“The orderly failure of a large complex financial institution.”

This should have been posted last week.. not sure what happened… probably just brain freeze on my end.

———–

US Treasury Secretary Hank Paulson is doing a fine job of buttressing global confidence in the US economy.

In an optimal system, market discipline effectively constrains risk because the regulatory structure is strong enough that a financial institution can fail without threatening the overall system. For market discipline to constrain risk effectively, financial institutions must be allowed to fail. Under optimal financial regulatory and financial system infrastructures, such a failure would not threaten the overall system.

To address the perception that some institutions are too big to fail, we must improve the tools at our disposal for facilitating the orderly failure of a large complex financial institution. As former Federal Reserve Chairman Greenspan often noted, the real issue is not that an institution is too big or too interconnected to fail, but that it is too big or interconnected to liquidate quickly.

There’s more in the speech, but that’s the bit that got people’s attention.  There have been rumors swirling for months around the financial health of a number of large US firms including Countrywide, Lehman Brothers, Wachovia, Washington Mutual, Citibank, and other large firms.   Mr. Paulson’s remarks tell me that he’s expecting at least one of these companies to go kaput some time relatively soon, and he’s sending up the warning that right now the Treasury & the Fed are ill-equipped to handle the fallout.

There’s been little but bad news flowing out of Wall Street recently.  Whether it’s automakers, home builders, or financial institutions, there seems to be an almost endless litany of woe emanating from lower Manhattan.   Mr. Paulson’s remarks only throw more gas on that fire if you ask me.

Stay tuned… and keep an eye on the health of the bank(s) you do business with.

HT:  Mish

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One Response to “The orderly failure of a large complex financial institution.”

  1. […] raised the possibility of problems at the bank a few weeks ago.   Maybe this is one of the ‘large financial institutions‘ Treasury Secretary Paulson was talking about last […]

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