times, says, “We should divide the banks into
three groups: the healthy, the hopeless and the needy. Leave the healthy alone and
quickly close the hopeless. The needy should be reorganized and recapitalized,
preferably through private investment or debt-to-equity swaps, but, if necessary,
through public funds. It is time for triage.”
“All depositors of recapitalized banks should be fully guaranteed…But bank
boards of directors and senior management should be replaced, and unfortunately
shareholders will lose their investment…This is not a call for nationalization but
rather for a temporary injection of public funds to clear up problem banks…To
avoid bank runs and contain market disruption, the Treasury should announce its
decisions at one time.”
Mr. Baker’s counsel derives, in part, from his experience with the collapse of the
Continental Illinois, whose office (or tombstone) can be seen from our window.
Paul Volcker instantly paid off all the Continental’s Eurodollar liabilities out of the
FDIC Fund, which was clearly illegal, but it prevented a financial collapse. That
experience led to Mr. Volcker’s great work in setting up the Basel Accords.
Mr. Volcker has a suggestion that we readily endorse. Speaking at NYU, he
suggested a two-tier financial system. “Commercial banks would provide customers
with depository services and access to credit and would be highly regulated, while
securities firms would have the freedom to take on more risk and practice trading,”
he said.
That’s fine with us, as long as:
1. The securities firms commit to refunding every dime of the taxpayers’ money
they now hold—and more speedily than Mr. Geithner paid his taxes, and
2. If one of them gets into such trouble that it has to run to Washington for a
bailout, the top management would have unlimited personal liability, if it
turned out that, after 2008, the firm had taken on new exposure to derivatives or
20 March
THE COXE STRATEGY JOURNAL