Jon Huntsman's Detailed Plan to End 'Too Big to Fail'

By Conor Friedersdorf

He's considered the problem more extensively than his rivals, and news of the Fed's secret lending makes his plan more relevant than ever

Jon Huntsman - Scott Audette Reuters - banner.jpg

During the financial crisis, the Fed secretly committed trillions of dollars to bail out "too-big-to-fail" banks, which wound up making billions in profits as a result, Bloomberg Markets reports in a huge scoop. My colleague Derek Thompson and Felix Salmon have smart takes on what the news means.

I want to focus on the political angle. Even folks who think the Fed did the right thing agree that their having to act wasn't ideal and came with a lot of negative side effects. So how do we stop this from happening again? Only one of the Republican candidates, Jon Huntsman, has put forth a detailed answer. His premise is that if a financial institution is so big that it warrants federal bailouts, then it's too big, full stop.

James Pethokoukis offers the most concise summary of Huntsman's proposal:

1. Set a hard cap on bank size based on assets as a percentage of GDP. (This cap would be on total bank size, not using any of the illusory "risk-weights" currently central to thinking about bank accounting. The lowest risk assets for banks in Europe, supposedly, are sovereign debt--yet this very same debt is now at the heart of the current crisis.

2. We should have a similar cap on leverage--total borrowing--by any individual bank, relative to GDP.

3. Explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy.

4. Impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. The fee would incentivize the major banks to slim themselves down; failure to do so would result in increasing the fee until the banks are systemically safe. Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.

5. In addition, focus on establishing an FDIC insurance premium that better reflects the riskiness of banks' portfolios. This would provide an incentive for banks to scale down, allowing the financial system to absorb them organically in the event of a collapse.

6. Strengthen capital requirements, moving far beyond what is envisaged in the current Basel Accord. The Accord is a mixture of regulatory oversight and political compromise. As a result, the U.S. has allowed its banking policy to be determined by the "least common denominator" among European and Asian countries, many with a long history of not being prudent.

It would be nice if everyone in the GOP field had a plan as detailed, but if you agree with the premise that "too big to fail" must end, this is far and away the best idea for getting there that anyone has yet offered.

The full plan is here:

Huntsman Financial Reform Proposal


This article available online at:

http://www.theatlantic.com/politics/archive/2011/11/jon-huntsmans-detailed-plan-to-end-too-big-to-fail/249144/