Fallout: The Financial Crisis

Plan under fire for ‘too big to fail’

Amy Scott Jun 18, 2009
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Fallout: The Financial Crisis

Plan under fire for ‘too big to fail’

Amy Scott Jun 18, 2009
HTML EMBED:
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TEXT OF STORY

Kai Ryssdal: The topic of the secretary’s half day on the Hill today was President Obama’s proposal yesterday for new regulations for the financial industry. Members in the Senate Banking Committee pressed the secretary on whether the Federal Reserve is the right choice to be the uber-regulator. There were complaints the proposal doesn’t streamline the tangled web of financial regulators much, if at all. And those four little words we’ve come to know so well — too big to fail? Oh, they were asking about those, too. Marketplace’s Amy Scott reports.


AMY SCOTT: If you didn’t think we had enough confusing terms in our financial system, the Obama administration has come up with a new one: Tier One Financial Holding Company. Brace yourself for the description.

PADDY HIRSCH: Any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed.

To Chester Spatt, former chief economist of the SEC, that sounds a lot like a company that’s too big to fail.

CHESTER SPATT: It provides a quasi-government guarantee, and an unfair competitive advantage, and I think therefore heightens the ability of those institutions in fact to take on systemic risk.

On Capitol Hill today, Republican Senator David Vitter of Louisiana echoed that concern.

DAVID VITTER: Tell me why that isn’t a big, flashing neon sign, “too big to fail.”

Secretary Geithner defended his plan, saying these Tier One firms wouldn’t be allowed to take as much risk. And he said the plan would create a system to break up big institutions, so that in fact they could be allowed to fail without taking the rest of us with them.

TIMOTHY GEITHNER: Our judgment is the combination of those two things will help mitigate the inherent moral hazard risk in any system that comes from the emergence of large institutions.

Of course, none of this will happen without lawmakers’ approval. Congress could decide to limit the size of financial institutions. Chester Spatt suggests imposing fees that deter them from becoming so big.

In New York, I’m Amy Scott for Marketplace.

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