The FCIC meets Bernanke on Too Big To Fail

No, the FCIC is not reviewing the book.  Instead, its tackling the topic with its preliminary report on the question that many find Too Big To Answer: what do we do so that firms can fail or how do we stop them taking advantage of the fact that they can’t?  Here is the report.  Very interesting reading.  And I post it along with the link to Bernanke’s testimony before the FCIC yesterday, which, as always, is both clear and deep.  A nice quote:

Few governments will accept devastating economic costs if a rescue can be conducted at a lesser cost; even if one Administration refrained from rescuing a large, complex firm, market participants would believe that others might not refrain in the future. Thus, a promise not to intervene in and of itself will not solve the problem.

And on the new strategies to address TBTF: 1) new Basel capital and liquidity regulations, 2) improve the ability to rapidly resolve/liquidate a large firm, and 3) greater systemic resilience through for example  transparency (clearinghouses and exchanges instead of OTC, penalizing corporate complexity).

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FCIC Casts a Long Shadow

The Financial Crisis Inquiry Commission has just released a preliminary staff report entitled “Shadow Banking and the Financial Crisis.”  The underlying view of the report is that 1) the shadow banking system is like the traditional banking system – leveraging its own equity to fund long-term investments with short-term borrowing, and 2) problem that lead to the Great Recession and bailouts was a lack of a regulator/lender-of-last-resort of the types that covered the traditional banking sector.

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The Preliminary Version of Wisdom from The Financial Crisis Inquiry Commission

April showers bring May flowers, and maybe April preliminary reports will finally bring some developments on the financial reforms.  The first look at the thinking of the Financial Crisis Inquiry Commission is now available on the FCIC website. The five reports (available here) cover the roles of securitization, the Fed, the Community Reinvestment Act, the mortgage crisis, and the GSE’s in the financial crisis. Your chance to weigh in on these reports is now – the Commission is inviting comment until May 15.

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Some Great Analyses of the Financial Crisis

The Financial Crisis Inquiry Commission has gotten a number of very good economists to write about different dimensions of the financial crisis.  Some of these papers are very good, and they are now on-line here and here.

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Financial Crisis Inquiry Commission

The Financial Crisis Inquiry Commission is now/finaly meeting. Perhaps the public is interested in watching their elected leaders berate the perceived Wall Street villains, but it is interesting to hear what our financial leaders have to say for themselves and for the system.  Their prepared testimony is on-line, and reflects their views of the financial crisis and their recommendations for regulatory and non-regulatory changes, both filtered through what is in the firm’s interests and what they view as potentially feasible in the current environment.  I particularly liked reading Lloyd Blankfein’s testimony and his views about what the government did and how it helped and as well as on the future of investment banking. All the testimony is here.  Will be interesting to follow.

Blankfein's testimony on January 13. (Click on the picture to see the video. Blankfein's testimony is between 7:28 and 18:11 in the video)

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