Too Big

It is absolutely remarkable how the majority in Congress (the people who pose legislation and control its flow toward passage) can consistently get it so wrong. The proposed banking legislation is just another example.

Everyone wants to see serious, even punitive, legislation passed that will reign in irresponsible behavior on Wall Street. Everyone wants to ensure that the taxpayers will never again be asked to bail out the financial Masters of the Universe when they again make very bad decisions and behave more like Ponzi artists than a financiers. And yet, Chris Dodd (you know, the same guy who in early 2008 suggested that there were no problems with the banks or with Fannie and Freddie) now submits legislation that sounds good, but actually accomplishes almost nothing.

Jonathan Macey comments:

Chris Dodd and the other politicians working on financial reform claim that their proposed legislation will end the long-standing U.S. policy which posits that the biggest financial institutions are "too big to fail" and therefore must be bailed out every time they find themselves in financial distress. At the core of the "Dodd bill" is the premise that regulators need yet more discretion, more power, and more regulatory tools if they are to succeed at last in exorcizing long-entrenched too big to fail strategies from the heart of our regulatory canon. The Dodd bill is fundamentally flawed because it fails to address the basic fact that the "too big to fail" is a political problem, not an economic problem. The only way to eliminate too big to fail as the regulatory solution of choice is to break up any financial institution that is or becomes too big to fail. Unfortunately, the Dodd bill does not break up existing banks.

In a modest feint in the right direction, by proposing to cap banks' size, the Dodd bill does reflect an appreciation of the fact that the moment a bank becomes too big, it simultaneously becomes too big to fail. Specifically, the proposed law bars existing banks from acquiring or merging with competitors if the resulting entity's liabilities would exceed 10 percent of the total U.S. banking system (unless, of course, the regulators decide to make an exception).

On the one hand, this indicates that the gnomes in Washington finally realize that size has gotten to be a problem for bank regulators. But the bill ignores the painful but embarrassing fact that there are around a dozen financial institutions that are already way over the too-big-to-fail threshold.

The dirty dozen need to be broken up … now! Defenders of Wall Street will wail about government intervention (just as they did when the telecom monopoly of AT&T was dismantled), but Dodd’s bill must have more teeth and must include a down-sizing provision for existing huge banks.

If a financial institution is too big to fail, it’s too big to exist.