It shouldn't surprise you to learn that I was not a fan of Gretchen Morgenson and Jo Becker's big profile of Tim Geithner in the NYT. As the late Tanta demonstrated time and again, Morgenson is an atrocious financial journalist. But I have neither the time nor the energy to highlight all of the errors and wildly misleading statements in the article. I do, however, want to highlight one ridiculous and nonsensical argument that Morgenson and Becker made in the article. They desperately tried to make something of the fact that the original template for Treasury's proposed resolution authority was a draft bill from Davis Polk & Wardwell, a large law firm that often represents Wall Street institutions. But the only argument they came up with doesn't even make sense:
[Treasury officials] point to several significant changes to that draft that "better protect the taxpayer," in the words of Andrew Williams, a Treasury spokesman. But others say important provisions in the original industry bill remain. Most significant, the bill does not require that any government rescue of a troubled firm be done at the lowest possible cost, as is required by the F.D.I.C. when it takes over a failed bank. Treasury officials said that is because they would use the rescue powers only in rare and extreme cases that might require flexibility. Karen Shaw Petrou, managing director of the Washington research firm Federal Financial Analytics, said it essentially gives Treasury "a blank check."This is an absurd and incredibly ill-informed criticism. The "least cost resolution" provision (sec. 1823(c)(4)) requires the FDIC to use the resolution method that is least costly to the Deposit Insurance Fund. But there's a very famous exception to the least cost requirement known as the "systemic risk exception" (sec. 1823(c)(4)(G)), which, not surprisingly, provides that if there is a formal finding of "systemic risk," the FDIC doesn't have to use the least costly resolution method. A "systemic risk" finding requires written recommendations from the Fed and FDIC's boards of directors, as well as a determination of systemic risk by the Treasury Secretary after consultation with the President. (When the systemic risk exception was enacted in 1991, it was universally viewed as the formal adoption of a "too big to fail" policy.) This is precisely the situation Treasury's proposed resolution authority is designed for. Treasury's resolution authority would only kick in when there's a formal finding of systemic risk—that's why the bill is called, "The Resolution Authority for Systemically Significant Financial Companies Act of 2009." So of course the bill doesn't include a "least cost resolution" requirement. Right now the FDIC is bound by the least cost procedures when resolving a failed bank, except in cases of systemic risk. There is currently no equivalent to the systemic risk exception in the US Bankruptcy Code for nonbank financial institutions such as bank holding companies. The whole point of Treasury's proposed resolution authority is to extend the FDIC's systemic risk exception to the insolvency regime that governs large bank holding companies (e.g., Citigroup, BofA, JPMorgan, Wells Fargo). If there's no systemic risk finding, failed bank holding companies will still be handled by the bankruptcy courts. Treasury's proposal gives the government the same kind of discretion in cases of systemic risk that the FDIC has under the Federal Deposit Insurance Act. Any attempt to paint Treasury's proposal as somehow more Wall Street-friendly than the FDIC's insolvency regime because it doesn't include a "least cost resolution" requirement is based on a fundamental misunderstanding of the US insolvency laws.