These days, America’s federally compliant, too-big-to-fail financial
institutions are hard at work on their living wills. The next time
disaster strikes, the authors of the Dodd-Frank reform legislation
stipulate, banking behemoths must have plans at the ready to dissolve
themselves, rather than have the taxpayers pay to wind them up.
The Federal Deposit Insurance Corp. was pushing for such an approach
to crisis management even before the 848 pages of HR 4173 landed
on the nation’s coffee table this summer with such a startling thud.
Don’t worry, Sheila Bair has told the bankers whose deposits her
agency insures: It won’t take more than 500 hours to throw together
an acceptable submission.
But we have been thinking: If the likes of Bank of America, J.P.
Morgan and Citigroup have to draw up end-of-days contingency plans,
what about the central bank that lit the fuse on the bomb that nearly
blew up the economy? Surely, it should have to make preparations
for its own dissolution, too. Following is a short-form living will
for the Federal Reserve. We submit it pro bono.
Actually, it may hearten Chairwoman Bair to know that it takes
nothing like 500 hours to draft a suitable plan. Colleague Evan
Lorenz was on the job for no more than 90 minutes, and he seems
to have hit the highlights, starting with the identity of the Fed’s
executor (it’s the Republican congressman from Texas).
Why would the Fed ever have to go out of business? Highly leveraged
financial institutions forever wobble on the cusp of disaster, and
the Federal Reserve Bank of New York, the largest of the Fed’s 12
satellite banks, is leveraged 71:1. Maybe its management will zig
when it ought to zag, and financial problems will overwhelm the
More likely is that the Fed will encounter insurmountable political
difficulties. What might Congress do if the gospel of H. Parker
Willis (Grant’s, Sept. 17) took root? Or if the people rose
up to protest against the unanticipated consequences of zero-percent
interest rates, quantitative easing and improvisational central
planning? The Fed came into the world on a wave of Progressive Era
reform. Maybe it will leave the world on a wave of modernist, free-market
The Fed is vast and multitasking. It fixes the funds rate, regulates
banks, administers the distribution of cash and coinage, clears
checks, watches over buried gold at the New York branch, manages
assets and lends (as a matter of last resort) to illiquid or even
insolvent depository institutions in times of crisis. Shutting down
such an enterprise in an orderly fashion will require careful planning,
just as Christopher Dodd and Barney Frank were saying.
As to the funds rate, to which so much econometric research and
learned discussion within the Federal Reserve is devoted, we hereby
entrust it to the market. As recently as the chairmanship of Paul
A. Volcker, it was the supply and demand that set the interest rate.
In general, the central-planning remit of the Federal Reserve —
nowhere to be found in the enabling legislation — should disappear
with the institution that tries (futilely) to discharge it.
No. 2, the regulatory function. The Fed is merely duplicative
or triplicative. The FDIC and the Office of the Comptroller of the
Currency (not to mention the state banking commissions) do what
the Fed does. If the central bank’s voice vanished from the national
regulatory choir, who would miss it? Pre-Fed, banks held much more
equity capital than they have post-. If the cost of failure were
moved squarely back to the officers, directors and shareholders,
perhaps the nation could get by with fewer regulators, fewer rules
and fewer bailouts. When did the taxpayers vote themselves a first-
or second-loss position in the too-big-to-fail capital structure?
No. 3, the distribution of cash and loose change, and the clearing
of checks. Let Brinks handle the cash and Coinstar the pennies,
nickels, dimes, quarters and newfangled, base-metal, president-themed
dollars. Check clearing? Maybe the Fed’s employees would choose
to carry on in a private setting. They could do a management buyout.
Next comes the trove of monetary gold buried underneath the New
York Fed on Liberty Street in lower Manhattan. Goldline could assume
the guardianship function — marketing, too. Glenn Beck and Monica
Crowley would share spokesperson duties.
The Fed has, of course, been accumulating a mountainous portfolio
of mortgage-backed securities, Treasurys and miscellaneous risk
assets (the latter, a legacy of the bailout to save Bear Stearns).
Blackrock and Pimco already manage the so-called toxic portion of
the Fed’s balance sheet. We bequeath the rundown of the investment-grade
segment to our friends at Annaly Capital Management (NLY) and Redwood
As to the critical lender-of-last-resort function, let the Treasury
do it. Having managed the Troubled Asset Relief Program (TARP),
Alexander Hamilton’s old department knows all too much about crisis
intervention. Come to think of it, in the new, post-Fed world, maybe
Treasury could forget what it learned and let insolvent financial
institutions go to their just rewards. Better margins for the survivors.
You say that the foregoing is nonsense? Perhaps, but what about
the pre-need funeral planning being forced on the big commercial
banks? Can you imagine old man Morgan or George F. Baker meekly
turning over to the government a set of directions for disassembling
their good and liquid and storm-proof banks? It’s a measure of how
far down the road of the socialization of credit we have collectively
traveled that nothing about the living-will initiative seems especially
out of the ordinary. Futile? Yes, perhaps — but not extraordinary.
Really, shouldn’t it seem extraordinary?
with permission from Grant’s
Interest Rate Observer.