I thought we had anti-trust laws that fixed the problem of companies that are too large to fail. I know that this Administration has opted not to do any such enforcement, but what's to stop us from enforcing it from this point forward?

The hard part of this is dealing with senior management. If they already have 25, 50, or 100 million dollars from salaries and bonuses tucked away, being fired doesn't scare them much.

How do you get that money back?

The problem is that the politicians of both parties needs money from the principals of the "too big to fail entities", the regulators expect to go to them to work and make big bucks eventually (or go back and forth), and the professors of Economics(tm) whore for all three. So the chances of any serious action being taken along those lines is less than zero.

Cranky

It isn't necessarily "free money" (look at what we're asking of the auto makers, or are we?) but basically the point rings true. The real challenge is, the political system that allows it to happen the other way (the way it did happen) - how can we fight it? And don't assume Democrats are good guys here, they have been corrupted and are almost as bad. We need a major overhaul of the system, not just partisan platitudes about getting the right party in power (albeit the Repubs were the worst by a clear margin.)

this is all well and good, but it completely misses THE fundamental point of the bailouts: stealing from the taxpayers to reward the very people that caused the problems.

plutocrats motto: 'solutions are for suckers'.
.

I'm pretty much in agreement. I'd start the housecleaning with the 2 (Citigroup & AIG) who came back for seconds on Inauguration Day, just to set the mood. Trouble with that is, all the agencies who who regulate all this need a complete & thorough overhaul/housecleaning, including some of Obama's current advisers like Johnson & Rubin. Until he has a complete & competent team with a coherent plan in place, setting new policy just won't do it.

I think this is a profound mistake. I hope that Obama will correct it.

The wall-to-wall appointment of insiders doesn't bode well for fundamental reform. Also, the responses to the letter I sent my congresscritters back during the TARP debate proposing they implement the "swedish model" were less than encouraging.

How do you get that money back?

Wealth tax. Which means: kiss it good-bye. The best that can be done is to tax future returns on those piles of ill-gotten loot until inheritances are squandered.

To Colin's question about getting the money back from senior (and junior for that matter) managers who escaped with big bonuses. I think a combination of criminal (racketeering statutes) and civil suits brought on behalf of American taxpayers is the way to go. Treat them like war profiteers and give them the option of jail and fines or fines alone. I'm not feeling very charitable about this.

"I thought we had anti-trust laws ..." posted by Always Hopeful
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The operative word here is HAD. Most of the financial regulation passed during the Depression has been repealed over the past 30 years or so (with too much Democratic help, I might add). Thus we have our current situation. And as Cranky observed, unless this situation gets a whole lot worse than it is now, it will take a miracle to get those regulations back on the books. Keep in mind that for FDR to be able to pass The New Deal, unemployment was at ~25%, the stock market had lost 90% of its value, & the prices of everything (including real estate & labor) were still dropping so those who still had money refused to spend or lend it.

Fun times! NOT.

On getting the money back, here's an idea: How about we enforce the letter of the law on fiduciary obligations, instead of letting it go with a wink and a shrug, the way it is now? That would do even more to solve the moral hazard problem.

The hard part of this is dealing with senior management. If they already have 25, 50, or 100 million dollars from salaries and bonuses tucked away, being fired doesn't scare them much.

How do you get that money back?

Prosecute them for fraud.

Hilzoy, I agree, but the following seems a forlorn hope:

I hope that Obama will correct it.

On the whole, his party strongly supported the actions that you deprecate, and his appointments are all from the government or from regulated institutions that received support, or both. According to Obama's rhetoric, there will be more support to come, and strong efforts to prevent any "creative destruction."

The point here is not punishment.

Why not? Why shouldn't these scam artists be punished? As someone else pointed out, firing top-level managers does not recover their ill-gotten gains. Why not punish them in some fashion? If you want to play in the big leagues and you fuck up with malice aforethought, the results should be painful for you.

Kevin wrote: We have not tried to purge our financial system of the parts that got everyone into trouble. Instead, we have tried to prop up everyone, and to inflict as little pain on the financial wizards who created this mess as possible.

I think this is a profound mistake.

In a simpler system that might well have been tried. In this crazy complex system there was (and still is) a risk that tearing one company up that way might really harm many other firms. It's not entirely provable, but I think the way things are being handled, excepting Paulson's obvious Wall Street leanings and the CEO pay issue, has been pretty good. It's not pretty, but keeping the big banks alive protects the economy and would have done better if they would just keep lending. Still, fixing mortgages is essential to getting the fundamentals back on track.

That is what bankruptcy court does, except when the firm is too political to allow nationalization by bankruptcy court.

What about the corrupt members of a company's board of directors?

From Wendy Gramm on Enron's board of directors to so many other corrupt board members, these people are the ones who've rubber-stamped CEOs (often over the objections of stockholders), giving these CEOs huge salaries, golden parachutes and massive, yearly multi-million dollar bonuses, even as a company's stock value might be tanking.

Managers might go, shareholders might get screwed, but many of these board members will just move on and pull the same stunt at some other company since they're all card-carrying members of the same country club corporate circuit.

Its shareholders should be wiped out, and its management replaced.

I'm assuming this includes bond holders, but even if it doesn't, I'd be interested in knowing what class(es) of people are affected most. I suspect it would be unsophisticated retirees and pension funds.

Then I see "management replaced." Call me old fashioned, but I want to see guillotines on the Mall (DC) and in the Battery (lower Manhattan).

I think this misses the central point of the column. We know perfectly well that 30-1 leverage is a bad idea, that transactions should be transparent, that ratings agencies should change ratings on organizations when they develop a different risk profile:

There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?� (The answer was obviously no.)

This is not a policy issue. Yes the recommendations make sense. But the only ones that really matter are those that try to ensure the people working in the regulatory and rating agencies not personally profit from protecting financial companies from scrutiny.

This is a corruption problem. AIG and MBIA were committing fraud. It was evident to anyone paying attention from, at latest, 3Q/2007 when the London CDO/CDS arm of AIG posted a loss of hundreds of millions of dollars.

The article's central point is that the regulatory and ratings agencies are systemically corrupt.

couldn't disagree with you more. It's like your living in a movie where you never learn. Unfortunately the rest of us have to be players in this endless groundhog day when enough people believe in the utter balderdash your spewing. First , the problem would never arise with proper regulation and oversite conducted on financial institutions. Secondly, please stop believing that darwinian unfettered capitalism will somehow police itself for the best interests og the overall population.

The very sound approach you outlined was rejected by Bernake and Paulson because it does not protect the asset values of the exotic financial instruments used by the major financial institutions--and therefore it threatens the compensation structure. They chose exactly the wrong approach. It prevented price discovery. That means no one really knows the value of the assets held by the different investment banks and that no one knows who is solvent. This inhibits inter-bank lending-who knows if the guy you're lending to can pay it back?

And, there's nothing to punish. Aside from those who perpetrated fraud in their mortgage lending practices, everything that happened seems to have been perfectly legal. Immoral maybe, but legal.

And that's the problem. The laws that would have prevented this mess were done away with, with very predictable results.

Bernie Sanders said it best: If a firm is too big to fail, it's too big to exist.

If he doesn't [...] then we have learned nothing, and deserve the future crises that will undoubtedly come our way.

"we"? i don't recall anyone coming around to ask me about it. "we" have no leverage, no influence, no power to affect this policy. the most that "we" can do is annoy the people who will make the decisions, like horseflies.

one thing that is certain is that those decision-makers are themselves just as isolated from the ill effects of their policies as the financial execs they'll be bailing out. when the economy tanks, now and in the future, some of "us" will be writing mildly critical op-eds from our comfortable offices, and the rest of "us" will be looking for work...

Wow, imagine Tesla Motors being able to buy GM auto plants for pennies on the dollar....