Oct. 27, 2009 (United Press International) -- U.S. authorities said they are seeking to solve future financial crises by allowing the government to unwind disruptive companies without taxpayer assistance.
It appears an oxymoron to suggest the government would step in absent any taxpayer funding, but the gist of the matter is "we are pursuing a policy of polluter pays," an official involved in the deal making said.
At the heart of the matter are non-bank companies deemed "too-big-to-fail," which means companies like American International Group Inc. (NYSE:AIG) , that were not on the regulatory radar last fall. AIG's potential collapse a year ago threatened the entire financial system through the derivatives trading that was supposed to support the subprime mortgage market. In reality, the bets against default concentrated the risks in one company where failure would have been the banking system's Achilles heel.
While the White House turns its focus on helping smaller businesses, the U.S. Treasury is working with House Financial Services Committee Chairman Barney Frank, D-Mass., to address the problem of the biggest companies in the country, but with the magical formula that a failing company pay the financial custodian who comes in to clean up the mess.
It's done in town board meetings routinely. A company that erects an unsightly tower for all the world to see must first put up a retainer for dismantling the tower, so the town isn't stuck with an expense in the future. But can that be done at the magnitude of dismantling companies the size of AIG?
In theory, yes. Oddly, however, the Federal Reserve, which would be assigned the task of monitoring companies that pose systemic risks to the system, would not collect funds up front from these companies. Instead, it would have permission to extract funds to pay for the rescue effort after the government seizes the company.
Metaphorically, that would be like telling a fire department it would not be paid in advance and could not turn to the taxpayer in hindsight to ask for help. Instead, it would have to put out a fire fast enough to salvage enough of a building to pay for its services.
The plan calls for the government to prop up the company if necessary, but cancel the claims of both creditors and shareholders, The Washington Post reported Tuesday.
Such a solution is not universally praised. Republicans prefer to tweak the bankruptcy code to accommodate companies too-big-to-fail. "That way, politics is not part of the equation," said a Republican staff member who asked not to be named.
Still others, including two former Federal Reserve chairmen, Alan Greenspan and Paul Volcker, say the way to deal with huge firms is not to let them get threateningly large in the first place. That plan involves separating commercial and investment banks so federally insured deposits are not caught in a bind through risky investments.
In market movement Tuesday, the Nikkei 225 in Japan fell 1.45 percent, while the Shanghai composite index in China lost 2.83 percent. The Hang Seng index in Hong Kong dropped 1.86 percent, while the Sensex in India lost 2.31 percent.
The S&P/ASX in Australia fell 1.59 percent.
In midday trading in Europe, the FTSE 100 in Britain rose 0.68 percent, while the DAX 30 in Germany rose 0.49 percent. The CAC 40 in France added 0.72 percent, while the pan-European DJ Stoxx 50 added 1.1 percent.
