How to Fix Too Big Too Fail

tbtfminnfedlogo Meet Roberta Karmel, an unassuming law professor. Meet Professor Karmel's answer to finally break up the big banks.

Another financial crisis, a prolonged recession, or changing political ideologies could cause a re-examination of the status quo and lead to a decision to break up the big banks. If that should happen, policy makers could well take another look at the Public Utility Holding Company Act of 1935 as a model for accomplishing such a breakup over a limited time span of, say, seven years. The political mood is already shifting. The 1980s mantras -- government regulation as problematic, free-market competition as an unquestioned good, financial engineering as worthwhile innovation and finance as more important than commercial and industrial enterprise -- are now being reconsidered. This could lead to a more responsible balance between government, finance and industry. Dodd-Frank, despite its length and complexity, is only the beginning of real regulatory reform. It's a continuation of the complexity of already overly complex financial and regulatory systems. What we need is a simple regulatory scheme to create a simpler banking system.

The public utility holding act is one of those New Deal legislative accomplishments which was torn asunder in 1996. Public Citizen describes the importance of this original law.

PUHCA (the Public Utility Holding Company Act of 1935) is one of the most important federal consumer protection laws ever passed. It regulates the parent or “holding” companies (that hold the stock of) electric and natural gas utilities, so that such owners can’t raise rates by charging high fees to utilities for services from their affiliates, and can’t speculate in riskier businesses with the ratepayer’s money, since such speculation harms utilities’ credit and raises their cost of borrowing money, thereby raising customers’ utility bills.

PUHCA requires utility parent companies to incorporate in the same state where the utility operates, so that the state can regulate them, or to be regulated by the Securities and Exchange Commission (SEC) if they operate in several states. PUHCA does not allow non-utilities, such as oil companies or investment banks, to own utilities. It also requires the SEC to approve any merger or utility acquisition by a holding company, to prevent the reappearance of the huge electric and natural gas cartels of the 1920s that abused their customers and went bankrupt in large numbers because of Enron-like speculation and accounting scams.

Of course none of this would ever happen. After all Congress has been bought and paid for, plus playing political power games with the nation as fall guy for over 20 years, full throttle. Numerous Senators and Congress representatives tried to end TBTF and break up the big banks. They were blocked at every turn.

Bloomberg Law interviewed Karmel about how the Dodd-Frank legislation is weak, full of loopholes and what really needs to happen.



One of Karmel's observations has been watched in horror by many desperate to stop the next financial crisis. In fact, right now lobbyists are trying to thwart implementation of the Volcker rule, as weak as it is, at every turn.

Much of the implementation of Dodd-Frank has been left to the various functional regulators of financial institutions. The more controversial provisions in the bills were dropped, eviscerated or relegated to studies.

Speaking of financial reform as window dressing, we have another professor, Bill Black, being interviewed below. Professor Black is asked if he views President Obama's State of the Union rhetoric as having any chance on getting serious about financial reform. Here again we see the need to end TBTF and the political insanity to avoid doing just that, the latest proposals being living wills for banks.


More at The Real News


So the only way to fix it is to shrink them, and to shrink them dramatically, to the point where they no longer pose a systemic risk. Here's the good news. Not only will that make our financial system vastly safer, it'll make those banks more efficient. They are way too big to manage.

Considering how the United States is going on it's 5th year without really changing anything after the financial crisis, it's doubtful any of the above will be done. Clearly it will take yet another Economic Armageddon, but with a government that actually represents the people in place at the time. People forget. They move on and here we are with campaign rhetoric that never mentions too big to fail in all of the digital bits streaming around the Internets and airwaves.

We just experienced what happens when regulations put in place from the Great Depression are redacted, watered down. It's called systemic risk and even contagion. By ignoring economic and financial history, we are doomed to repeat the same follies again and again.

Don't forget and consider sharing Karmel's recommendation to resurrect the Public Utility Holding Company Act of 1935 to break up the big banks.