Matt Yglesias, Making Sense
When he says this:
Looks like a bunch of banks are going to repay their TARP money and thus get out from under the burdens of executive compensation restrictions and other TARP-related regulations. That said, merely repaying the funds won’t change the fact that all large financial institutions are now benefiting from a few different federal programs and an immensely valuable implicit federal guarantee. … At the end of the day, the valuable thing that systematically significant institutions got from TARP was not so much the TARP money as investors and creditors’ knowledge that money would be provided in the future if necessary to prevent bank failures. That’s something the banks can’t “give back” nor can the government “take it away.”
True, but all American institutions benefit from the existing legal and political system. For example, all media institutions benefit from the fact that the legal system will not award damages for negligence in reporting, even if defamatory or otherwise damaging. (Non-media institutions don’t generally get the same immunity for negligent defects in their products.) Software companies benefit from the fact that the courts enforce those mandatory waivers that you have to click when you install a program. (Auto companies aren’t permitted to disclaim liability the same way.)
The always implicit federal backstop for the money center commercial banks (which was not extended to money center investment banks) has always been reflected in their stock price. The high risk of investment banking has always been reflected in the low P/Es of investment banks, and the higher risk of jobs in i-banking has been reflected in the higher salaries earned in i-banking.
— y81 · Jun 9, 06:48 PM · #
y81, I don’t think the issue here is fairness so much as moral hazard. That other people have other moral hazards doesn’t imply anything about whether this moral hazard should be maintained. We’ve got options—should we regulate to encourage smaller banks, should we regulate to encourage less risky banks, or should we just wait until everything blows up all over again?
— Consumatopia · Jun 9, 11:41 PM · #
This is also bad for capitalism — it’s one of the reasons Freddie and Fannie can be identified as causative agents of the financial crisis. This implicit got’cher-back allows irrationality to go unpunished and prevents rational players from reaping competitive rewards.
— mike farmer · Jun 9, 11:46 PM · #