Solution to "Too-Big-to-Fail" Banks: Break Up Firms, Avoid Future Bailouts, Public Citizen to Tell Congress

Oct. 22, 2009 – WASHINGTON, D.C. – Giant banking firms should be broken up, rules should be reinstated prohibiting commercial banks from risky speculative ventures and new “resolution authority” for non-bank financial institutions should be created, Public Citizen will tell Congress today.

Those are just a few solutions to deal with institutions that are deemed “too big to fail,” Robert Weissman, president of Public Citizen, will tell the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law.

 “It is hard to look at what was done over the past year and a half and conclude it was anything less than disastrous,” Weissman says. “The bailout strategy is unacceptable. It unjustifiably plunders the public treasury to support failed, reckless enterprises while reinforcing the cycles that lead to periodic failure and ever-larger bailouts.”

 Congress should take a page out of the book of antitrust law, Weissman says. Antitrust offers a good approach to addressing Wall Street abuses because it looks at industry structure, rather than just setting rules for market participants, he says. The antitrust approach asks not how regulatory agencies can monitor the mammoth financial institutions, but whether those institutions exist at all.

 Weissman recommends that: 

  • The government should break up “too-big-to-fail” firms. This would take place over time, with regulators managing the process. Or the government could instruct the mega-institutions to sell off operations or spin off subsidiaries;
  • Congress should reinstate the Glass-Steagall Act, which kept commercial banks separate from investment banks and other enterprises that undertake risky investments;
  • Congress should enforce the existing 10 percent concentration limit for depository institutions, and consider lowering the threshold. This means that a bank cannot acquire another bank if the acquisition gives it more than 10 percent of deposits nationwide;
  • Congress should assess what constitutes appropriate size or interconnected limits for non-depository assets;
  • If Congress doesn’t want to immediately start breaking up firms or reinstate Glass-Steagall, it should create an independent commission to assess the structure and risks posed by the financial services industry;
  • Congress should impose a fee on the too-big-to-fail institutions to capture for the public the subsidy these corporations are receiving in credit markets;
  • Special rules of conduct designed to deter risky behavior and enable effective monitoring by government regulators should be applied to the largest financial institutions. These should prohibit the use of offshore tax havens, mandate that executive compensation and bonuses be linked to long-term performance, enhance consumer protection standards, enhance obligations to serve underserved communities, and more.

 The problem with the bailout, Weissman explains, is that the government has not required reciprocity from any of the bailed-out firms. Nor has it demanded the firms change the behaviors that led to the collapse.

 The government needs “resolution authority” that would give it the tools it needs to act quickly and with flexibility when large financial firms are about to go under and jeopardize the whole system, Weissman says.

 This authority would provide structured government intervention, rather than the haphazard approach we have seen. It should draw on the assets of the failing institution, rather than on government assets, when dealing with crises. It should provide officials with the power to merge a failing financial firm into another institution, or sell off pieces of the failing firm. It also should provide the power to maintain ownership of a resolved firm if doing so is in the public interest.

 “Wall Street is now populated by a handful of dominant mega-corporations – a smaller group of larger firms than existed even before the current financial crisis,” Weissman says. “Many – including many who believe the too-big-to-fail problem is a looming, ongoing, long-term and recurring threat to financial stability – believe this state of affairs is a fait accompli. The antitrust tradition teaches us that it need not be so.”

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