/>Created 06/10/2009 - 9:51am
I stopped reading The Wall Street Journal editorial page when it soared off into wingnuttery, writing tomes on the imaginary conspiracy to off Vince Foster and other fantasies. The news pages remain useful; the editorial page hasn't improved much.
But as they say, even a monkey at a typewriter eventually will write something interesting. And on Tuesday, the lead editorial  of the Journal, "Making Failure an Option," made a strong argument.
The big banks are lining up to pay back the money Treasury gave them under TARP, the Troubled Asset Relief Program, after passing the Treasury's softball  "stress test." Eager to avoid any restrictions on pay, bonuses or activities, they are rushing to declare their health and independence.
Economist Simon Johnson explains why banks should get the same treatment as nuclear power plants and spells out the goals of a Capitol Hill meeting he will be speaking at Thursday sponsored by a coalition that aims to "break up the banks." Learn more. 
But this raises the fundamental question of what economists call "moral hazard," only multiplied many times over. These banks have been deemed officially as "too big to fail." When they operate, it is with the implicit backing of the U.S. Treasury. They will be able to borrow money more cheaply as a result, and will be tempted, big time, to take greater risks. Risk and leverage create the potential of bigger bonuses for bankers. But they can gamble with their losses implicitly covered by taxpayers. This is a recipe for renewed catastrophe.
The Treasury Departments under both Bush and Obama decided against taking over and reorganizing the big banks. Instead both chose to subsidize them and nurse them back to health. Congress and the administration are turning their attention to new regulations for finance, but congressional action won't take place for a while--and initial proposals don't include either a lid on size or turning the big banks into public utilities.
Just telling them they are on their own won't work, the Journal rightly concludes. The markets won't believe it. So the Journal suggests, why not let one of them fail? And then it nominates Citigroup to be thrown under the bus.
"Resolving Citi--by either forcing it into a strategic partnership, if anyone will have it, or selling off its assets and breaking it up--wouldn't be cheap," the WSJ editorialist writes. But it would eliminate one of the leading "zombie" banks, end the "slow bleeding of taxpayer money into the bank," and send the banks a message: You are on your own and we really do mean it.
Citibank is essentially already owned by the Federal Government. As the paper notes, it has received insurance on $300 billion in deposits, some $63 billion in FDIC-guaranteed debt, and another $300 billion or so in taxpayer guarantees of its toxic assets, $45 billion in direct capital injections, and more. It is, along with Bank of America, the weakest of the major banks. And Citibank has a checkered history of needing bailouts from huge bad bets--from the time it speculated on Russian bonds on the eve of the Russian revolution to betting on loans to Latin American governments in the 1980s, to needing bailouts twice in the most recent crisis.
Treasury has joined with the banks in peddling confidence, so it is unlikely that the editorial writer's advice will be taken. But that leaves the question: If the banks are free of the TARP but officially too big to fail, what is to keep them from taking larger and larger gambles with other people's money, knowing that they pocket the profits and taxpayers will cover their losses? You don't have to believe in Vince Foster conspiracies to think this is a question that deserves a straight answer.
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