The Wrong Way to Fix 'Too Big to Fail'

Financial experts bemoan Barney Frank's new bill

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This week, Treasury Secretary Tim Geithner and Sen. Barney Frank endorsed a new plan to deal with financial institutions deemed 'too big to fail.' Under the new legislation, if a large bank collapses its rival firms will cover the cost of bailing it out—not taxpayers. It would also grant federal regulators broad powers to seize and liquidate large banks. USA Today lauded the new bill, saying it will force banks to take "fewer risks" making for a "more solid banking industry." But a handful of other financial experts are criticizing the plan. Dissenting opinions complain the bill either does too much, or too little in its aim to "fix the system." Here's what they're saying:

  • Won't Prevent Future Government Bailouts, writes The Atlantic's Dan Indiviglio: "I don't like that there appears to be opportunities for sort-of bailouts through the FDIC and Fed, separately, for non-bank financial firms. Although the FDIC and Fed have historically had some leeway to help out ailing firms, these provisions appear to enable them to provide assistance even outside receivership. The reality is that, even in this new regulatory framework, the government would still be able to assist a firm if it wants, rather than resolving it. I guess we just need to hope it generally opts to let firms fail so the climate of moral hazard doesn't endure."
  • Doesn't Eliminate the Behemoths, writes Bob Burnett at The Huffington Post:"A basic problem that must be fixed is the growth of bank holding companies: banks that accept deposits and also engage in investment banking and brokerage activities. These mega-banks were prohibited in the original Glass-Steagall Act but permitted when part of the bill was repealed in 1999. It's time to go back to the original intent of Glass-Steagall and eliminate the behemoths that played a major role in precipitating the financial crisis."
  • Too Much Fed, Not Enough Capital Requirements, writes David John at The Heritage Foundation: "They...decided to give both the council and the Fed virtually unlimited power to do what they want to a 'too big to fail' financial institution including forcing it to break up completely, sell various subsidiaries, etc. This open-ended power is both dangerous, and very likely to cause even more damage to the financial system than that likely from large financial services companies’ potential failures. It would be far better to limit the potential risk of such a company by imposing higher capital requirements on it. That approach would both limit a firm’s incentive to grow unless it is efficiently managed, and provide a cushion of money that could be used to cover losses in bad economic times."
  • Moral Hazard Continues, writes Republican Congressman Jeb Hensarling in USA Today: "Instead of learning from their collapse, the Obama-Frank bill creates new Fannies and Freddies by implicitly promising bailouts for institutions it deems too big to fail. This ignores the simple truth that the only way to end taxpayer-funded bailouts is to end taxpayer-funded bailouts."
  • It's Too Early to Judge, writes Lita Epstein at Daily Finance: "Don't get too attached to any of its provisions. The legislative process is just starting, and I can guarantee that lobbying for changes will be intense among financial institutions and all interested parties. We can only hope that in the end taxpayers are truly protected from ever having to bail out Wall Street again."
This article is from the archive of our partner The Wire.