Time to draw Blood

Further in Alan Blinder's When the Music Stopped I am at the Fed's balance sheet where it occurs to me how the administration can finally shoot the weak stragglers heading off into the sunset. So okay Tim Geithner was right in not upsetting the system in the middle of the crisis, but now the kid gloves can be taken off to rein in the moral hazard that the crisis engendered. The weaklings are Citigroup and Bank of America and the Fed could act in a manner similar to the FDIC where it arbitrarily determines it does not like the collateral it is holding from these two banks and tells them to sell themselves off in whole or parts with the threat that the Fed is demanding it's cash back.

Why do this? First and foremost it will do much to reverse the moral hazard of the bailouts where financial institutions realize that eventually bad decisions can put a bank out of business. I resent Citi Group's recent “we were there through out American History” advertisements. Both Citi and BofA do not deserve to be part of our history after their sloppy inattention to good banking and determined empire building, especially Ken Lewis's disastrous rescue of Angelo Mozzillo's Countrywide. I think the TBTF problem would be ameliorated if the Fed could make this move in the name of good banking and thereby leave Congress and lobbyist completely out of it. It would be something for Bank Director's to consider when they go off on a bender, such as Robert Rubin when calculating the existential odds of actions of the bank he is nominally overseeing.