Paulson had his 3 page plan. Geithner’s was two. These guys just aren’t serious. If Geithner or Bernanke needed new legislation to resolve the BHCs, then they should be proposing it. They aren’t. Even after all this time there is no coherent plan or even the glimmers of one. They don’t want the power to restructure banks or take on bondholders because they don’t want to do these things. They want to pump money (that is needed more elsewhere and could be used more productively) to prop up the old system without restructuring or meaningful reform.

This is substantially different from having a problem but not having the tools to fix it. You could still get the tools. Here the problem is that they don’t care what tools they have because they wouldn’t use them anyway.

But they don’t have enough money to handle the other big BHCs without imposing big haircuts on bondholders, and Congress isn’t going to give them any more funds. Which forces Treasury to put the BHCs into an FDIC-type resolution if they’re going to force the sickest into “nationalization” or “pre-privatizaton” or whatever label one wants to use.

However, the standard FDIC process, which is to sell the failed bank’s operations and deposits to another bank and then take its time cleaning up the left-over mess, isn’t available to the big, complex BHCs. First, there aren’t big enough healthy buyers to swallow the remaining BHCs — the WaMus and Wachovias have already been handled and there’s no more take-over capacity. Second, we’d just be creating a new, even bigger, TBTF institution. Third, how do we handle the non-core operations and the cross-border messes. And fourth, if you think the Chrysler hedge funds put a wrench in the spokes of that deal, just imagine the unmitigated mess of conflicting interests in those BHCs, especially where we’ve got cross-claims between parent and subsidiary, between subsidiaries, off-balance-sheet SIVs and so on and so on. Without a better legal roadmap for resolution, we’d have Chrysler to the tenth power with all the uncertainty feeding back into a fragile financial system. Claims by critics that all it takes is to set up a good bank and bad bank are so much handwaving.

Now, all of this suggests that both regulators and the markets shouldn’t be so relaxed about the complex BHC structures that have been allowed to proliferate, often for arcane regulatory or accounting reasons. Hopefully, as the capital markets recover, BHCs with complex structures will be penalized through higher costs of funds and we’ll have improved cross-border resolution procedures.

I also hope that, as part of the “capital raising” that Citi, BofA et al will be forced to undertake after the stress tests, part of the process will be to get rid of non-core subsidiaries and clean up the capital structures that have proved to be house of cards.

Of course, we have an even worse mess in the insurance industry with all the related-party reinsurance and cross-holdings to reduce reserve requirements. But that’s a clean-up that can (cross our fingers) wait for another day.

I notice too that this sense of restraint tends to show up when they really didn’t want to do something anyway, or at least not right now.

Heh, yeah, they’re human beings. I don’t defend every decision they’ve taken. And they’ve been absolutely dreadful in their efforts to communicate the “logic” of their overall approach. Some of it’s been too clever by half, some an attempt to obfuscate, and some just bad communication.

But when we’re analyzing whether specific actions have been too aggressive or too passive, we have to take into account what their options really were and are. I think they’ve exploited some options to the fullest when they thought it was warranted and in the process rode roughshod over some pretty big toes. I think they’ve avoided some options without making an effective and candid case for why those options weren’t pursued. But I also think they’ve been legitimately constrained in not having some highly desirable options practically or legally available.

But I have to admit I am skeptical when Bernanke, Geithner, or Bair invoke legal limits on what they can and can not do. If you look at their interventions or how many of their big programs are structured, they simply don’t square with existing law or the Constitution. AIG execs were informed their company had been purchased to the tune of 79.9% by the US government. Treasury goes to the Fed to do end runs around Congressional budgeting authority for programs whose losses will ultimately funnel back to Treasury and the taxpayer. I notice too that this sense of restraint tends to show up when they really didn’t want to do something anyway, or at least not right now.

This is something I criticize Obama for so it is not an isolated technique. When Obama wants something he goes full throttle to get it. When he doesn’t, all kinds of insuperable obstacles emerge. Given how often this happens I don’t think it is an incidental correlation.

Pace Bill Black, normal FDIC processes aren’t available for highly-complex cross-border bank holding companies that reach the Prompt Corrective Action stage. In the same speech where Bair proposes FDIC as the agency to handle a new form of BHC resolution process, she does an excellent job of explaining why the FDIC is handcuffed under current law and why even with proper authority the FDIC’s normal sale procedures aren’t practical for the complex BHCs.

On this point — the need for a new form of Congressionally sanctioned resolution authority — Bair and Geithner are pretty much on the same page. So when you ask rhetorically why the government doesn’t enforce the current law which requires it to take Prompt Corrective Action, that’s one part of the response. The current law doesn’t work.

What I’d like to know is why Barney has put off taking up Geithner’s (and Bair’s) call for new legislative authority to handle the TBTF bank holding companies. Last I heard, Barney was talking about late this year or sometime next year at the earliest. I’d sure like new procedures to be in Treasury’s back pocket over the coming year. And I agree with Bair that FDIC is the place to administer any such new authority since she’s having to expand capacity anyway to deal with the ongoing rise in smaller bank failures. I do think on systemically important institutions that FDIC should have to take into account the concerns of the other financial system managers (Treasury and Fed) in designing a resolution plan for any given systemically-important institution. But surely that sort of requirement for coordination and consensus isn’t beyond the capacity of our legislators or bureaucrats to handle.

As for the FDIC link to the stess-tested BHCs you mentioned, it’s not just the PPIP (which I expect to be found mostly unworkable because of the difficulty in achieving Goldilocks pricing and so expect to fade into insignificance). Many of the BHCs are major (although not exclusive) beneficiaries of the FDIC’s new debt-issuance guarantees. So yes, the FDIC already has to be monitoring actively the financial status of the BHCs it guarantees. And good on Geithner for insisting that any bank that’s paying FDIC for debt-guarantees can’t pay back the TARP funds. The squeals and shrieks from the TARP-banks who have been pounding their chests and proclaiming their robust independence from government largess, like Goldman, are heart-warming.

I’m gonna call his parole officer and let her know she can let up on him now.

just found out one of my clients got shot Sat night. He didn’t make it.

some days the world sucks worse than other days I guess, but I can’t stop just walking around and staring at the walls….

don’t even have the energy for a decent rant.