I would not likely prevail in any argument with a true expert about the propriety of the standards generally used to determine whether a particular institution is “unsafe”, “unsound”, “well capitalized” or any of those things.
But we ought to at least consider that those standards by which, e.g., “soundness” is determined are really just conventions.
I’m old enough to remember the fluidity that once existed in some of those things. At one time, what is now understood as “well capitalized” depended on the movement of the institution’s assets, and was lower than it is now. So, for example, a fast-growing institution was required to have a lower equity in an absolute sense than one that was slow-growing. An equity position that was considered quite adequate 30 years ago will get one shut down today.
Further, there are now these “trip wire” standards that cause institutions to auger in. My understanding is that AIG stepped on one, in effect, when Moody’s dropped its rating, automatically causing AIG to be required to come up with billions of dollars in credit reinsurance that it didn’t have in its piggy bank. It really didn’t necessarily mean that Moody’s was right or that AIG was a hazardous debtor or that the reinsurance bond was the right amount or anything. I’m not saying AIG did not, for some reason, become scarier than it was a couple of years before, but I am saying that crossing a number of lines that are essentially arbitrary does not necessarily make an institution perilous, since the overall business of the institution is what really determines its soundness as an enterprise. “Insolvency” is generally defined to mean that one owes more than one owns and cannot timely meet one’s obligations. The two segments of that definition are not necessarily coincidental, particularly when the second part is readjusted according to a minefield of potential readjustments, and when one’s access to liquidity is subject to sudden change based on criteria that are essentially conventional.
So what we have here, at least to a degree, is a series of institutions which have crossed lines that do not necessarily define, accurately, their long range ability to survive. In other words, they have crossed “fear factor” lines that did not even exist some years previously. What, for the most part, the Fed and Treasury have done is ground the current in the trip wires for now. If the Fed and Treasury are correct in believing that doing so will reasonably ensure the long term viability of certain institutions, then one must question whether the trip wires were reasonably placed to begin with.