Banks ARE Backed by the Government

Greeves & Roethler, PLC

In an article posted by Reuters, here, the Kansas City Federal Reserve Chairman, Thomas Hoenig, makes a strong argument that the banks that received TARP money during the 2008 financial crisis exist as government-sponsored entities and should be regulated more stringently.

It is difficult to argue with Mr. Hoenig’s analysis.  It is obvious that these banks are “too big to fail.”  Because of this, the government clearly has taken the position that these large banks are to be backed by the federal reserve.  Therefore, it only makes sense that these banks should have regulations imposed on them to prevent them from going to the federal reserve, hat in hand, and begging for more money due to risky investments that they made on the financial markets.

I, personally, am not a fan of the government supporting any business.  However, I suppose, if the government and the tax payers are going to be required to back the large banks then the large banks have chosen to lose their independence and should, therefore, be required to be forced to follow regulation by the government to prevent the banks from taking unreasonable risks.

Another concerning issue regarding this development is the possibility that these banks will receive preferential treatment under the bankruptcy code.  As many are aware, most student loans are non-dischargeable no matter what bank you received the loan from, so long as it is backed by federal money.  It is not a large stretch to go from that statutory analysis to also conclude that, because the banks are backed by federal money, none of their debts should be discharged by filing for bankruptcy.

The views contained in this article are only the views of Glenn W. Roethler and not that of the firm, Greeves, Price & Roethler, PLC.  Thank you for taking the time to read this article by Tempe, Arizona based attorney and lawyer Glenn W. Roethler.

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