by ilene - March 29th, 2010 1:31 pm
Courtesy of Simon Johnson at Baseline Scenario
When a company wants to fend off a hostile takeover, its board may seek to put in place so-called “poison pill” defenses – i.e., measures that will make the firm less desirable if purchased, but which ideally will not encumber its operations if it stays independent.
Large complex cross-border financial institutions run with exactly such a structure in place, but it has the effect of making it very expensive for the government to takeover or shut down such firms, i.e., to push them into any form of bankruptcy.
To understand this more clearly you can,
The Citigroup situation is simple. They would like to downsize slightly, and are under some pressure to do so. It is hard to sell assets at a decent price in this environment, so why don’t they just spin off companies – e.g., quickly create five companies in which each original shareholder gets a commensurate stake?
The answer is that Citi’s debt is generally cross-guaranteed across various parts of the company. US and foreign creditors have a claim on the whole thing, more or less (including the international parts), and you can’t break it apart without upsetting them. The cross-border dimensions make everything that much more knotty.
Senator Kaufman explains what this means – essentially the “resolution authority” proposed in the Dodd legislation is meaningless. How would any administration put a huge bank into any kind of “resolution” (a FDIC-type bank closure, scaled up to big banks) when it knows that doing so would trigger default across all the complex pieces of this multinational empire?
You could do it if you are willing to accept the costs – and if you understand there are big drawbacks to providing an unconditional bailout of the 2009 variety. But will a future administration be willing to take that decision? The Obama administration was not – and big finance will only become bigger and more complex as we move forward.
If you look into the eyes of the decision-makers from spring 2009, they honestly believe that taking over Citi or Bank of America would have caused greater financial trouble and a worse recession. You can argue about their true motivation all you want; this…