Wednesday, July 02, 2014

Woll on Bank Bailouts

Props to Henry Farrell for putting me onto the imperfect-but-still-superb account by Cornelia Woll, offering a comparative analysis of bank bailouts.   It's the only thing that I know of that so much as tackles this ambitious line of inquiry and the fact that it might have been better is only a quibble.

Woll analyses six cases: USA, Britain, France, Germany, Ireland and Denmark (with some useful side comments on Iceland).  The takeaway: it's complicated.  Every case is different, thanks to chance and the alchemy of local circumstance.  Still, she offers a valuable framework: how far (and how) did any individual nation solve its problem through the collective action of bankers, how far via taxpayer intervention.   The "collective action" prize pretty clearly goes to France where a small gaggle of insiders who went to the same schools and built the same resumes (I'll bet they lunch at the same restaurant) were able to come up with a package that seems to have worked with efficiency and at relatively low cost.  Apparently some say the sovereign could have squeezed the bankers to pay a bit more but so far as I can tell, the political backlash has been only modest.  Oak leaf cluster to Denmark where a smaller country with an (apparently) tougher problem seemed to be able to deploy a tradition of collective effort and cut through problems that prove insoluble elsewhere (or wait a minute--maybe I just said that Denmark did better even than France).

On the "collective action: continuum, perhaps the extreme opposite may be the United States, where the possibility of solving the problem within the banking community seems never to have gotten much thought.  Odd, perhaps, when you recall that New York bankers did an impressive job of pulling together in the Long Term Capital Management fiasco just 21 years before.  Perhaps inevitably, the US wins also in terms of number of dollars pumped into the system--though in percentage terms, it seems to me they score fairly well (returns still aren't all in on how much it actually cost).    Germany and Britain seem to me to have performed in a somewhat similar manner: aggressive public intervention once it became clear that private collective action was going nowhere.  

Which leaves Ireland. By Wolls' account--and so far as I know, just about everybody else's, Ireland's response seems to have been the most amateurish and ham-handed: panicky response to individual crises with not so much as hint of an overall strategy.  Woll seems to sure the common view that Ireland's response proved costly to the state. She also argues for the less obvious proposition that it didn't help bankers much either: individual bankers may have come off worse in Ireland than in any of the others.

All this is wonderful but I can identify at least to respects in which she might have done better.  One, for all her superb general analysis, her individual narrative chronologies.   It's often quite unclear just why she is telling you what and when.  And I don't see any point at all to laundry-lists of individual names.  Perhaps the point is to show you just how individual each case is. Perhaps, but a lot gets lost in the shuffle. For example, I can believe the Irish case was an expensive shamble, although I'm not sure ever specifies just where the expense came about and how it could have been avoided.

A larger point: Woll presents her cases in the frame of a power play between banks and "government," perhaps better "the public."  She seems to take it as a given that a bailout/solution is good to the degree that it dumps costs on banks and not on the public.  My instincts tell me this is true. But as I read on, I realized that she never told me just why this is true: is there a clear moral or functional reason why banks instead of the public ought to be the payer-of-first-resort?  To my surprise, I realize that I am not so sure. I suppose the very fact that I am thinking about the issue is some testimony to her acuity in laying out the issues.  


The New York Crank said...

If you'll forgive the ravings of a rank amateur in the fine arts of banking, economics, and bankruptcy diving headfirst into this pool...

In the U.S. either the banks or the depositors had to be bailed out to prevent a total crisis. However, the Administration missed a golden opportunity to seize the bankrupt banking entities and break each of them up into 50 separate banks, each doing business in only one state.

This would have broken their shield of "too big to fail," which they currently can deploy again if they feel like enjoying another wild night in Las Vegas. And it would instead likely (or likelier) shield the public from coughing up for another disaster promulgated by greed.

Yours very crankily,
The New York Crank

CrocodileChuck said...

NY Crank is correct.

Moreover, there is a well used playbook in the USA for remediating insolvent banks.

The FDIC does it dozens, or hundreds [depending on the scale of the crisis] a year.

Too bad Sheila Bair wasn't in the driver's seat in Q4 '08, instead of the snot nosed tyro Geithner (acolyte of Robert Rubin; indeed, he was approached personally by Sandy Weill to be CEO of Citi before the SHTF).

Ever wonder why 'C' is still trading?

Buce said...

Indeed. Geithner stays Weil did make the offer; that he (Geithner) thought. "a crazy idea;" that his wife was "appalled," and that Rubin himself said that he agreed with Geithner. Seems to say more about the sort headedness of Weil than anything else .