Bair Versus Geithner

http://www.futureofcapitalism.com/2009/10/bair-versus-geithner

President Obama's FDIC chairman, Sheila Bair, and his Treasury secretary, Timothy Geither, are openly disagreeing over how to fund losses associated with the failure of a financial giant. The debate, in essence, is about whether a so-called Goldman Tax should be imposed before ("ex-ante") or after ("ex-post") another crisis:

Here's Ms. Bair:

Congress should establish a Financial Company Resolution Fund (FCRF) that is pre-funded by levies on larger financial firms -- those with assets of at least $10 billion. The systemic resolution entity should have the authorities needed to manage this resolution fund, as the FDIC does for the Deposit Insurance Fund (DIF). The entity should also be authorized to borrow from the Treasury and those borrowings should be repaid by the financial firms that contribute to the FCRF. We believe that a pre-funded FCRF has significant advantages over an ex post funded system. It allows all large firms to pay risk-based assessments into the FCRF, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.

And here's Mr. Geithner:

The government should have the authority to recoup any such losses by assessing a fee on large financial firms. These assessments should be stretched out over time, as necessary, to avoid adding to the pressure induced by the crisis. Such an ex-post funding mechanism has several advantages over an ex-ante fund. Most notably, it would generate less moral hazard because a standing fund would create expectations that the government would step in to protect shareholders and creditors from losses. In essence, a standing fund would be viewed as a form of insurance for those stakeholders.

by Editor  |  Oct 29, 2009 at 12:46 pm Related Topics:  Banking, Capital Markets Regulation, Goldman Sachs, Timothy Geithner receive the latest by email: subscribe to the free futureofcapitalism.com mailing list