Jake's View | Five bad options to tackle 'too big to fail' fallacy
There you have the big plan for how our government thinks it can avoid picking up the burden if once it has designated certain banks and financial concerns as "too big to fail". Let's examine the five options.
The regulators can use one of five options for a rescue: force-sell to a buyer; allow a bridge firm to hold it for some time so that it can carry on its business; ask existing shareholders or creditors to inject money; move some of the bad debt to an asset-management company; or, only as the last resort, allow the firms to be owned by taxpayers temporarily.
There you have the big plan for how our government thinks it can avoid picking up the burden if once it has designated certain banks and financial concerns as "too big to fail". Let's examine the five options.
But what if there are no buyers about? Will force-sell then become force-buy? There would be some very interesting legal consequences if such a buyer itself failed because of the forced acquisition.
We tried this approach once in 1987 with a forced-buy rescue of a gambling pit that masqueraded as a futures exchange. The hat went around at the financial secretary's insistence and all who were designated put in their designated contributions. It worked, but there was an implicit government guarantee.