As I have been advocating for months now on my blog and in phones calls and letters to Congressional contacts, some of the Obama administration’s most resistant regulators and economists – such as Tim Geithner and Larry Summers – in recent weeks have finally conceded that the administration’s financial and regulatory reforms do not go far enough to prevent future financial catastrophe, and have been needlessly “industry-friendly.” Consequently, in Congressional testimony this week, Geithener, following the lead of courageous reformers on ‘too big to fail’ (TBTF) policy such as former Fed Chair, Paul Volcker – an advisor to President Obama and a vocal proponent of de-coupling banks from investment firms; along with others whom I have also written about like Sheila Bair, Elizabeth Warren and the resurgent former New York Governor, Eliot Spitzer — the Obama administration economic policymakers now say that the government should consider breaking up the biggest banks and investment firms long before they fail, or at least impose stricter limits on their risky trading activities — steps that Mr. Obama himself continues to resist.
US Rep (I-VT) Bernard Sanders, Sept 2008
By comparison, our friends across the pond seem to have their priorities in order. The City of London’s top financial regulator, Adair Turner, Chair of the UK’s Financial Services Authority is adamant that banks and investment houses in Britain must bolster their capital ratio standards and put employee needs before addressing executive bonuses and compensation. More on this topic here.
However, comparisons aside, Congress is leading on this issue and the Obama administration has finally endorsed aggressive ‘too big to fail’ reforms. The House Financial Servies committee is about to take up one of the most fundamental issues that precipitated the near collapse of the global financial system last year, and seriously put at risk the financial health of our economy — namely, how to deal with ‘too big to fail’ companies such as AIG, Goldman Sachs and Bank of America. These are banks and financial corporations that are so big, and so central to the operation of the nation’s economy and financial system that the government has no choice but to rescue them when they fail operationally or get into balance sheet trouble due to poor management or highly risky practices driven by greed and profits. Congressman Barney Frank (D- MA), Chair of the powerful House Financial Services Committee, has said his committee would take up more aggressive legislation on the topic, even as lawmakers and regulators continue working on other problems highlighted by the financial crisis, including overseeing executive pay, protecting consumers, pushing for stronger shareholder rights, and regulating the trading of risky derivatives. Channeling the public mood and outrage over the huge taxpayer bailout of the financial industry, Rep. Frank’s recent observation that critics of the administration’s health care proposal had misdirected their concerns — and that Congress would now be adopting “death panels” not for infirmed people, but rather for gravely infirmed “zombie banks” and struggling major corporations.
The administration and its Congressional allies are trying, in essence, to graft the process used to resolve the troubles of smaller commercial banks onto both large banking holding companies and non-bank investment firms and financial services companies whose troubles could again threaten to undermine the markets, as well as the overall national economy. By using this strategy, the administration has signaled its willingness to sign on to any such legislation that reaches the presidents desk.
I think someone was listening, after all. . .
Read more here. . .
Web Resources:
Too Big to Fail, by Andrew Ross Sorkin
Too Big to Fail, in plain English Video
‘Too Big to Fail’? Politico.com
Robert Reich on ‘Too Big To Fail’
