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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 19, 2010 at 9:40 AM

Bair takes on too big to fail, but bank reform is too small to succeed

Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., today became the highest-ranking official to advocate against too-big-to-fail banks. In a speech before the Community Bankers of America, she said, “Job number one must be to level the playing field once and for all and to put an end to the doctrine of too big to fail.”

She supports legislation that would levy an assessment against the biggest banks in an attempt cover their risk-taking if (when) things go bad, while allegedly protecting taxpayers. However, she warned about loopholes in the bill by Sen. Chris Dodd, D-Financial Services, “which seem to allow the potential for backdoor bailouts through the Federal Reserve Board’s 13(3) authority.”

The big banks can muster hundreds of millions of dollars to buy senators and House members to make reform a Swiss cheese of such loopholes. And as much as Bair’s stance is welcome, it’s still not enough.

Update: The Senate will now supposedly drop the “back-door bailout” provision. Even so…

As Sen. Bernie Sanders of Vermont as said, “Too big to fail is too big to exist.” By their size and business models that depend on such “innovations” as derivatives and securitizing often worthless “assets” to toss into the Wall Street casino, they are inherently dangerous. This is true even before one adds the untrustworthy nature of regulators in recent years, both because of “free market” ideology and the ability of the banking sector to buy politicians.

In the Great Panic of the fall of 2008, Americans learned how these huge institutions, with their vast intertwined relationships, can quickly bring the financial system to the abyss. Then, lawmakers face the financial equivalent of nuclear blackmail: Save us or the world economy will collapse. Thus, we had nearly $800 billion in direct taxpayer aid and trillions in obligations on future American living standards fly out the door while the bankers are reaping record bonuses.

More than a year and a half after the meltdown, not one banker has been prosecuted — even in the face of such scandals as Goldman Sachs playing both sides of AIG and getting bailed out 100 cents on the dollar (and lately helped wreck Greece while profiting from it). Nor have we seen the equivalent of the Depression’s Pecora Commission, which laid bare the swindles of the 1920s “banksters” to the American people, who then demanded reform.

It’s difficult to imagine an assessment on the TBTF banks that could cover their potential damage. If it were meaningful, it would be so onerous as to cause them to voluntarily break up and create, well, banks that actually did banking again. Otherwise, it’s a sham and taxpayers, as well as the economy, remain at risk.

Break up TBTF in an orderly way and decentralize the headquarters of the new institutions (which would be a huge boost to numerous cities). Separate risky investment banking from federally insured commercial banking. Regulate derivatives and outlaw some entirely. Regulate and shine a light on the shadow banking system. Use incentives such as the tax code and antitrust enforcement to get the capital markets out of destructive trading and merger-mongering, and back into the business of seeding new companies, expansions and job creation. And get the bank money out of politics.

I’m waiting for the high federal official to say any of this. We know it won’t be Treasury Secretary Tim Geithner, much less Larry Summers — these are the acolytes of Bob Rubin, who presided over the foundation of the current crisis, laid by the Clinton administration and the Republican Congress. That was back in the days of bipartisanship.

As for those who think such measures would dangerously destabilize the global economy and cause capital flight from America, consider: A stable, sound and transparent financial system, with banks deploying capital productively, will attract investment. Second, if the world’s largest economy reforms, others will follow. And remember back in the 1980s, when the world’s largest banks were all Japanese and “experts” worried this meant American decline? In fact, the Japanese banking behemoths helped collapse that country’s economy and hold it down for a decade.

Comments | More in Bailout, Banking

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