Obama Fails to End “Too Big to Fail” Syndrome

Saturday, January 16, 2010

The Troubled Asset Relief Program (TARP), created to manage the federal government’s bailout of Wall Street, is supposed to conclude this October, but issues stemming from the unprecedented rescue operation are likely to linger long past that. In addition to holding hundreds of billions of dollars in private assets into at least the near future, the administration has not begun to address what to do about the “implicit guarantee” that the bailout created: the notion that no matter how big a mess Wall Street creates, the government—and taxpayers—will never let it down out of fear of allowing banks “too big too fail” to just collapse.

In the latest report from the Congressional Oversight Panel charged with reviewing TARP, the panel members warned: “Belief remains widespread in the marketplace that, if the economy once again approaches the brink of collapse, the federal government will inevitably rush in to rescue financial institutions deemed too big to fail.”
This situation has distorted prices, “giving large financial institutions an advantage in raising capital that mid-sized and smaller banks–those not too big to fail–do not enjoy.” Furthermore, the government’s “implicit guarantees also encourage major financial institutions to take unreasonable risks out of the belief that, no matter what happens, taxpayers will not allow their failure.”
In the report, the panel members offer some possible remedies for eliminating the “implicit guarantee.” These include submitting the largest financial institutions to increased oversight and mandatory federal insurance, imposing limitations that prohibit banks from getting to a specified size, or even reinstating the provisions of the Glass-Steagall Act, repealed in 1999, which kept institutions from acting as both investment and commercial banks.
-Noel Brinkerhoff
January Oversight Report (Congressional Oversight Panel) (pdf)
10-Year Anniversary of the Bill That Led to the Current Economic Crisis (by Noel Brinkerhoff and David Wallechinsky, AllGov)


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