Judgment Day Looms for Banks Still 'Too Big to Fail'

Bloggers debate a Rep. Barney Frank initiative for government control of over-large banks

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"Too big to fail" has become an unavoidable, annoying catchphrase, but the underlying fear--that banks are so large that their collapse would spell the entire economy's doom--still haunts Washington. As part of a many-fronted financial regulation push in coming weeks, Rep. Barney Frank is introducing legislation that would make it easier for the government to "seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans," the New York Times reports. Is Frank merely trying to scare banks into agreeing to gentler controls? As financial heavyweights reap heady profits again, Wall Street-friendly analysts are trying to tamp down the resurgence of interest in regulation, but experts who have been patiently awaiting a crackdown are more hopeful:

  • Just a 'Trial Balloon,' says Lita Epstein at Daily Finance, and one "that's going to quickly burst," though it "might succeed in getting the the financial industry in the mood to negotiate something less drastic." Clearly, she writes, "the White House knows he public won't accept any more bailouts," and "doesn't want to split up the giant institutions, so instead it's looking for a different way to rein them in."
  • Unproductive  "One thing our public officials should not do," write Sanford Weill and Judah Kraushaar, "is get caught up in a debate over 'too big to fail.'" The crisis, they argue in the Wall Street Journal, "was provoked by last year's failure of Lehman Brothers, a company that few, if any, would have argued was too big to fail." So the government shouldn't "get side-tracked" by this "catchy phrase," but should instead "focus directly on how to create and enhance market discipline."
  • We Need Some Sort of Big Bank Regulation  It's true, admits the New Yorker's James Surowiecki, that "most developed nations have banking systems even more concentrated than ours." But the benefit of big banks is unclear, and what is certain is "that too much concentration in finance increases risk, since a handful of dominant players are more likely to make the same kinds of mistakes, and jeopardize the entire system." Which means? "Unless consumers rise up en masse to move their money to credit unions, the market isn’t going to deal with the problem. And that means Washington has to."
  • Goldman's Not Going to Like This, says the Morning Money team at Politico. "Healthy banks" like Goldman and JPMorgan Chase" are disturbingly large, but are likely to argue that "they have thrived under the current regime, paid any government bailout money back as soon as they were allowed, and should not be punished for the sins of foolish risk takers such as AIG." They may also contend "that the problem at places like AIG ... had more to do with disclosure of derivative positions and accounting treatment of complex mortgage-related securities."
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