‘Too Big to Fail’ Gets Bigger

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    September 14, 2009, 11:59 am
    Obama’s Speech: ‘Too Big to Fail’ Gets Bigger

    By Edmund L. Andrews

    The third in our series on President Obama’s speech today — a year after the collapse of Lehman Brothers — on financial regulation and the economy.

    One of the central goals of President Obama’s regulatory overhaul plan is to rein in banks and financial institutions that are “too big to fail.” The meltdown that followed the bankruptcy of Lehman Brothers exactly one year ago, followed by the nightmarish spectacle of bailing out reckless giants like American International Group and Citigroup, are things that policymakers never want to see again.

    “Too big to fail isn’t a policy; it’s a problem,” Ben S. Bernanke, chairman of the Federal Reserve, has often remarked.

    But at least for the moment, Too Big To Fail is an even bigger problem now than it was before the crisis. And while Mr. Obama has offered two basic ideas to address it, his economic team has yet to offer anything close to a concrete plan.

    The nation’s four biggest banks now control 60 percent of all bank deposits in the country, higher than two years ago. The handful of banking winners, like JPMorgan Chase and Wells Fargo, have acquired giant failing competitors. The ranks of bulge-bracket Wall Street investment banks have been cut back by the loss of Lehman Brothers and Bear Stearns. The remaining survivors, like Goldman Sachs and Morgan Stanley, have been recruiting top producers from their crippled rivals.

    Mr. Obama’s regulatory overhaul plan would tackle the problem in two ways.

    The first is to have Congress give the government stronger powers to shut down big insolvent institutions in an orderly way — what policy wonks call “resolution authority.” The Federal Deposit Insurance Corporation already has the power to seize troubled banks, and it has taken over more than 145 banks in the last year. Normally, the F.D.I.C. arranges to sell the bad bank’s assets to a healthier institution and absorbs the losses that are left, after paying off customers’ insured deposits.

    Mr. Obama’s plan would expand the government’s power to cover bank holding companies as well as non-bank financial institutions — investment banks, insurance companies, industrial loan companies and possibly even private equity firms.

    But Mr. Obama would do well to put some meat on the bones of that plan. When would the government decide to intervene, as opposed to letting the normal bankruptcy process unfold? Since “resolutions” always cost money, how would the program be financed? (Banks currently pay insurance premiums to the F.D.I.C.’s insurance fund. Would Met Life pay insurance premiums to a federal agency in advance?)

    Mr. Obama’s other tactic would be to impose tougher supervision on the risks taken by “systemically important” institutions, whose failure would jeopardize the economy. For starters, this group would include the 19 biggest banks that were subjected to the government’s “stress tests” this spring.

    The decisive tool for reining in risk practices is higher capital requirements, which the Treasury Department has indeed proposed. But officials have offered no hint of how high those requirements would be, or even to answer one of the most basic questions: Will those higher capital requirements be intentionally punitive, so that financial institutions consciously avoid becoming “too big to fail”? If not, how much insurance would such institutions have to pay for the backstop they get from the government?