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Is resolution feasible?

Putting aside the actual merits of breaking up big banks (I'm actually not convinced that this is the most important priority), I often read people remarking on how imposingly difficult it would be to do. These banks are complex and they operate in dozens of countries and their businesses are intertwined. Fair enough. But that seems to work even better as an argument against resolution authority. After all, resolution is essentially breaking a bank up and selling its component parts off at high speed amid an acute crisis with creditors banging away on your door. If these things are too difficult to defuse in a time of calm, it's hard for me to see how they could be taken apart amid an emergency.

By Ezra Klein  |  April 29, 2010; 4:00 PM ET
 
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Comments

What's so difficult? Banks sell lines of business, branches, operations, etc. all the time. The FDIC seems able to sell stuff over a weekend.

There are a whole lot of investment bankers and lawyers who specialize in bank mergers & acquisitions. It may not be trivial, but it's far from impossible.

Posted by: fuse | April 29, 2010 5:07 PM | Report abuse

With all due respect, it seems to me that you might have your argument backwards. As I understand what you're arguing (I apologize if I got this wrong), you're saying that some people argue that you can't break up the banks due to their massively complex, international nature, which means that resolution authority would not work, which means that these people are incorrect in the first place by arguing that the banks can't be broken up. However, that assumes that resolution authority actually would work. I think the correct argument is that if these people are right that banks can't be broken up right now, that lends credence to the argument that resolution authority is an illusion and the regulators would never actually use it because it can't be practically implemented, and thus we still could have TARP-like situations.

Put another way, could the government really shutdown Citigroup in light of its massively international and global reach? I'm not sure it's so clear.

And one last thing, which seems to me like no one -- and I mean no one -- has addressed. The government could not have resolved Citigroup or Bank of America Corp. in 2008, but it could have closed Citibank and Bank of America, NA, and many people thought that Citibank and BofA, NA should have been closed in 2008 (i.e., they were at least undercapitalized, and possibly critically undercapitalized). If the government had no guts to shut down these banks during a crisis, why should we believe that it'll actually shut down any of these large financial institutions during a crisis rather than bail them out?

Posted by: JamesCody | April 29, 2010 8:01 PM | Report abuse

Resolution does not have to occur at "high speed amid an acute crisis". One of the major problems with finance is that ailing firms often are forced to sell-off assets when they are least valuable, and in turn contribute to the loss of value in similar assets. It's a feedback effect. But properly done, the resolution authority involved can simply hold the assets. How long did it take the Resolution Trust Corp to sell of S&L assets in that crisis? It was years. If done right, resolution is like a well-controlled, slow-moving bankruptcy.

Posted by: sanjait | April 30, 2010 1:51 PM | Report abuse

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