It’s clear by now that a failure of regulation on multiple fronts helped to fuel the financial crisis. What’s more, according to Bob Pozen -- chairman of MFS Investment Management and author of the book Too Big to Save? How to Fix the U.S. Financial System -- government has also failed, in certain instances, to clean up the fallout from the crisis.
Pozen says the government went overboard in bailing out so many companies, as well as guaranteeing the debt of “everything in sight.” It was a mistake, Pozen charges, to give 600 banks so much money. He argues that the only reason so many banks received funds was that “people got panicked, and [government] just gave it out.” He points to American Express
Pozen does note that these are not all-or-nothing situations. For example, in the case of Morgan Stanley
We went overboard
Besides bailing out 600 firms, the government also guaranteed the debt of banks, thrifts, and their holding companies, Pozen notes. “It’s legitimate that we should have guaranteed some debt of, say, banks and thrifts that really had difficult problems issuing debt,” he says. “But for instance, John Deere
Pozen also questions banks like JP Morgan
Rectifying the system
As part of creating that more disciplined process, Pozen says there are only two instances when large firms should be bailed out. The first is if the firm is central to the nation’s system of payments (the processing of checks, wires, and cash). The second is if the firm’s failure would lead to the failure of many other financial institutions throughout the world. Applying those criteria, Pozen says the appropriate number of bailout recipients is “probably in the 20 to 30 range, not in the 500 to 600 range.”
Another part of articulating a more disciplined process, Pozen says, would be to rectify the guaranteeing of bondholders. Through many of these bank bailouts (i.e., that of Bear Stearns), we bailed out the most sophisticated bondholders in the world; Pozen argues that we should stop guaranteeing new bank debt and let the current guarantees expire.
Additionally, Pozen would like to see a statute preventing the bailout of a financial institution unless the Treasury Secretary provides a written rationale for it. Pozen says the decision by the Treasury Secretary to bail out an institution should require approval from the Fed and the FDIC chairman, followed by a U.S. Government Accountability Office review after the fact. “At least we will understand why we did it and then see if it really made sense,” he says. “I think this would put some real discipline into the process.”
Listen to the entire Bob Pozen conversation here.