Garett Jones  

Sheila Bair, former FDIC chief, on Secretary Geithner

Hoisted from the Comments: Is ... Markets for Everything: Bumpin...
Tim seemed to view his job as protecting Citigroup from me, when he should have been worried about protecting the taxpayers from Citi....

That's from her new book, profiled in the Financial Times.
You already know that countries whose banking sectors are largely government-owned have worse economic performance, but here's the best recent paper on the topic. From the abstract:
This evidence supports "political" theories of the effects of government ownershipof firms. 

They use government-owned bank shares as a key measure.  Unfortunately, the authors don't separate out de facto from de jure government ownership.  In expected value terms, aren't all our biggest banks government owned?  

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COMMENTS (3 to date)
DougT writes:

I get tired of this trope. Was Lehman government-owned? Did their bondholders get bailed out? Was Washington Mutual government-owned? What happened to their preferred shareholders?

You can argue that bondholders of Fannie, Freddie, Citi, and Bank of America got government support, but what happened to their shareholders, or those of Bear or AIG? They were effectively wiped out.

The government's response to the 2008 financial crisis was varied and ad-hoc. Some might say it was nuanced and context-sensitive. But one thing it wasn't was a uniform "bailout" of shareholders. Most shareholders of financial firms lost money in 2008.

Isn't the FDIC's job to keep banks from failing?

Milton Friedman seemed to think so in, Why the American Economy is Depression Proof.

Arthur_500 writes:

Shareholders should have been universally wiped out - accordance with the bancruptcy proceedings. FDIC is insurance that guarantees a fixed return of assets to depositors. That's all they do or should do.

In any bank failure the first in line are depositors. IF the bank does not have adequate assets to cover depositors then FDIC guarantees those depositors up to 100,000.

If FDIC has to cover depositors then there is nothing left over for shareholders, bondholders, etc.

I suggest that if we were to follow the laws we wouldn't be having this discussion at all. AIG is a prime example. AIG - the part that guaranteed swaps, had no real assets so that should have been the end of their initial involvement. Those who used those guarantees could have tried to sue in Court and go after some other assets that AIG had access to (their insurance businesses for example), but that is a different story.

Bottom line is the government with the likes of Mr. Geitner of the Fed and later of the Treasury, bailed out AIG in order to circumvent the bankrupcy proceedings. In order to do this they picked winners and losers.

In the end, "Too Big to Fail" is a euphamism for government ownership of those companies they think they want to bet on.

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