Plan would target firms 'too big to fail'
Congressional leaders are expected to propose a plan requiring large banks, brokers and insurance companies to set aside reserves for bad times, and oblige big banks to write up something like a living will. John Dimsdale reports.
FDIC Chair Sheila Bair testifies at a Senate hearing. (Alex Wong/Getty Images)
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Kai Ryssdal: Speaking of things we haven't heard about in Washington for a while, too-big-to-fail is back. The chairman of the Federal Deposit Insurance Corporation, Sheila Bair, resurrected that phrase today. She told a banking conference there's a growing consensus over ways to dismantle banks and other financial institutions that are bigger than they ought to be.
We're expecting to hear something about this from Congress as soon as tomorrow. A plan that would force big banks, brokers and insurance companies to set aside extra reserves, keep more money in the bank as a hedge against bad times. And, if the times get too bad, the plan would give Washington more power to get rid of management and restructure debts.
Our Washington Bureau Chief John Dimsdale reports the legislation would also oblige big banks to write up something like a living will.
JOHN DIMSDALE: The proposal would require each big financial company to come up with a plan for its own demise in the event of a crisis. Big firms would have to show how their investments and debts would be covered if they fail.
Stephen Lerner, with the Service Employees International Union, says the requirement will protect taxpayers.
STEPHEN LERNER: If you can't describe, if your deals go bad, how it's going to get resolved without tanking the entire economy, then that's a problem. So, we have to get out of this trap where no matter what the banks do we get stuck here with the burden.
If big banks add innovative and possibly risky products or investments to their portfolios, they would have to update their living wills.
Scott Talbott with the Financial Services Roundtable thinks the requirement is a good idea, but says the industry has a concern about too much disclosure.
SCOTT TALBOTT: The challenge will be that you want to provide the markets with enough detail that they have certainty your plan makes sense, but at the same time, you don't want to give away competitive advantages and corporate secrets.
Perhaps it would be better if regulators themselves put together the roadmaps for unraveling, says finance professor Kevin Jacques at Baldwin Wallace College.
KEVIN JACQUES: What you want is you want the government regulators to have a plan in place that basically says to these institutions, if you take too much risk, if you get yourself into too much trouble, we're going to allow you to fail, and we're going to unwind you.
The proposal will have a congressional hearing on Thursday.
In Washington, I'm John Dimsdale for Marketplace.
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From Milan, MI, 10/30/2009
"Too big to fail" sounds very much like "in violation of anti-trust legislation" to me.
From Bayside, NY, 10/27/2009
I though my first posting was lost so I rethought and did it over:
Allowing banks to merge with investment banks and brokerages required the repeal of legislation passed in 1933 called the Glass Steigel Act. That wise legisation was enacted after the tumultuous period of the late twenties -early thirties that took the economy from a casino exuberance to massive business failures, unemployment, bread lines and hungry children including my late father.
Glass Stiegel created a fire wall between banks where the public can park or borrow money and brokerage houses which are more speculative. The FDIC was created at the same time to guarantee a modest amount of savings. The FDIC was never intended to prop up the speculative activities of a Goldman Sachs or other Wall Street Chicanery.
Despite the wise legislation of 1933 which led to stability and later prosperity, it met opposition by shills for the investment banking firm of goldman sachs. Glass Steigel Act. Was rescinded at the insistence of Greenspan and Rubin to appease their friends at Goldman Sachs.
I ask what did Goldman Sachs do to deserve different treatment from Bear Stens and Lehman?
What was the difference? Watch It’s a Wonderful Life with Henry Fonda, Fonda’s character almost ends his life in the desperation of the depression. How many people now have lost their homes because they lost their jobs after the banks stopped lending and the neitghbors stopped buying. Liquidity dried up and Goldman Sachs gives a rat’s @@#
Requiring the mega mucks who are self professed to be too big to give a $#@@
I have this to say, get a plan man. It's way past time to bring some accountability back; quite frankly though I'll beleive it when I see it.
From Bayside, NY, 10/27/2009
One would expect sufficient gov't oversight to provide regulations be imposed to avoid the likelihood of a toxic meltdown. That was the case in 1933. I've got a vauge recollection in College being assigned reading a chapter in either Accounting, Banking, Economics or History about banking regulations instituted after the '29 crash. Those guys Glass- Steigel knew of what they spoke. It took us through to stability and later prosperity. It worked quite well until it was repealed in 1999 at the insistence of Rubin and Greenspan; Clinton succumbed to the insistence of Goldman .
Assume for a moment that just as a screwdriver has a specific job separate from a hammer, that a saving and loan has a distinct job to borrow John Q Public's money to lend to other citizens who want to loan to buy a house or open a small busiess on Main St. There is a place in the world for an investment bank and brokerage but an investment bank should not be protected by FDIC. FDIC should be available to protect the saving and loan and commercial bank too.
allowing the large commercial banks and the investment banks to merge and trade with dirivatives was tantamount to playing Russian Roulette.
10/27/2009
Some might say that this idea is just another way of exposing corporate America to the death penalty. This notion neatly packages the inevitability of two outcomes - death and taxes - that is, the effects of a corporate death is alleviated by requring that the bank's current earnings must be saved (taxed) so that it may have a proper funeral without consuming the funeral party.
This is not the first time this idea has been raised. For example, the decommissioning of nuclear power plants had a similar notion - at the time the power plant is put into service, there should be a fund in place to clean it up for its inevitable proper burial. After all, even nuclear power plants can not escape death. And, at the end of the their useful lives, without proper planning, they may poison the air, water or provide a source of radioactivity for someone with a criminal purpose.
Of course, the arguments about nuclear decommmissioning currently swirl around whether the funds are sufficient to deal with environmental costs of dismantling a radioactive nuclear plant. With so much at risk, the calculus is not easy.
Perhaps that is where planning for bank death should begin. After all, capitalism is too important to left to capitalists to determine the costs of failure or death. (Who likes to think about the end of life - especially when times are good.)
While calculating the cost of bank death may lessen the horrific economic and social impact of a bank failure, particularly from the type that are "too big to fail," it must be done.
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