Econintersect: Occasional Global Economic Intersection contributor Shah Gilani has three very specific proposals to ending the TBTF (too big to fail) era. The bottom line of Gilani’s proposals involves criminal prosecution and removing the perverse incentives in the current system. Gilani is speaking out in advance of a GAO (General Accountability Office) report examining what is essentially a government subsidy for the TBTF banks. The preliminary report is due out in a few weeks and the final report early next year.
Gilani refers to a Bloomberg editorial which referenced an IMF study putting the collective value of TBTF status at $83 billion per year. When this was protested by bank lobbyists, Bloomberg rejected the protest, citing an academic study that valued the TBTF advantage at $100 billion in 2010.
Boston University professor Cornelius Hurley has suggested that exemption of the large banks from criminal prosecution under existing U.S. statutes should end – and the economic value thus exposed as risk should be priced by insurance companies which would insure banks and executives against criminal charges. The exemption referred to is a stated policy of the Obama administration and U.S. Attorney General Eric Holder, according to Hurley.
So, here are Gilani’s three simple proposals to end the TBTF burden:
- I say, first of all, apply criminal statutes to what are being characterized as civil crimes.
Calculate the amount of losses that result from banks schemes in terms of fraud and theft and hand out jail sentences (to all directors and all the top executives who can be placed at the scene of the crimes) commensurate with what criminals like Bernie Madoff face… a lifetime behind bars.
- Second, fine the Hell out of crooks and make them have insurance policies to pay those fines. At least there will be less of a direct burden on shareholders, who foot the bill for fines, on account of it being cheaper to foot the premium bills for directors and officers and executives and traders, than just reaching into the equity pile to pay fines.
- Third, don’t allow fines to be deducted as operating costs. Establish them on the balance sheet as a liability to be paid out of future compensation. That way, there won’t be any bonus pools for years and years and no incentive pool for coming up with criminal schemes.
Sources:
- This Could Finally End “Too Big to Fail” (Shah Gilani, Wall Street Insights & Indictments, 26 September 2013)
- Bank Lobbyists Dispute $83 Billion Subsidy. They’re Wrong (Bloomberg editorial, 12 March 2013)
- GAO Must Ensure Accurate Accounting in TBTF Study (Cornelius Hurley, American Banker, 24 September 2013)