TBTF

When a company wants to fend off a hostile takeover, its board may seek to put in place so-called “poison pill” defenses – i.e., measures that will make the firm less desirable if purchased, but which ideally will not encumber its operations if it stays independent.

Large complex cross-border financial institutions run with exactly such a structure in place, but it has the effect of making it very expensive for the government to takeover or shut down such firms, i.e., to push them into any form of bankruptcy.

To understand this more clearly you can,

1. Look at the situation of Citigroup today, or
2. Read this new speech by Senator Ted Kaufman.

I will limit my remarks today to this central aspect of the challenge we face.

In particular, does this bill take the necessary steps to reduce the size, complexity and concentrated power of the behemoths that currently dominate our financial industry and our economy? If not, what is the justification for maintaining their status quo, what is the risk that one might fail, and – if that were to occur – what is the likelihood that the American taxpayer will once again have to bail them out?

The answer is that there is little in the current legislation that would change the behavior or reduce the size of the nation's six mega-banks. Instead, this bill invests its hopes in two ideas: First, that chastened regulators (who failed miserably in preventing the crisis) will this time control these mega-banks more effectively – today, tomorrow and decades into the future. And, second, that a resolution authority designed to shield the taxpayers from yet another bail-out will be able successfully to unwind incredibly complex mega-banks engaged across the globe.

In the midst of the Great Depression, Congress built laws that maintained financial stability for nearly 60 years. Through the Glass-Steagall Act, which included the establishment of the Federal Deposit Insurance Corporation, Congress separated investment banks, which were free to engage in risky behavior, and commercial banks, whose deposits were federally insured. As I described in a previous speech, during the last 30 years, that division was methodically disassembled by a deregulatory mindset, leading to the reckless Wall Street behavior that caused the greatest financial crisis and economic downturn since the 1930s.

What walls will this bill erect? None. On what bedrock does this bill rest if the nation is to hope for another 60 years of financial stability? Better and smarter regulators, plain and simple. No great statutory walls, no hard divisions or limits on regulatory discretion, only a reshuffled set of regulatory powers that already exist. Remember, it was the regulators who abdicated their responsibilities and helped cause the crisis.

Thus far, on the central aspect of “too big to fail,” financial reform consists of giving regulators the authority to supervise institutions that are too big, and then the ability to resolve those banks when they are about to fail. Upon closer examination, however, the former is virtually the same authority regulators currently possess, while the latter – an orderly resolution of a failing mega-bank – is an illusion. Unless Congress breaks up the mega-banks that are "too big to fail," the American taxpayer will remain the ultimate guarantor in an almost certain-to-repeat-itself cycle of boom-bust-and-bailout. read on

Massive banks cannot be controlled, at least not in the US context; we are not Canada. “Smart regulation” in this context is an oxymoron. Our regulators have been captured by the ideology of finance for 20 years; the big banks industry are not about to let them out on parole now.

For a long while, the Obama administration insisted that size caps for banks were not on the table. Then, in January, the president himself announced the Volcker Rules – which include a size cap for banks. We’ve argued this cap should be even tighter – big banks can get smaller in an orderly fashion and regulators can help - but still any cap would be a step in the right direction.

Yet there is no size cap in Senator Dodd’s bill.

Given that this White House has shown it can achieve considerable things, when it applies itself, why not pursue the Volcker Rules in full?

The White House is clearly not afraid of the business lobby – Deputy Secretary Neal Wolin took on the Chamber of Commerce this week regarding the Consumer Protection Agency for Financial Products; his tone was strong and his arguments were telling.

Yet the White House, Senator Dodd, and perhaps even Barney Frank are all stuck on one issue – they can’t contemplate making our biggest banks smaller (or even limiting their size).

It’s as if a very clever political poisoned pill has been put into place. If you act against the big banks they will …. What exactly? Threaten to prolong the recession? Help your opponents get elected? Run ads against everything you believe in?

Whatever the reason, write it down and think about it. How do you feel about a small set of big financial firms having this kind of power? How is that good for the rest of the business community, let alone regular citizens and our democracy?

This administration is perfectly capable of taking on the big banks. All that is missing is a little clarity of thought and a fair amount of political courage. Or they can just call up Senator Kaufman.

Chris Dodd wants to go out in blaze of glory, not with a bill that makes no sense at all on its most critical points.

Ted Kaufman is turning into a relentless critic, Elizabeth Warren is fast becoming a folk hero, and Paul Volcker is poised to make a major speech in Washington on Tuesday. Is Volcker likely to toe the party line and defer to Senator Dodd – or will he lay out in forceful terms what reforms would really mean, i.e., what are the true Volcker principles, who has them, and how would you know?

Financial reform might make for good television after all.