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Bank Holding Companies (Again)

By Anonymous

Serial bloviator Simon Johnson writes:

In most countries, the course of action would be clear. The government would take over banks, remove ?bad assets? from their balance sheets, inject fresh capital, and put them bank into the private sector. This is essentially what the FDIC does when it takes over a bank. There is some debate about whether the government currently has the power to do this for bank holding companies ? Tim Geithner says no, Thomas Hoenig says yes ? but if not, this is certainly something the Obama administration could press for.

Let's try this one more time: The government does not have the authority to seize a bank holding company and place it into receivership (or conservatorship). There is no debate about this.

Johnson clearly doesn't understand Hoenig's argument, because he was very clear on this point. Hoenig wrote:

One of the difficulties with all of these options is that while there are time-tested, fast resolution processes in place for depository institutions, today's largest financial institutions are conglomerate financial holding companies with many financial subsidiaries that are not banks.

The bank subsidiaries could be placed into FDIC receivership, but the only other option under current law for the holding company and other subsidiaries is a bankruptcy process.

Even an MIT professor should be able to understand that.

Full post as published by Economics of Contempt on May 08, 2009 (boomark / email).