Not too long ago, few people worried about financial firms being "too big to fail," but with hundreds of billions of taxpayer dollars going to bail out Wall Street, that's changed.
House Financial Services Committee Chairman Barney Frank (D-Mass.) is working with Treasury officials on a new proposal to give the government more authority to take over troubled financial firms. The proposal is still being worked on, but what we know so far is that it would give the government powers to seize troubled financial firms, throw out their management, change terms of existing loans and wipe out shareholder stakes.
It would also make it harder for firms to borrow heavily against their assets and force them to hold more money in reserve. The idea is to discourage banks from being behemoths. More broadly, financial regulatory reform is aimed at filling in the regulatory gaps, like derivatives trading. Reform will also make it more expensive for big banks to do proprietary trading. Federal Financial Analytics managing partner Karen Shaw Petrou expects banking giants to spin off those assets.
Comments
The government already does whatever its corporate masters want. How else do you explain the seemingly random government responses to failing financial institutions like Lehman, Citi, WaMu, AIG? If enough members of congress are owned by an institution, it receives rescue funds. Get a majority of the federal government in your pocket and you get to keep your executives in office, too.
If Lehman had shared more of its ill-gotten gains with government officials, it could have stopped Goldman Sachs' appointee to Secretary of the Treasury from shutting it down.
We should institute a uniform means for financial companies to buy the guaranteed support of any goverment official, and a standard process for disclosing "owned members of government" to the public through an SEC filing. It would remove the uncertainty over which companies will be chosen as winners or losers by our leaders in the event of a crisis.
This to me is a giant step in the government's plan to nationalize banking. If the government is allowed to take over "troubled financial firms", they can include variables and assumptions into their model that will generate whatever "troubled" result they want.
If this plan were in place a year ago, the government would now be running Bank of America, Citicorp and probably 15 more financial institutions. These banks failed the government's stress test and would probably have qualified as "troubled." But even after the stress test's worse case model underestimated the amount of loan defaults and underestimated the unemployment rate, those "troubled" banks are doing well. They're doing so well that most of them have either paid back their bailout or have tried to repay but were turned down.