Government will be there again to bail out banks
Savings and CD rates offered by big banks are a good indication that not as much has changed since the financial crisis as many of us had hoped.
"The mere enactment of the Dodd-Frank legislation did not end the concept of 'too big to fail' in the market’s eyes," says Christy Romero, a regulator who should know.
Romero bears an odd job title: Acting SIGTARP (Special Inspector General, Troubled Assets Relief Program).
Her testimony before the House subcommittee investigating whether Dodd-Frank has ended "too big to fail" was clear and compelling.
She noted that the nation’s largest financial institutions are still "able to raise funds more cheaply and enjoy enhanced credit ratings based on the assumption that the government remains as a backstop."
This certainly rings true to me as I survey the uncompetitive deposit rates offered by the Citis and BofAs of the world.
It’s almost as if they’re telling us: "We don’t have to pay depositors more, because we can get funding cheaper in other markets. We’re government-supported, you know!”
Although Romero doesn’t view the situation as hopeless (she still thinks Dodd-Frank, through resolute regulatory implementation, can accomplish its mission of ending TBTF), I’m doubtful.
Recently, for example, I noted widespread agreement among the financial punditry when a Sanford Bernstein analyst essentially identified Goldman Sachs as being "too big to prosecute."
In my view, when some TBTF firm starts to teeter on the brink of collapse in the future, Dodd-Frank and its "resolution" mechanism will be rendered quaint history.
All the considerable lobbying forces of the financial community will be brought to bear to achieve one objective -- a bailout by the government.
They’ll be all over Congress and the regulatory agencies.
We’ll be hearing the same tired arguments about preserving the failing firm’s "global franchise" and maintaining U.S. "competitiveness" in international markets.
And we’ll have to endure the same CNBC talking heads (who never tire of telling us "free-market capitalism is the best path to prosperity") whining about "contagion" and imminent "financial meltdown."
I’m sorry, but I think "too big to fail" is still with us, Dodd-Frank notwithstanding.
Unfortunately, we missed an opportunity to fix the problem last time around.
We could have broken up the large financial institutions, as we did their predecessors in the 1930s and the public utility holding companies in the 1930s and 1940s.
But we didn’t. We came up with Dodd-Frank instead.
There is, however, a silver lining here.
We’re certain to be offered another opportunity to rid ourselves of TBTF.
Maybe more than one.
And maybe sooner than we think.
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