Obama Banking Policy

Here is a criticism of the Obama banking policy by David Kotok:

Too big to fail has become smaller. CIT was not on the original Geithner-Summers-Bernanke-designed list of 19 organizations deemed to be too large to fail. In the post-Lehman environment, this has become the norm. Failing is not permitted.

Now we see the making of this policy unfolding to a new level. CIT has received $2.3 billion in TARP money. The government has a stake. Therefore the government will now infuse additional money in order to “protect” the taxpayers. They will do this under the guise and umbrella of “helping small business.” That means a million small and independent businesses will not be incented to go to their local banking institutions but will instead be involved with a weakened CIT, operating under duress.

CIT has experienced a “run,” as those who are able withdrew their cash are doing so. We have an insolvency crisis at CIT becoming a liquidity crisis, because the cash is drained. Now, in steps the new industrial policy of the United States, as developed under the Obama administration and designed by the Secretary of the Treasury. Loan more, reconfigure the balance sheet, alter the form, assign the collateral that is workable, and otherwise find ways to pretend to be more secure while pouring more capital into a sinking ship.

I heard the former president of the St. Louis Fed summarize the dilemma well. Bill Poole said, “If you are in a hole and the hole is deep, stop digging!” With CIT they are going another layer deeper. Too big to fail is growing – Washington does not know how to stop digging.

Markets will like this in the short term, because markets like free lunches and bailout money. We as money managers will continue to position advantageously for the purpose of benefitting our clients in this continuing, post-crisis saga. But to policy wonks this is a disaster in the making, and it is getting bigger.