This is wildly inappropriate. Elizabeth Warren knows a lot about bankruptcy--but just because it has the word "bank" in it, doesn't make her an expert in banking. Her specialty isn't even in corporate liquidations; she mostly writes about consumer bankruptcy. The highly specialized world of bank resolution is not one where she has, as far as I can tell, very much expertise.
Moreover, this isn't her job. Her job is to watch where the TARP funds go and monitor their effectiveness, not lecture Congress on how hard to punish wayward bank executives. This Forbes column is scathing:
We seem to have lost an oversight panel, and gained another voice shouting slogans at congress.There are indeed very good lessons to be drawn. There has to be a process to decide which institutions are solvent. One needs an orderly process for dealing with those that are insolvent, particularly if they pose systemic risk. It is unproductive to prop up "zombie" banks. And so on. Most important is to understand why certain policies worked as well or as poorly as they did and what the long-term consequences were. This kind of analysis is largely lacking in the panel's reports.
But the Congressional Oversight Panel Report seems to have come to a more controversial conclusion. The COP argued that historical lessons show that the most effective response to banking crises has involved a combination of ousting "failed management" and liquidating banks. The April report takes on the Treasury's responses in these areas and questions how effectively it has implemented its goals in dealing with the crisis.
The report essentially argues for nationalization on the grounds that, under government reorganization, bad assets can be removed, failed managers can be ousted or replaced and business segments can be spun off from the institutions. "Depositors and some bondholders are protected, and institutions can emerge from government control with the same corporate identity but healthier balance sheets," the report argues, parroting a position that has been staked out by many prominent economic pundits.
Clearly, this is Elizabeth Warren's particular crusade against the banks, since a majority of panel members dissented from the direction the report took and two refused to sign off on it at all. Her letters to Secretary Geithner and Chairman Bernanke stop just short of attacking them for trying to restart the market for asset-backed securities. These markets have been an important part of the financial intermediation system for decades, funding student loans, consumer credit and small businesses. But Professor Warren has had a long-standing antipathy to consumer credit markets.
The sad thing is that the COP now seems completely politicized and fractured at a time when there are important questions to be asked. There is plenty of room for thoughtful analysis of the stress tests. For example, how do accounting rules and the evolving economic contraction affect their validity?
Finally! I was watching Elizabeth Warren on Morning Joe recently pushing policy prescriptions and I thought "is this appropriate?" She's supposed to be . Why has no one until now called her on this?
I accidentally deleted the second half of the the second sentence. I meant to say she is supposed to be a watch dog trackign TARP spending not pushing policy prescriptions.
The Forbes column this blogger relies on was a hatchet job that made several important factual errors and exaggerations.
The Congressional Oversight Panel's mandate is to report to Congress on whether the Treasury's strategy is using the money as wisely as possible to try to fix the financial system. And COP has fulfilled its mandate in six well-researched reports that were written with much input from experts in the field. Most of the reports had the support of one or both of the Republican COP appointees.
The Forbes column (and hence Ms. McArdle, who clearly didn't even bother to read the report--or its executive summary--herself) completely misrepresents the conclusion. The report specifically states that Treasury's current strategy may work and DOES NOT recommend a major shift it strategy at this stage.
The report does not recommend wiping out bank shareholders, though it does say that such an option should be considered if things get much worse. The report, Professor Warren, and many commentators on the right and left, do suggest that the bank managers who got the banks into such trouble in the first place might not be the best people to get the banks out. Firing bad managers is not about punishment; it's about ensuring that the banks we have entrusted with $590 billion in taxpayer funds (and trillions more in guarantees) are led by people who will be careful with our money. This is about making sure TARP is effective, as Ms. McArdle says.
And for the record, Professor Warren has a great deal of expertise in corporate bankruptcy, having written the textbook for the course which covers both consumer and corporate bankruptcy.