Wednesday, April 6, 2011

Institutionalizing Too Big Too Fail

Roosevelt Institute Fellow Mike Konczal writes in Why is Paul Ryan’s Budget Trying to Dismantle Financial Reform?

"During the financial crisis of 2008, regulators found that they were lacking the necessary legal powers for unwinding and resolving large financial institutions. We can debate whether they actually lacked these powers, but their argument that they didn’t have them was more than enough for them to avoid having to do anything. They also found that when they went to collapsing institutions like Lehman, there was little prep done at the firm by either regulators or staff for what it would mean to unwind itself, so the only option was to send it flying into bankruptcy in the most awkward way or do an extensive bailout. These were the only options.

"How to solve this problem? Give regulators the powers they need and then make a very public showing of prepping firms for resolution when they fail. Have records of “living wills” so it is clear that no firm is too big to fail. It’s not enough to say, “We’ll never bail anyone out again.” We need to do a few simple things to make sure a crisis or a failure goes more smoothly. Seems fair, right?

"Well a funny thing happened on the way to writing living wills. Wall Street has decided that they can’t be bothered and are lobbying against it."

Surprise. It turns out that what Wall Street wants is enshrined in Paul Ryan's budget bill.

Mike concludes, "In a budget that skews so strongly towards the top 1%, it’s telling that it tries to break apart one of the few mechanisms for holding Wall Street accountable post-crisis."

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