Reasons Why Too Big to Fail Is Just Wrong.

The Obama Administration's Financial Regulatory Reform: A New Foundation does what ever it can to preserve "Too Big to Fail" institutions. The proposal calls "Too Big to Fail" financial conglomerates Tier 1 Financial Holding Company. This is from the White Paper: Financial Regulatory Reform:

Any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed (Tier 1 FHC) should be subject to robust consolidated supervision and regulation, regardless of whether the firm owns an insured depository institution.

Translation: We are OK with financial institutions - Tier 1 FHC - that can cripple the entire global financial system such as Citigroup because we are going watch them more closely.

Reality: Financial conglomerates pay people lots of money to stay five steps ahead of any regulator. Labeling a financial conglomerates a Tier 1 FHC and supervising them more robustly is not going to stop a Tier 1 FHC to repeat what they did in the past decade.

Reason No. 1: The Fed has sole discretion to designate a financial conglomerate a Tier 1 FHC.

“(A) UNITED STATES FINANCIAL COMPANIES.— The Board, on a non-delegable basis, may designate, by regulation or order, any United States financial company as a United States Tier 1 financial holding company, if it determines that material financial distress at the company could pose a threat to global or United States financial stability or the global or United States economy during times of economic stress based on a consideration of the following criteria:

(i) the amount and nature of the company’s financial assets;
(ii) the amount and types of the company’s liabilities, including the degree of reliance on short-term funding;
(iii) the extent of the company’s off-balance sheet exposures;
(iv) the extent of the company’s transactions and relationships
with other major financial companies;
(v) the company’s importance as a source of credit for households, businesses and State and local governments and as a source of liquidity for the financial system;
(vi) the recommendation, if any, of the Financial Services Oversight Council; and
(vii) any other factors that the Board deems appropriate.

That is a lot of authority to have especially for an institution that has a horrible history of regulating bank holding companies and other aspects of the financial system. There is authority to designate a Foreign Tier 1 FHC. Oh, and if a financial conglomerate has a right to a hearing to challenge the Fed's determination.

Reason No. 2: Explicitly and implicitly creates a tiered and "most favorite" financial system.

The use of the term "Tier 1 FHC" says a lot. What about Tier 2 and Tier 3? But this proposal is actually stating what is happening now - smaller regional and community banks are allowed to fail but TBTF get trillions in taxpayer money to survive. This all about preserving the financial oligarchy.

Paul Volcker said it in a more diplomatic way:

The approach proposed by the Treasury is to designate in advance financial institutions “whose size, leverage, and interconnection could pose a threat to financial stability if it failed”. Those institutions, bank or non-bank, connected to a commercial firm or not, would be subject to particularly strict and conservative prudential supervision and regulation. The Federal Reserve would be designated as consolidated supervisor. The precise criteria for designation as “systemically important” have not, so far as I know, been set out. However, the clear implication of such designation whether officially acknowledged or not will be that such institutions, in whole or in part, will be sheltered by access to a Federal safety net in time of crisis; they will be broadly understood to be “too big to fail”.

Think of the practical difficulties of such designation. Can we really anticipate which institutions will be systemically significant amid the uncertainties in future crises and the complex inter-relationships of markets? Was Long Term Capital Management, a hedge fund, systemically significant in 1998? Was Bear Stearns, but not Lehman? How about General Electric’s huge financial affiliate, or the large affiliates of other substantial commercial firms? What about foreign institutions operating in the United States?

Implicitly, through this Federal safety net that Paul Volcker refers to, those designated as TBTF will have an automatic premium to investment returns that small institutions or those not designated will not have. For instance, an stock investor is going to pick a TBTF with this implicit Federal safety net over a non-TBTF. It is that rational thing to do (LOL).

The choice is this: Do we want a financial sector that is a source of a huge portion of income and growth in our economy or do we want a financial sector that is a financial intermediary - a tool to allocate capital and resources.

Reason No. 3 - It will encourage more risk taking or less lending.

As Paul Volcker point out, this implicit Federal safety net may encourage TBTF institutions to take more risks particularly since their down-side is protected.

As for less lending, which is not necessarily a bad thing, this could be happening now. TBTF institutions could be anticipating these higher capital requirements and are hording the trillions of dollars in liquidity provided by the Fed and Treasury Dept. instead of providing loans. At the least, Richard Bove, a securities analyst seems to think so. The other argument is that TBTF balance sheets are so screwed-up that they need to recapitalize and can't originate any loans.

There are alternatives to the "New Foundation" proposal but they do require pissing off the financial oligarchy:

Alternatives to TBTF

1) Reinstate many of the 1930's regulations such as Glass-Steagall or as midtowng has argued eliminate laws such as Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, and the Depository Institution Deregulation and Monetary Control Act of 1980.

2) Require an internal firewall between proprietary trading and investment banking from commercial banking. Trading and investment banking must be funded with their own capital and not any capital from the commercial banking side.

We have to make banking boring again.

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on the "institutions deemed too big to fail"

one possible scenario actually is bypassing current corporate bankruptcy court/law and handing them to a "resolution" or FHC...

it to literally liquidate them and sell them off but to do it in such a way as to not cause a financial collapse.

Now obviously, the track record currently is to make these Zombie banks even bigger and prop them up with Trillions of dollars in U.S. taxpayer funds.

But....that said, this concept of a FHC could do the opposite of what is currently happening, similarly to how the FDIC can seize and shut down failed institutions orderly.

A blantant signal of financial conglomerates' fear

Notice there is not a lot of vocal opposition to these horrible idea of "Tier 1 FHC" and macro-prudential policies but there is a growing and vocal opposition to Consumer Financial Protection Agency. Why? Financial conglomerates know they can manipulate the "Tier 1 FHC" system so they won't fight that but they can't do the same with CFPA. - Financial Information for the Rest of Us.

well firstly

I'll point out again, this "tier 1 FHC" isn't necessarily going to feed the Zombies. It's a classification, not necessarily a guaranteed zombie feeding trough.

Odds are (as already mentioned) it will be that due to past history but they could just as easily turn this classification into a "wind 'em down and liquidate 'em", similarly to the FDIC. It is not just I with that analysis, who clearly want real reforms, including Glass-Steagall, that's Barry Ritholtz, NC, Zero Hedge and so forth analysis on this very classification.

Secondly. The corporate lobbyists have the CFPA in their gun sights. You are precisely right, they are doing a massively financed campaign to stop the CFPA, surrounding the hill and using shows like Glen Beck and so on. is running an exposure campaign on this. They actually contacted us via email and are asking for our help (I also said they could post here) to get the word out to fight the corporate financial lobbyists' with their multi-million dollar funded lobbyist activity.

The classification

,which can be manipulated, is an implicit Federal safety net as Paul Volcker called. I agree it doesn't guarantee anything but it comes pretty close without explicitly saying so.

Why do we need the classification? - Financial Information for the Rest of Us.

you need this classification

in order to pull them out of regular bankruptcy court and law and put them in a special class in order to wind them down without causing a domino global collapse.

It's a similar principle on why the FDIC exists, instead of those banks ending up in bankruptcy court.

Angels Dancing On The Head Of Pins

To those who worship the Free Market System, know that your god does not exist. It never has. The tax payer funded bail-out of failed giant corporations is just one proof. What exists is a class system with one set of rules and privileges for the executive class and wealthy owners and another for everyone else. What exists is capitalism for the poor and socialism for the rich. That's why, on average, you get a lighter sentence and serve it in a more pleasant prison if you are a crook in high management who embezzles, say, a million dollars from the bank than if you are some hard working chump who tunnels into the bank and steals, say, fifty thousand cash. Conrad Black, the former media mogul, now serving time for massive fraud against his investors, has his own computer connected to the internet and he drinks cappuccinos every morning.

Now, to argue in favor of a pure Free Market system is to argue against the status quo. Jefferson, for example, tried to make inheritance illegal because it cut against his ideal of America being a meritocracy. He didn't have a prayer. No one truly wants a meritocracy and no one would know how to set it up anyway. If your uncle is a producer at a major studio, you have an exponentially greater chance of becoming a movie star than the vast majority of people. How do you stop that?

My point is that the free market system, whatever its theoretical advantages, assumes some sort of meritocracy and is a hopeless ideal. It is a thousand times less practical, say, than socialism. History demonstrates repeatedly that those at the top of the heap will do anything, including murder, including not uncommonly murdering their own children (like the great Christian, Emperor Constantine) to maintain their class advantages. Those who manage to topple the existent hierarchy seize those same advantages as their booty. So can we talk about something practical.

Angels Dancing On The Head

Angels Dancing On The Head Of Pins
(an earlier post) had the most insightful comments.

Not particularly complimentary to the perceived "American" way...but then most Americas have been living life with their head stuck up their ass for the past 50 years.

Congress (under guidance from their uberwealthy patrons) constructs this Byzantine matrix of tax loopholes and regulatory favoritism and legions of media pundits exhort the masses to support it. OK, so there are small tidbits thrown out to the masses from time to time to keep them involved, that hardly constitutes good government.

Too many Americans are too dependent on Government funding i.e ..Gov "Valium", to care what happens. They vote for the incumbent just so long as he ensures those Gov checks keep coming. Meanwhile those not part of this nooky handout & those who are younger... well they are screwed. Yep, let's admit it.. after Wall St, The Military Industrial Complex, Lawyers/AMA/Insurance/Drug Companies, retirees get their cut... well heck, there's not much left. Young folks, welcome to the new normal. You're on par with 2nd & 3rd world contemporaries because that is the US's future and you are the future.

What's to support or admire about the US these days?
Better a complete meltdown and a system reset to cleanse the system (and yes, I am prepared to take my chances with that).

Shoot, I don't have to do a thing either . The Prez, Congress, Big Biz are SO corrupt and/or clueless they already have us pointing towards the cliff and accelerating.

Hope ya'll have a "plan B" to cope with the outcome.

Volcker Okay w/Banks Too Big Too Fail

Volcker is just a shill for the banks.

"The safety net has been extended outside the banking system," Volcker said. "That's what I want to change." He said the administration's proposal to create a new system for winding down large nonbank companies would make that easier.

How about this little proviso being added:

"No Tier 1 institution may be given any government assistance unless and until anti-trust actions have been initiated against the institution."

Arguing for such a provision would be in the spirit of "working within the system" but seeking ways to hoist the bastards on their own petards.