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The Banks Already Got Their Bailout - Now They're Getting a Cushy Bankruptcy Option

Last month, two professors wrote an article for the New York Times about federal lawmakers' "bankruptcy-for-banks" bill, in which they opine that the bill is sound but needs fine-tuning.

Should banks have the option to file bankruptcy?

We already bailed them out. Anyone who lived through the Great Recession knows that. (And, as many have pointed out, very few people, if any, have been held accountable for causing it.) So, the question is whether or not banks should have this option.

"[I]f banks can be reorganized in bankruptcy," the professors write, "the possibility of a win-win result is in the cards. We could restructure a big bank to stop it from damaging the economy, but without having to bail it out."

The premise is relatively simple:

A catastrophic banking failure could cause real economic damage, which might lead government regulators to bail banks out in order to prevent that from happening. By contrast, the failure of companies in other industries wouldn't pose that risk.

Thus, we have the bankruptcy-for-banks bill.

But what makes the bill cushy?

The professors have identified a couple of serious problems with the bill as it stands, including:

  • The banks themselves - not the government - would decide whether to go through with bankruptcy. Regulators and "creditors" (American taxpayers) wouldn't be able to force bankruptcy. Bank executives could very well decide not to file and hope instead for a bailout. After all, it worked for them in 2008.
  • Unlike everyone else - like average citizens facing overwhelming debt who need bankruptcy relief - this bill would exempt bank executives from liability and lawsuits stemming from naughty behavior prior to filing bankruptcy.

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