Congress and TBTF – Bring in the Bomb Squad
Joshua Rosner examines the House regulatory reform bill, which does not, in its current form, acknowledge that “Too Big to Fail” is too big to exist.
The House draft bill written by Rep. Barney Frank (D – MA) – along with several former Fed attorneys and Treasury staff and consultants — ignores fundamental reality: You don’t employ a bomb squad to sit around and wait for a bomb to explode, you engage them to dismantle it as soon as they find one.
Unfortunately, this bill is one more act of sleight of hand by a congress that, to the detriment of the public, fails to see that banks are there to serve the public good and can be regulated with such a goal. An honest bill would recognize that any institution that is “Too Big to Fail” should be given economic ‘incentives’ (through prohibitively high capital levels and insurance assessments) to shrink or sell off business units. The notion that we do not have the right to break up anti-competitive and oligo-polistic businesses flies in the face of antitrust laws and ignores the valuable lessons in growth demonstrated by Teddy Roosevelt’s trust-busting. Those legislators who are truly seeking to protect the public interest and to be worthy of re-election, should demand that legislation spell out, in plain English, that the entire capital structure of a TBTF institution be wiped out, and its holding company held responsible as a source of strength, before taxpayers are exposed to a single dollar of loss.
If leadership won’t add such language, call your elected official and ask how much they actually receive when they agree to put on the kneepads.
Rather than require the break-up or shrinkage of those institutions, this bill suggests we leave the institution intact until it becomes ‘troubled’ and instead subject it to greater oversight by the same Fed that mismanaged prudential oversight of precisely the large financial holding companies at the center of the crisis. Keep in mind that even on the 1-5 (best to worst) secret rating scale regulators use to define ‘troubled institutions’, BofA was only a 3 and it has been speculated that Citi was only a 2 even as they were begging the government for support. Should we wait to act until an institution is even worse off than they were in the height of the crisis?
This Trojan horse of a bill will recognize and codify the view that we must accept and agree to live in a world where there are institutions that are TBTF. We have chosen to head in the opposite direction from the responsible approach suggested by both Bank of England Governor Mervyn King, who wants to break up TBTF institutions, and other European regulators who are likely to oversee the breakup of TBTF institutions, ING and Lloyds.
Each of the elements of this historic and flawed approach was carefully negotiated in close coordination with the most interested parties – that is, the bankers and their friends. Mock hearings will be this week and the complete bill will be marked up mid-week next week. When the hearings begin, the public should demand to know how many of these “experts” have ever taken money as consultants or employees of the “Too Big To Fail” (TBTF) banks or the Federal Reserve System. You can play along with the game show at home by watching the testifying “experts” closely. Try to keep score of how many of them identified the collapse of our credit markets in 2006 or 2007. You can go on to the bonus round and score which of these “experts” expressed a view or
highlighted the risk that the Fed’s “emergency powers” would create a moral hazard and be used to bail out our banks. Importantly, Senator Chris Dodd put these powers into legislation in the dark of night in 1991 at the request of Goldman Sachs and other large beneficiaries of government support in this crisis.
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