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Wednesday, March 25, 2009

Geithner Outlines 'Resolution Authority'

Business week posted an article on Geithner's legislation proposal and outlined what 'Resolution Authority' is actually being requested. The article is referenced below.

'The goal of the proposal is to give the government better tools to handle the failure of giant and deeply intertwined financial firms like insurance behemoth American International Group (AIG) and banking titan Citigroup (C)—companies'

The key phrase being 'like AIG and Citigroup' . Will this fate soon fall upon AIG and Citigroup themselves?

'The proposal would also effectively shift some authority now held by the judiciary to the executive branch in an effort to speed up what could otherwise be slow-moving bankruptcy proceedings.'

When 'Resolution Authority' is applied, what effect will this have on effected financial institutions?

The last section in the article called 'Preventing Firestorms', talks about stemming systemic risk.

Ultimately, if this legislation is passed, I feel that the US government will have the ability to ultimately say, 'We have the necessary tools in place to prevent big institutions, who are too big to fail, from failing'. Systemic risk is exactly the failure of any of these type of institutions. The legislation proposes a US government mandated controlled bankruptcy, where all creditors and debtors expeditiously renegotiate terms of existing debt.

Will this even pass? How will the contracts be renegotiated? Will effected financial institutions sue the US government for full values of their contracts?

This 'Resolution Authority' is unconstitutional, and too vague. If the government did have this power for AIG and Lehman, what would AIG and Lehman look like now?

FAZ is now the play.

Please share your thoughts and predictions below.