Yesterday, the Federal Deposit Insurance Corp. (FDIC)
successfully completed the sale of IndyMac bank,
eight months after it was nationalized following
catastrophic losses due to subprime mortgages. The bank’s 33 branches will
reopen today as branches of OneWest, a Pasadena-based bank.
Even though it
cost more than
originally estimated, the successful nationalization and re-privatization of IndyMac — the fourth largest bank ever seized by federal regulators — shows that taking over troubled financial institutions, clearing them of their troubled assets, and selling them back to the private sector can be done. As Stephen Gandel
wrote in Time:
For the government, the IndyMac sale provides a shining example of how takeovers can work, at a time when the Obama Administration may soon begin pushing for more nationalizations…The government is in the process of stress-testing the nation’s largest banks as part of Treasury Secretary Timothy Geithner’s plan to fix the ailing banking sector. And many think the outcome of those tests could lead to more takeovers.
We’ve been arguing that nationalization is the best way to handle zombie financial institutions. However, in order for leviathans like AIG and Citigroup to be nationalized and wound down, some mechanism — different from that employed by the FDIC — needs to be created. As FDIC Chairman Sheila Bair
explained to the Senate Banking committee yesterday:
The problems of supervising large, complex financial institutions are compounded by the absence of procedures and structures to effectively resolve them in an orderly fashion when they end up in severe financial trouble. Unlike the clearly defined and proven statutory powers that exist for resolving insured depository institutions, the current bankruptcy framework available to resolve large complex non-bank financial entities and financial holding companies was not designed to protect the stability of the financial system.
moreOp-Ed Contributors
By SIMON JOHNSON and JAMES KWAK
Published: March 19, 2009
A.I.G. can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they’re needed to retain employees who are crucial for winding down transactions that are “difficult to understand and manage.” In other words, only the people who stuck the knife into the American International Group can neatly extract it for a decent burial.
There is no reason to believe this.
Similar arguments made during the 1997 Asian financial crisis, when currencies and stock markets collapsed in much of Southeast Asia, turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery.
<...>
But these reforms made all the difference. Banks became healthy and resumed lending within a few years after the crisis broke. The chaebols that survived are stronger than they were before the crisis. They are now withstanding the severe pressure of the global recession because they were forced to become better regulated, and more separate from banks.
<...>
If A.I.G. wants to argue that complex transactions, hedging positions and counterparty relationships require employees who are intimately familiar with those trades, it should at least provide evidence that the arguments for doing so are sounder than the ones made in Indonesia in 1997, when leading bank-owning conglomerates claimed that only they understood their financing arrangements, which certainly were complex. Or the Russian bankers in 1998 who were convinced that only they and their friends could possibly close the deals that they had taken on. We heard variants of the same idea in Poland in 1990, Ukraine in 1994 (and in the Ukrainian crises subsequently), and Argentina in 2002.
Any grain of truth in these arguments must be weighed against the costs of allowing discredited insiders to manage institutions after they have blown them up. Even if the conclusion is that a few experts need to be retained, offering guaranteed bonuses to virtually the entire operation is hardly the way to achieve the desired results. We should not let people think that the best way to guarantee job security is to lose lots of money in a really complicated way.
The argument that A.I.G.’s traders are the people that we must depend on to save the United States economy is as weak and self-serving as it was in Thailand, Korea or Indonesia. A.I.G. is essentially advocating survival of the weakest. Thankfully, the American people are not buying it.
Simon Johnson is a professor at the M.I.T. Sloan School of Management and a former chief economist at the International Monetary Fund. James Kwak is a student at Yale Law School.
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