While the process of restructuring the finance industries continues, I thought a little bit of a look at some other industries attempting the same process may well be in order. The US car industry – that one that occasionally produces a car or two, but it mainly concerned with pensions and health benefits – is a good example. As this article in the New York Times (thanks, Catallaxy) has pointed out, it has been restructuring for about 30 years or so.
The firms in it, being “too big to fail”, continue to sit over the remains of their once proud brand names. The government keeps trying to send them a little bit more help to get them through the phase they are going through, but never actually achieving anything like a lasting solution to get them back into a viable position.
The pity is that I see this as a possible future for the banking industry as well. Fortunately there are a lot more banks out there than just the three (although Australia comes close with four) but the rest of the analogy holds reasonably true. The government attempts to hold the system together seem to be doomed to the perpetual twilight of the Japanese banking system a la 1990 – with the US legislators trying to help solve the problems with accounting standards changes rather than actually looking at the real problems – a lack of either solvency or liquidity.
As the Japanese found out, that sort of jiggery-pokery with the contents of financial reports – making them less clear – just leads to one thing: a distrust of the reports, leading on to a lack of investor confidence.
Surely this must be avoided. To me the only solution is the one that was selectively applied up front – weak banks should be allowed to fail. The US has a good system to allow this to happen – Chapter 11 allows for a restructuring and recapitalisation from private sources while continuing to trade. Bankruptcy, in the event Chapter 11 does not work, allows for the assets to be realised, creditors paid out and the husk of the bank to be put down, rather than being zombies hanging around, soaking up literally trillions of dollars from productive uses.
It would be painful while it is going on, no doubt, but an extended period of restructuring, as per the US car industry or Japanese financial sector, would surely be worse in the long term. It would also serve as a timely reminder that no-one, anywhere, should be too big to fail. That simple fact tends to concentrate minds wonderfully.