White House Proposes More Authority Over “Too Big to Fail”
by Tim Manni
A White House official has said that Barney Frank, chairman of the House Financial Services Committee, will introduce legislation as early as this week designed to tackle what the New York Times refers to as “one of the most fundamental issues stemming from the near collapse of the financial system last year:” institutions deemed “too big to fail.”
The legislation would be an alteration to an existing White House strategy on how to deal with some of the nation’s largest financial firms:
The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.
Setting up the equivalent of living wills for corporations, that plan would require that they come up with their own procedure to be disentangled in the event of a crisis, a plan that administration officials say ought to be made public in advance.
“These changes will impose market discipline on the largest and most interconnected companies,” said Michael S. Barr, assistant Treasury secretary for financial institutions. One of the biggest changes the plan would make, he said, is that instead of being controlled by creditors, the process is controlled by the government.
Lawmakers claim that the increased government authority of banking and non-banking institutions is designed to prevent costly taxpayer bailouts and wind downs of failing companies (see Lehman Brothers).
However, while the masses agree that something needs to be done to regulate these “too big to fail” institutions, investors on Wall Street don’t like the idea of being kicked to the curb:
“Of course you want to set up a system where an institution dreads the day it happens because management gets whacked, shareholders get whacked and the board gets whacked,” said Edward L. Yingling, president of the American Bankers Association. “But you don’t want to create a system that raises great uncertainty and changes what institutions, risk management executives and lawyers are used to.”
T. Timothy Ryan, the president of the Securities Industry and Financial Markets Association, said the market crisis exposed that “there was a failure in the statutory framework for the resolution of large, interconnected firms and everyone knows that.” But he added that many institutions on Wall Street were concerned that the administration’s plan would remove many of the bankruptcy protections given to lenders of large institutions.
How inclined will the private market be to invest in nation’s large banks (which offer credit to thousands of Americans) if they’re faced with the chance of never being paid back? This proposal could make permanent changes to long-standing (and existing) contracts between lender and institution.
We see two possible negative consequences to Washington’s current proposal to dealing with the “too big to fails”: one, lending costs could rise if big banks can’t readily find lenders, and two, this seems like another opportunity for Washington to cement their foothold in the banking industry.
As Mr. Ryan stated, there is a failure in the framework of how we deal with these “large, interconnected firms,” but this may not be the best strategy to solve it.
What do you think — is Washington going for too much control of the baking industry?
