Economics

How would President Romney handle another bank crisis?

For me, this was the best bit of the Republican debates by far:

BLOOMBERG’S GOLDMAN: Governor Romney, it’s 2013, and the European debt crisis has worsened. Countries are defaulting. Europe’s largest banks are on the verge of bankruptcy. Contagion has spread to the U.S. And the global financial system is on the brink. What would you do differently than what President Bush, Henry Paulson, and Ben Bernanke did in 2008?

ROMNEY:  Clearly, if you think the entire financial system is going to collapse, you take action to keep that from happening. … But I can tell you this—I’m not interested in bailing out individual institutions that have wealthy people that want to make sure that their shares are worth something. I am interested in making sure that we preserve our financial system, our currency, the banks across the entire country. …  There is no question but that the action of President Bush and that Secretary Paulson took was designed to keep not just a collapse of individual banking institutions, but to keep the entire currency of the country worth something and to keep all the banks from closing, and to make sure we didn’t all lose our jobs. My experience tells me that we were on the precipice, and we could have had a complete meltdown of our entire financial system, wiping out all the savings of the American people. So action had to be taken.

Mitt Romney and the other GOPers might get a similar question tonight given what’s happening in EU credit markets. I wonder if Romney, if he gets a second bite at the apple, might suggest a plan created by his economic adviser Glenn Hubbard of Columbia, as well as Hal Scott of Harvard and Luigi Zingales of the University of Chicago. If not, he should.

Here are basics (via the WSJ): It is basically a version of the good bank/bad bank—also incorporating a debt-equity swap—solution run by the FDIC. The Bad Bank would assume all the troubled assets and long-term debt, and would also received a loan from the Good Bank. The Good Bank would have all the remaining assets, as well as insured deposits and  FDIC-guaranteed short-term debt as liabilities. After the split, the good bank could be cut loose from FDIC receivership. Long-term debtholders would get equity in the Good Bank, old shareholders would get equity in the Bad Bank.

The debate version of that plan: “I would have the FDIC take over the failed bank, fire the top execs, split it in two and put the healthy half back on the market ASAP.”

One thought on “How would President Romney handle another bank crisis?

  1. Better question than James Cramer bailing out Italian banks. Really expected more from CNBC and staff. Profits or Jobs sounds like an Obama question. Profits come before jobs and are added when companies think they can increase profits.

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