Tuesday, March 24, 2009

Geithner's New Powers


Treasury Chief Tim Geithner wants power to seize nonbank financial firms. Federal receivership would allow the federal government to take control and run struggling financial firms. How is this different from bankruptcy?

One, equity holders could retain a portion of the company. Equity holders, management and board members should not benefit from exercising risky strategies that placed the company in peril. Yet, they may under Tim Geithner's plan.

Two, if the company continues as a going concern under Uncle Sam, credit derivatives may not come due. It could open the market for a new credit bet. Debt holders would need to buy CDS coverage for bankruptcy and another one for federal receivership.

If the problem is too big to fail, why isn't the strategy to break up huge global financial firms? Having Treasury increase the possible intervention pie to insurance companies and hedge funds does nothing to address the problem.

Is this the setup for another round of taxpayer sponsored corporafornication for America's shadow banking system? When will it end? Optimizing the financial system for equity holders, existing boards/senior management, and credit bettors will suboptimize the whole.

Financial houses need to produce quality products. Restarting securitizations of all stripes and expanding credit wagering is hair of the dog medicine.

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