Friday, July 8, 2016

Eliminating US Financial Insitution Bailouts

There is a bill working its way through the US House of Representatives that would reform the bankruptcy process for large financial institutions.  The bill would make bankruptcy for these institutions resemble the bankruptcy process for airlines and other industries. This is all to the good.

No one hesitates to fly on an airline that is in Chapter 11 bankruptcy.  Similarly, no one should be hesitant to do business with a financial institution that is in a bankruptcy situation that parallels Chapter 11.

The key here is that Chapter 11 bankruptcy blows out the common stock holders and puts the company in the hands of the bondholders (and other creditors).  Bondholders should take over and agree to a workout that reorganizes the balance sheet and permits the enterprise to continue.  Basically, that's what the house bill provides.  With bondholders providing the backstop, the financial institutions could continue to do business, as airlines do today when operating under a Chapter 11 bankruptcy.

This bill would take the taxpayers off the hook for foolish and irresponsible behavior of large financial institutions and make the bondholders and creditors (and common stockholders) pay the piper.  Hopefully, it will become law.

The 2008-09 bailouts of financial institutions engineered by Bernanke, Paulson, Geithner, and Obama led to the most repressive financial institution regulation in American history and destroyed any prospects for serious economic growth since.  This is the price paid by average Americans for the bailouts and over-reaction by politicians.  There was no real need for the bailouts in any event, but this bill, if enacted, would eliminate what remains of the largely irrational arguments advanced by bailout supporters.

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