Simon JOhnson: Regulation is a Myth

EDITOR’S NOTE: Johnson is a leading economist who has been a consistent critic of anyone who fails to face reality. Applying his knowledge as an economist form the International Monetary Fund, his point is that we have a bank oligopoly in control of our society and that the TBTF banks are running the show. I agree

March 31, 2011, 5:00 am

The Myth of Resolution Authority

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Senator Ted Kaufman, Democrat of Delaware, has been highly skeptical about whether the federal government's power to shut banks can be applied to global megabanks unless an international accord is reached.Andrew Harrer/Bloomberg News Senator Ted Kaufman, Democrat of Delaware, has been highly skeptical about whether the federal government’s power to shut banks can be applied to global megabanks, unless an international accord is reached.

Back when it really mattered – last spring, during the debate over the Dodd-Frank financial regulation – Senator Ted Kaufman, Democrat of Delaware, emphasized repeatedly on the Senate floor that the proposed “resolution authority” (the power to shut banks) was an illusion.

His point was that extending the established Federal Deposit Insurance Corporation powers for “resolving” financial institutions to include global megabanks simply could not work.

At the time, Senator Kaufman’s objections were dismissed by “experts” from both the official sector and the private sector. Now these same people (or their close colleagues) are falling over themselves to argue that resolution cannot work for the country’s giant bank holding companies. The implication, which these officials and bankers still cannot grasp, is that we need much higher capital requirements for systemically important financial institutions.

Writing in the March 29 edition of National Journal, Michael Hirsh quotes a “senior Federal Reserve Board regulator” as saying: “Citibank is a $1.8 trillion company, in 171 countries with 550 clearance and settlement systems,” and “We think we’re going to effectively resolve that using Dodd-Frank? Good luck!”

The regulator’s point is correct. The F.D.I.C. can close small and medium-size banks in an orderly manner, protecting depositors while imposing losses on shareholders and even senior creditors. But to imagine that it can do the same for a very big bank strains credulity.

And to argue that such a resolution authority can work for any bank with significant cross-border operations is simply at odds with the legal facts. The resolution authority granted under Dodd-Frank is purely domestic; that is, it applies only within the United States.

Congress cannot readily make laws that apply in other countries. A cross-border resolution authority would require either agreement among the various governments involved or some sort of synchronization for the relevant parts of commercial bankruptcy codes and procedures.

There are no indications that such arrangements will be made, or that serious intergovernmental efforts are under way to create any kind of cross-border resolution authority — for example, within the Group of 20.

For more than a decade, the International Monetary Fund has been advising that the euro zone adopt some sort of cross-border resolution mechanism. But European (and other) governments do not want to take this kind of step.

Rightly or wrongly, they do not want to credibly commit to how they would handle large-scale financial failure –- preferring instead to rely on various kinds of ad hoc and spontaneous measures.

I have checked these facts directly and recently with top Wall Street lawyers, with leading thinkers from left and right on financial issues (in the United States, Europe and elsewhere), and with responsible officials from the United States and other countries. That Senator Kaufman was correct is now affirmed on all sides.

Even leading figures within the financial sector now acknowledge this. Mr. Hirsch quotes E. Gerald Corrigan, former president of the Federal Reserve Bank of New York and an executive at Goldman Sachs since the 1990s: “In my judgment, as best as I can recount history, not just the last three years but the history of mankind, I can’t think of a single case where we were able execute the orderly wind-down of a systemically important institution – especially one with an international footprint.”

It is most unfortunate that Mr. Corrigan did not make that point last year – for example, when he (and I) testified before the Senate Banking Committee on the Volcker Rule in February 2010.

In fact, rather tragically in retrospect, Mr. Corrigan was among those arguing most articulately that some form of Enhanced Resolution Authority (as he called it) could actually handle the failure of large integrated financial groups (again, his terminology).

The “resolution authority” approach to dealing with very big banks has, in effect, failed before it even started.

And standard commercial bankruptcy for global megabanks is not an appealing option -– as argued by Anat Admati in The New York Times’ Room for Debate in January.

The only people I have met who are pleased with the Lehman bankruptcy are bankruptcy lawyers. Originally estimated at more than $900 million, bankruptcy fees for Lehman Brothers are now forecast to top $2 billion. (The AmLaw Daily describes this in detail.)

It’s too late to reopen the Dodd-Frank debate –- and a global resolution authority is a chimera in any case. But it’s not too late to affect policies still under development. The lack of a meaningful resolution authority further strengthens the logic of larger capital requirements, as these would provide stronger buffers against bank insolvency.

The Federal Reserve has yet to announce the percentage of equity financing – i.e., capital – that will be required for systemically important financial institutions (the so-called S.I.F.I.’s). Under Basel III, national regulators set an additional S.I.F.I. capital buffer. The Swiss National Bank is requiring 19 percent capital and the Bank of England is moving in the same direction.

Yet there are clear signs that the Fed’s thinking –- both at the policy level and at the technical level –- is falling behind this curve.

This time around, officials should listen to Senator Kaufman. In his capacity this year as chairman of the Congressional Oversight Panel for the Troubled Assets Relief Program (for example, in this hearing), he has been arguing consistently and forcefully for higher capital requirements.

12 Responses

  1. Fraud is allowed in California. Don’t believe it? There is a statute that says anybody can send a notice of default and a notice of sale and as long as you abide by the timelines and exhaustive measures of posting and publishing, you can go to sale and record a trustee’s deed upon sale. You don’t have to have any note, just claim you are a authorized agent. No courts are involved, you don’t have to record any assignments. Just make sure that you put in your Notices that you are abiding by 2924 and if the homeowner objects or tries to fight, all you have to do is cite to other prior cases in California. Also, just say that the homeowner has to “tender” the amount of the indebtedness. If you do that, the judge won’t listen to any talk of “fraud”. If the homeowner is still trying to mention the fraud word, always repeat that in California 2924 is exhaustive. The judge will love that because it means he is done and headed to the golf course. He will also tell the homeowner that any fraud talk is to be directed to the legislature, not the courts. If the homeowner still won’t shut up, just say he wants a free house, even though he hasn’t missed a payment. Who cares, it’s a nice house and we want it. And folks, that’s all there is to fraudulent taking someone’s home in California. If this story is to hard to believe I have pages and pages of case law to back it up.

  2. California is large and has quite diverse cultures. Some say it is too large and has too many cases. Others say the judges lean liberal and want to appear to make progressive decisions; however, many of them get overturned on appeal.

    The question has often been asked: “Is the 9th Circuit really overturned by the U.S. Supreme Court more often than the other circuits?”

    To answer the basic question, yes – the Ninth Circuit has historically been overturned more than other circuit courts: “Over the past fifty years, the Ninth Circuit, the largest circuit court in the country, has been reversed by the U.S. Supreme Court an average of 10.78 times per term. The next closest circuit, the Fifth Circuit, which is also the second largest circuit, was reversed an average of 7.42 times.” (Kevin Scott, Supreme Court Reversals of the Ninth Circuit, 48 Ariz. L. Rev. 341.)

    “Also, the judges in the 9th aren’t uniformly liberal, of course. The well-known conservative ones (like Kozinski) aren’t all doctrinaire, though, and many even contain crazy independent streaks or penchants for unpopular legal theories. It’s not just the most liberal circuit, it’s the most crazy circuit.”

    And if you haven’t read up on Kozinski you are in for a treat.

  3. Read new case decisions every day. The absolute worst decisions come from the state of CA — and, probably, the state with the most frequent decisions.

    Not that other states do not have bad decisions — but CA seems to relish decisions against homeowners. And, some decisions are absolutely absurd (one recent decision states that rescission does not apply to residential transactions — court mistakes the new home purchase non-application for rescission — to “residential transactions.”

    What is going on in California?????

    A circus.

  4. History is a powerful tool to understanding the current crisis. Congresswoman Marjorie Holt warned Congress in 1976 that the Declaration of INTERdependence they were signing for the “One World” concept they had been sold would wreak havoc in years to come. Here is what the ONLY Congressional representative, who had enough integrity and sense of consequence, had to say on the Congressional Record:

    Congressional Record (1/19/1976), p. 240, “Extensions of Remarks, World Affairs Council”

    Hon. Marjorie S. Holt (MD) 1920-2007), in the House of Representatives: Mr. Speaker, many of us recently received a letter from the World Affairs Council of Philadelphia, inviting members of Congress to participate in a ceremonial signing of “A Declaration of Interdependence” on January 30 in Congress Hall, adjacent to Independence Hall in Philadelphia.
    A number of Members of Congress have been invited to sign this document, lending their prestige to its theme, but I want the record to show my strong opposition to this declaration.
    Mr. Speaker, this is an obscenity that defiles our Declaration of Independence, signed 200 years ago in Philadelphia. We fought a great Revolution for independence and individual liberty, but now it is proposed that we participate in a world socialist order.
    Are we a proud and free people, or are we a carcass to be picked by the jackals of the world, who want to destroy us?
    When one cuts through the high-flown rhetoric of this “Declaration of Interdependence,” one finds key phrases that tell the story.
    For example, it states that, “The economy of all nations is a seamless web, and that no one nation can any longer effectively maintain its processes of production and monetary systems without recognizing the necessity for collaborative regulation by international authorities.”
    How do you like the idea of “international authorities” controlling our production and our monetary system, Mr. Speaker? How could any American dedicated to our national independence and freedom tolerate such an idea?
    The declaration goes on to urge a strengthening of the United Nations and a broadening of the jurisdiction of the World Court, “that these may preside over a reign of law that will not only end wars but will end as well the mindless violence which terrorizes our society even in times of peace.”
    Mr. Speaker, we have lately witnessed the United Nations organization in full cry against America and her allies of the Free World. We have watched the U.N. become an instrument of the Soviet Union and its shabby following of despots large and small.
    America should never subject her fate to decisions by such an assembly, unless we long for national suicide. Instead, let us have independence and freedom.
    A major threat to world peace is the Soviet Union, which imposes slavery on its people and devotes its economy to the single task of building a war machine to extend that slavery throughout the world.
    It subverts governments of independent nations; it arms and impels its subservient client states to wage wars of conquest against their neighbors.
    Mr. Speaker, there is one force that preserves freedom where it still survives in this world, and that is the strength of the United States, to the extent that we maintain a powerful, credible economic and military deterrent, we shall also have peace.
    The Soviet Union seeks world empire. America asks only that free people remain unmolested by the slavemasters of the Kremlin.
    If we resist the expansion of the empire that threatens to dominate the world and destroy the independence of every nation, we shall be fulfilling the ideas of our Declaration of Independence.
    If we surrender our independence to a “new world order” dominated by the Soviet Union and its clients, we will be betraying our historic ideals of freedom and self-government.
    Freedom and self-government are not outdated. The fathers of our Republic fought a revolution for those ideals, which are as valid today as they ever were.
    Let us not betray freedom by embracing slavemasters; let us not betray self-government with world government; let us embrace Jefferson and Madison, not Marx and Lenin.
    Apparently, after this Declaration of INTERdependence, it appears when it comes to banks related to the IMF the laws we rely upon are powerless.

  5. Let it be know that I have paid over $ 230,000 in mortgage payments, interest, and taxes plus an additional in excess of $ 100,000 including purchase deposit and improvements for a home that was appraised in the amount of $ 375,000 in the year 2004 and appraised in the amount of $ 417,000 in the year 2006. Current today’s value is $ 162,000. I will be forced to stop payment due to fraudulent acts and crimes perpetuated by US Financial institutions and US Banking system. If the property goes to auction let it be known that who ever obtains the property by way of purchase needs to fully understand that the said property is stolen real estate provided by the US Government, comprised of US Representatives, US Senators , Fannie Mae, Freddie Mac plus and including unfound decisions enlisted by both State and Federal judges. The best way to rob and bank is to own a bank or work on Capital Hill who supports the crimes of the banks . that is this property

  6. TO ALL ,

    I agree wholly with “Mortgage Movies” We need to flood youtube and the media with video from within these foreclosure courts ,, get all the video we can of judges failing to examine documents , shutting people down with ridiculously short time limits to put forth argumants and such … You can now buy covert digital video cameras that look just like fountain pens on eBay for under $30 ,, I got mine for $11.04 inc. shipping direct from Hong Kong ..

  7. I’ve stated this much more simply.. .

    Unelected Federal Regulators = False Sense of Security

  8. Virginia you are right this could be another holocaust,and we the American people are the victims.It’s like living in Nazi Germany and the next victims will be our children.

  9. We’re DOOMED!

  10. Our Hero Lynn Syzmoniak on 60 Minutes This Sunday!
    Written by Matthew D. Weidner, Esq. on Apr 01, 2011 12:58 pm

    As this war rages on, it’s easy to focus on all the ways we are losing the battle for integrity, for justice, for the respect of basic law and respect for important Constitutional rights. It’s demoralizing to go into courtrooms day after day, continuing to fight the same battles over and over and listen to …

  11. New Mortgage Movies Video on U.S. Trustee Lawrence Sumski:

    “She has a cohort who is posting this to YouTube….”

  12. Did you ever feel like the banks were at war with the government, who won’t meet their demands – so they are shooting bullets of foreclosures to send a message that they’ll continue until bailed out; knowing that a civil revolution could erupt if they continue to fire aimlessly at the public? There are over 67 million victims to torture in their arsenal of weapons.

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