shopyield.com

Bloomberg interview with former Bank of England policymaker William Buiter on the Federal Reserve and Wall Street… (running time ~ 4 min)

From FT.com on AIG, systemic risk and a pre-bankruptcty regime for systemically important institutions…

~~~~ “ By keeping AIG technically solvent, the bond holders and other senior unsecured creditors of AIG are kept current on interest and principal. AIG’s debt sells at a steep discount relative to US Treasury bills and bonds, reflecting the market’s perception of its fragile solvency. If the government were to nationalise AIG now, while it is still technically solvent and a going concern, the senior unsecured creditors would all be made whole - AIG’s debt would effectively become US Treasury debt. 

Saving AIG’s unsecured debt holders and other unsecured creditors would be unfair.  It would also be a terrible distortion of future incentives, by encouraging reckless lending to large financial institutions - institutions deemed to large, to interconnected or too politically well-connected to fail.  It would be the mother of all moral hazard.

Here we run again into the incomprehensible fact that, almost 15 months after the start of the crisis, the US Federal authorities have not yet created a special resolution regime (SRR) with prompt corrective action (PCA) powers  that would allow a duly appointed Administrator or Conservator to take any systemically important institution into Administration/Conservatorship before the normal tests for insolvency (balance sheet insolvency or liquidity insolvency) have been met….

…When it became obvious that AIG too was too large or too interconnected to fail, the SRR net should have been extended to AIG also.  Surely someone in a position of responsibility in Washington must have a little list with the names of the systemically important financial institutions?  There has to be an SRR with PCA powers for all these institutions.  There is no excuse for the absence of such a regime for all financial institutions except for commercial banks.

In the absence of a proper SRR for AIG, nationalisation of AIG threatens to make all unsecured creditors whole.  That would be disastrous for medium and long-term financial stability.  I very much hope a way will be found to impose a charge/haircut on all unsecured creditors if AIG gets nationalised completely.  I also hope that, if the authorities decide not to nationalise AIG completely at this stage, they will still succeed in making the senior unsecured debt holders and creditors of AIG pay a hefty price for this undeserved financial support….” ~~~~