The Latest from the Prospect
 â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â â
Â
View this email in your browser
<[link removed]>
**MAY 5, 2023**
Kuttner on TAP
****
****
****
****
****
****
****
****
**Bank Runs, Behemoths, and Bailouts**
Better regulation would head off dubious rescues that only increase bank
concentration.
The government's chummy use of America's biggest bank, JPMorgan
Chase, to take over failed First Republic Bank last Monday was supposed
to restore confidence. Yet a day later, there was a different sort of
bank run-on the stocks of other regional banks. Those stocks have
since rebounded somewhat, but confidence in the banking system is far
from high.
There were alternatives to the comptroller of the currency's
sweetheart deal with JPMorgan, lubricated by a hefty $13 billion in FDIC
funds. But they were foreclosed by both the Treasury's earlier
reliance on JPMorgan as a white knight and an overly literal reading of
the law governing FDIC rescues.
The FDIC is required to resolve failed banks with the least cost to FDIC
funds. During the frantic weekend of April 30, when the comptroller and
the FDIC chose JPMorgan over other suitors, other alternatives seemed to
pencil out at more than $13 billion.
However, the "least cost" standard can be waived when the regulators
find that an impending bank failure poses a systemic risk. In the case
of two other recent failures, those of Silicon Valley Bank (SVB) and
Signature Bank, regulators invoked systemic risk and came up with
resolution strategies that did not increase concentration of the
nation's largest bank.
With SVB, the FDIC took over the bank on March 13 while it sought
suitors. Then on March 27, the FDIC sold it to First Citizens Bank and
Trust Co.
With First Republic, by contrast, the die was cast several weeks ago
when JPMorgan, as a favor to the Treasury, put together a pool of $30
billion in deposits, including $5 billion from JPMorgan and $25 billion
from nine other banks, to shore up the cash position of First Republic.
The others included Citigroup, Goldman Sachs, Wells Fargo, and Morgan
Stanley. (Did somebody say cartel?) Why would these worthies possibly
want to do Treasury a favor?
"This show of support by a group of large banks is most welcome, and
demonstrates the resilience of the banking system," the Treasury
Department said in a joint statement
<[link removed]> with the
Federal Reserve, Federal Deposit Insurance Corporation, and the Office
of the Comptroller of the Currency.
But regulators knew that restoring confidence in First Republic was a
long shot. As the bank's impending insolvency played out in public
view over several weeks, regulators might have looked hard for other
options; instead, they partnered with JPMorgan.
So when the collapse predictably came, JPMorgan was well positioned to
take over the leavings. Since the government owed JPMorgan a favor, the
FDIC's bargaining position over the terms was fatally weakened.
JPMorgan was able to call the shots.
As Columbia University law professor Kathryn Judge observes, current
standards for the FDIC-the "least cost" solution-are too rigid, and
having to certify a systemic risk is too blunt an instrument for waiving
the rules. "We need to weigh the cost to the FDIC fund against other
objectives such as maintaining a healthy level of competition and give
the FDIC more flexibility to take other objectives into account," says
Judge.
One suspect aspect of the JPMorgan deal was the unusual guarantee that
the banks that had deposited the $30 billion in now-insolvent First
Republic would get their money back at 100 cents on the dollar, with no
"haircut." A good chunk of the FDIC's $13 billion presumably goes to
make good on that promise.
If the comptroller and the FDIC had struck a deal with a different
consortium of suitors, that might have included a haircut for the
JPMorgan group, which would have cost the FDIC less money. But having
blessed the earlier (doomed) effort to save First Republic with $30
billion in quickie deposits, the government couldn't very well stiff
the JPMorgan cartel when the collapse came.
This, of course, is the deeper problem with cozy relations between the
Treasury and behemoth banks.
~ ROBERT KUTTNER
To receive this newsletter directly in your inbox, click here to
subscribe. <[link removed]>
Follow Robert Kuttner on Twitter <[link removed]>
[link removed]
Taking Debt Ceiling Negotiations Seriously
<[link removed]>
On today's X-Date, looking at what could actually be accomplished in
bipartisan talks yields few answers. BY DAVID DAYEN
Crackdown on Predatory Green Loans
<[link removed]>
The Consumer Financial Protection Bureau has proposed rules forcing a
program that offers loans for energy efficiency upgrades to confirm a
borrower's ability to repay. BY LEE HARRIS
The Fed, the Supreme Court, and Their Legitimacy
<[link removed]>
The government's least democratic branches are incompetent and corrupt
because they are unaccountable. James Madison would not be surprised...
BY MAX MORAN
Â
[link removed]
Click to Share this Newsletter
[link removed]
Â
[link removed]
Â
[link removed]
Â
[link removed]
Â
[link removed]
YOUR TAX DEDUCTIBLE DONATION SUPPORTS INDEPENDENT JOURNALISM
<[link removed]>
The American Prospect, Inc., 1225 I Street NW, Suite 600, Washington, DC xxxxxx, United States
Copyright (c) 2023 The American Prospect. All rights reserved.
To opt out of American Prospect membership messaging, click here
<[link removed]>.
To manage your newsletter preferences, click here
<[link removed]>.
To unsubscribe from all American Prospect emails, including newsletters,
click here
<[link removed]>.
