Market Discipline-WHAT?

There are many questions surrounding our country’s latest Bail Out. Is there market discipline if certain banks are being bailed out and others aren’t? What about a free market system whereby banks should be allowed to fail? – Would it really be catastrophic if this happened? Which banks should be bailed out and why? Are the banks using the money the way it was allocated to them, or are they using the money to buy up other banks?

Did you know that AMTRAK was created out of the Bailout of Penn Central (was our nation’s largest railroad). In 1970 Penn Central announced a need to declare bankruptcy. Here’s the catch – the biggest banks of that time owned a lot of Penn Central’s stocks AND the banks’ officers were Penn’s Board of Directors. By the time the public was informed of Penn’s status, CHASE happened to have sold 262,300 shares of stock. The Federal Reserve and Congress still came to the rescue. Out of this, came AMTRAK – 85% of its stock was owned by the government and, of course…we the taxpaying people. So, the banks were fine, the losses were passed on to the people. This surprises most people. Does this surprise you?

In Chapter 3 of “The Creature From Jekyll Island”, G. Edward Griffin outlines many past bailouts; Penn Central, Chrysler, New York City (yes, the actual City government of New York), and Lockheed Martin. One of the most interesting case studies in my opinion was the bailout of the Commonwealth Bank of Detroit. This bank was a relatively small community bank that served in minority neighborhoods. A bailout occurred under the guise that the interest of the communities this bank served would be drastically compromised, i.e. The banking community wouldn’t have as much choice and the balance of power would be tilted into the “hands of a few”.

So what really happened with this bailout? The FDIC guaranteed the bad debt, Commonwealth Bank of Detroit (CBD) was sold to a firm funded by Saudi princes, which is now Comerica, and CHASE walked away unscathed.

Do you think this bailout had anything to do with the concern that minorities might not be served? My opinion is that dealing with any issue as it relates to potential discrimination is at the very least, difficult. I go back to my question: Would it be better to have a bailed out bank serving a community, or better to allow institutions to fail and retain the free market system? To put it another way – In this case, if CBD wasn’t bailed out, and failed, would the community suffer, or would it correct itself? Keep in mind that 11 years later, CBD does not exist ­ the community does. I guess you know my opinion!

What’s YOUR opinion?

Megan McDonald, Licensed Mortgage Planner
Excel Home Lending
383 Inverness Parkway, Suite 140
Englewood, CO 80112
Cell: 303-717-9995
Fax: 303-468-6133
http://www.excelhomelending.com
http://www.mcdonaldlendingservices.com