Remember that the TARP proposal was made after the first rescue of AIG. It was clear at this time that the real problem in the economy was the fact that regulators did not have the authority to manage a controlled resolution of firms like AIG (i.e. of non-bank financial institutions). I can understand that regulators would need a big line of cash to aid them in resolving the AIGs of this world, but I can’t understand how the cash is useful – even today – without the legal authority to perform the resolution.
Some might say that the reason that a resolution authority wasn’t included in TARP was that nobody thought it would be necessary before AIG and things were simply happening too fast to create a proposal of that magnitude on the fly. There’s a huge problem with this argument: Bear Stearns. After Bear Stearns’ sudden collapse in March, one of the first priorities should have been to draft a resolution authority for taking over a firm in a similar situation.
Thus, the question remains: Why didn’t Hank Paulson insist that Congress create an authority to resolve insolvent non-bank financial institutions in September 2008?
Also of note Tim Ryan, CEO of SIFMA, in a FT commentary titled “Wall Street is a willing partner in financial reform” carefully omits support for the one tool that would make it possible for the government to get the too big to fail problem under control. The message the financial industry seems to be broadcasting loud and clear is this: we’ll submit to more regulation, but we really, really don’t want to ever have to face the consequences of competing in a real free market environment.
Synthetic Assets 