Addressing TBTF with tax and other policy: because "Big Banks Go Wrong, Pay Little Price"
by Linda Beale
Addressing TBTF with tax and other policy: because “Big Banks Go Wrong, Pay Little Price”
The New York Times today reiterated what many Americans lament–Big Banks went uncharged for serving as the main engine of the Great Recession that cost ordinary Americans jobs, homes and futures. See Andrew Ross Sorkin, Big Banks Go Wrong, but Pay a Little Price, New York Times, at B1 (March 12, 2013).
Big Banks (and especially their managers), however, made out like bandits through the socialisation of losses and privatisation of gains. The aftermath of the crisis provided lower cost of funds from the perceived government TBTF subsidy. Big Bank managers made big bucks leading their institutions into disaster and “staying on” after the disaster because their “expertise” was essential. The stock market, but not ordinary Americans’ pocketbooks or paychecks, has recovered from the recession, forging a return of lucrative M&A activity and, of course, the management of wealthy people’s assets. No Big Bank has faced criminal indictment for “the damage caused to the economy and millions of Americans” by their sloppy mortgage financing, sloppy foreclosure procedures, and casino capitalism “bets” with credit default swaps and other derivatives.
The reason–the lesson from Enron and Arthur Andersen, where thousands of lower-level employees who had no control over corporate actions lost their jobs when the firms collapsed after wrongdoing and charges. Any Big Corp can be TBTF. “[S]imply charging a company with a crime reaises the possibility of putting the firm out of business.” Id. at B5. Collateral damage is therefore a major hurdle to bringing a criminal case against a corporation.
The takeaway, according to the Times article, is that “prosecutors should focus on the individuals responsible for the misconduct” rather than indict corporations, which can result in “condemnation of one person [many employees] for the actions of another [boards and managers or ‘rogue’ employees]” (quoting, in the latter case, Elizabeth Ainslie’s paper on indicting corporatrions).
While protecting employees of rogue firms (where management and directors have pursued aggrandisement of their own status and riches at the cost of society’s well-being) is important, it is not clear that the takeway outlined above is a complete answer. Several additional components should be addressed, by a combination of Congressional and state legislative action and regulating agencies. And actions to limit the size of corporations would have another advantage–acting as a deterrent to their power in dictating the well-being of ordinary employees, and thus helping to deflect the growth of corporatism in our society.
- First, boards that make irresponsible judgements that allow CEOs and managers to engage in reckless bets with their companies should be able to be held personally responsible more easily, without corporate protection for the ultimate costs.
- Second, anti-trust needs to be expanded to limit the interwoven boards and contractual relationships that permit a few TBTF institutions in an industry to dominate the market and set the “Wall Street Rule” for what is acceptable behavior. ULtimately we need forced split-up of TBTF institutions, through anti-trust or new means, as necessary.
- Third (and most relevant for this blog, of course), tax policies encouraging corporate consolidation should be strictly limited. The section 368 reorganization provisions should be tightened to require a much higher percentage of continued shareholder interest: the current requirement for a tax free reorg of only 40% (under an example in the reorg regulations) should be tighted to at least 70%. The opportunities for loss recognition in reorgs provided by the Bush Treasury under regulations should be eliminated. Spins of parts of mega corporations to existing shareholders should remain tax-free, but spins that amount to initial steps in acquisitions should be more limited.
Will Congress (or state legislators) take any of these actions? It is highly dubious. The left is too often too cowardly to act and mostly funded by wealthy interests. Most on the right–disproportionately represented in Congress because of gerrymandering in the House and the disproportionate Senator-to-population ratios in the Senate–dogmatically favor market fundamentalism no matter the evil it causes when it comes to advantages for business to make more profits, even if it comes at the expense of ordinary people through market power to defeat unions, defeat reasonable pay requests, etc. (Of course, when it comes to exploiting government , the right tends to favor government subsidies–look at Wisconsin’s recent move to remove pesky environmental regulations protecting wetlands to support a mine owner, in the purported interest in supporting job creation, even when the mine is likely to cause long-term environmental damage and potentially devastating water pollution and destruction of wetlands.)
cross posted with ataxingmatter
The check the box regulations need to be repealed. If an entity provides limited liability to it’s equity holders, it should be a corporation, period.
And subchapter S should be limited to corporations with gross receipts below a certain threshold. I would vote $5 million.
“Second, anti-trust needs to be expanded to limit the interwoven boards and contractual relationships that permit a few TBTF institutions in an industry to dominate the market and set the “Wall Street Rule” for what is acceptable behavior. ULtimately we need forced split-up of TBTF institutions, through anti-trust or new means, as necessary.”
I’ve looked into this, and while A/T litigation would be applicable vis-a-vis concentration of market power among a few banks (0.2% of the banks hold 70% of the industry’s assets), the regulatory schemes coupled with the SCOTUS Suisse holding means A/T is not going to pierce the regulatory veil, sorta speak, and regulate the financial/banking industries any time soon.
Moreover, the Suisse Court’s holidng is telling in how delusional all branches of government are when it comes to the need to regulate the financial industry:
“First, the activities in question here—the underwriters’ efforts jointly to promote and to sell newly issued securities—is central to the proper functioning of well-regulated capital markets.
. . .
We believe it fair to conclude that, where conduct at the core of the marketing of new securities is at issue; where securities regulators proceed with great care to distinguish the encouraged and permissible from the forbidden; where the threat of antitrust lawsuits, through error and disincentive, could seriously alter underwriter conduct in undesirable ways, to allow an antitrust lawsuit would threaten serious harm to the efficient functioning of the securities markets.”