Pernicious Mendacity

The British are finally following the successful example of Sweden and breaking up the banks "too big to fail". Royal Bank of Scotland and Northern Rock {2.18.08}will be sold in parts to create three new banks. Northern Rock will be split into two entities and Royal Bank of Scotland will sell off a hundred or so branches. So why are Americans forced to pay for zombie banks like Citicorp to stay in business? It is not because American politicians do not understand the solution. Richard Nixon's former Secretary of the Treasury George Schultz quipped that the solution for banks too big to fail is to make them smaller. What prevents implementing the Swedish solution here is the incestuous relationship between regulators and the supposedly regulated. Former Treasury Secretary Hank Paulson who was the chairman of investment bank Goldman Sachs met in secret with Goldman executives at the Moscow Marriott Grand Hotel in June 2008. The meeting was billed to insiders as a social gathering, but Paulson gave bank executives inside information about the Treasury's plans to handle failed banks and his department's views on economic matters. The problem is that at the time of the meeting Paulson was subject to an ethics letter agreement in which he promised to abide by 18USC §208 and 5CFR Part 2635 not to "participate in any particular matter that has a direct or predictable effect on my financial interests..." Paulson still owned pension benefits from Goldman Sachs. When the financial system later imploded, Paulson obtained the necessary waiver to talk to bank officials about internal government business. Government watchdog groups are calling for an official investigation of the incident. Former Assistant Secretary of the Treasury, Dr. Paul Craig Roberts, when asked if current Secretary, Timothy Geithner, worked for the American people or Goldman Sachs in a media interview he replied, "Goldman Sachs".

When Sweden broke up its failed banks in 1991, it took the valuable portion of bank assets and placed them up for sale. The problematic assets were split off and consolidated into 'bad banks' that received government aid. What may be amazing to Americans is that the Swedish banks did this voluntarily. Only one bank refused state aid. Swedish government intervention end up costing taxpayers nothing, and may have even turned a profit depending on how one counts the beans. Some of that kind of patriotism would be useful in the US, but Swedish bankers also viewed the decision to split up as prudent business. Nursing sick banks takes a long time and may never be successful, whereas quarantining the bad assets in separate entities took recovery half as long as expected. A year after the collapse of Lehman Bros., economists are warning that the banking crisis is no where near being over. Joseph Stiglitz, Nobel laureate, says the underlying problems have not been fixed and the "problems are worse than they were in 2007 before the crisis."