The Elephant in the Room

“When elephants stampede; it is the grass that gets trampled.”
                                                                                         Thai Army
proverb

Think of the elephants as the mega Wall Street financial firms. Think of the grass as the nation’s Main Street community banks.

One of several debates raging in Washington between Main Street and Wall Street involves the "prefunding" of a reserve by “too-big-to-fail” firms (sometimes called systemically dangerous firms) to be used to resolve their own failures the next time our nation experiences a financial meltdown.

The prefunded resolution reserve fund is sometimes referred to by Washington pundits as the “pre-arranged funeral plan.” The idea is that those Wall Street mega firms that have been identified as systemically dangerous would pay into a fund dedicated to resolving and unwinding those firms should they become financially insolvent, thus sparing the taxpayers and community banks from having to bail out these mega firms after they are already dead—as we have all just experienced. It is ICBA’s position that managers and investors at the mega firms who made terrible decisions or got too greedy should not profit and be propped up by the taxpayers and the Main Street community banks of this nation ever again. In the future, when these Wall Street Cyclopes fail they should be forced to use their own money to resolve their failures.

Wall Street and the financial trade groups that represent them in Washington argue that if a prefunded reserve is set up, it will “out” these firms and identify them as being “too big to fail” thus institutionalizing a “too-big-to-fail” policy. Wall Street’s solution is that systemically risky firms should be required to “post-fund” a resolution reserve to take care of mega financial firm failures. In other words, the systemically dangerous firms would be required to post the money after they become insolvent.

ICBA argues that creating a resolution fund after the mega bank has already failed is like purchasing life insurance for someone who is already dead! Who pays for the life insurance policy if the insured is already dead before the policy is purchased? I think we all know who will pay.

Gertrude Stein famously said, "A rose is a rose is a rose." And Shakespeare said, “That which we call a rose by any other name would smell as sweet." (Only I can assure you that these mega financial failures don’t smell like roses to the taxpayers and community banks.) At ICBA we believe that the failure of a $2.5 trillion bank will not smell nearly as bad if the money to resolve the failure comes from the failed bank itself rather than picking the pockets of the taxpayers and community banks. We all know who the elephants are. So, let’s stop pretending that there are no elephants in the room.