Many traditionalists, including Warren Buffett, lashed out at the stress tests as wrong and unnecessary. He was quoted in the Financial Times complaining that Citigroup’s high-profile problems had tainted the entire industry. Most of the banking institutions were relatively healthy, he said, and in any event, fourteen of the nineteen banks being stress tested could easily be resolved under the FDIC’s normal processes if they got into trouble.
Buffett was right. But the truth is, I had no place to turn to find allies to fight these ill-conceived ideas. I had hoped that the new administration would be tougher on the banks. Instead, it was bailing out all the big guys. That meant that neither the OCC nor the Fed would have to suffer the embarrassment of an FDIC resolution of any of the big banks they regulated. The little banks would be subject to our harsh process if they failed, but who cared about them? No one at Treasury, the Fed, or the OCC was going to challenge that. I was alone. There were a few token conversations about moral hazard, and we tried to include language suggesting that the government would support only new investors. But Tim was going to get what he had always wanted—the propping up of all the big banks. Some shareholders would have to accept a reduction in the value of their shares, but big institutional bondholders, who should have been subject to the discipline of the market, would be fully protected.
Excerpt From: Bair, Sheila. “Bull by the Horns.” Free Press. iBooks.
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