Too Big to Fail v. Too Small to Survive

By: Daniel Scheeringa

The Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) has issued its final report, and the TARP program is projected to cost much less than forecast.  Unfortunately, TARP didn’t solve the original problem of “too big to fail”.  The problem is worse today, and the legislative solution may make things even worse.   

Moral hazard is when rational actors take bigger risks than they otherwise would, in the knowledge that someone else will bear the risk.  Although there were previous examples of the moral hazard of bailouts[1], the greatest illustration of this concept came in 2008.  As the financial crisis broke, 18 large investment banks received $208 billion in TARP money to save them from insolvency after they made risky bets on CDO’s.  As the report states, in the case of AIG, the guarantee was extended not only to AIG itself but to its Read the rest

So Sue Me!

 

It is not every day someone says they want to be sued in federal court. But, in fact, Mr. Rajat Gupta, a former board member at Goldman Sachs and Procter & Gamble, is doing just that. Mr. Gupta sued the Securities and Exchange Commission claiming that the SEC cannot pursue their current administrative case against him because such a case would need to be brought in federal court. (It is alleged that Mr. Gupta fed Raj Rajaratnam inside information about both Goldman Sachs and Procter & Gamble which was used by the Galleon hedge fund investment advisors.) Recently, the SEC delayed Mr. Gupta’s administrative case for at least 6 months. Not only is this bizarre case legally fascinating but it places the potency of a section of the monumental finance-reforming Dodd-Frank Act under siege. 

 

Gupta seeks a federal injunction to prevent the SEC Read the rest