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Plan would target firms ‘too big to fail’

John Dimsdale Oct 26, 2009

Plan would target firms ‘too big to fail’

John Dimsdale Oct 26, 2009


Kai Ryssdal: Speaking of things we haven’t heard about in Washington for a while, too-big-to-fail is back. The chairman of the Federal Deposit Insurance Corporation, Sheila Bair, resurrected that phrase today. She told a banking conference there’s a growing consensus over ways to dismantle banks and other financial institutions that are bigger than they ought to be.

We’re expecting to hear something about this from Congress as soon as tomorrow. A plan that would force big banks, brokers and insurance companies to set aside extra reserves, keep more money in the bank as a hedge against bad times. And, if the times get too bad, the plan would give Washington more power to get rid of management and restructure debts.

Our Washington Bureau Chief John Dimsdale reports the legislation would also oblige big banks to write up something like a living will.

JOHN DIMSDALE: The proposal would require each big financial company to come up with a plan for its own demise in the event of a crisis. Big firms would have to show how their investments and debts would be covered if they fail.

Stephen Lerner, with the Service Employees International Union, says the requirement will protect taxpayers.

STEPHEN LERNER: If you can’t describe, if your deals go bad, how it’s going to get resolved without tanking the entire economy, then that’s a problem. So, we have to get out of this trap where no matter what the banks do we get stuck here with the burden.

If big banks add innovative and possibly risky products or investments to their portfolios, they would have to update their living wills.

Scott Talbott with the Financial Services Roundtable thinks the requirement is a good idea, but says the industry has a concern about too much disclosure.

SCOTT TALBOTT: The challenge will be that you want to provide the markets with enough detail that they have certainty your plan makes sense, but at the same time, you don’t want to give away competitive advantages and corporate secrets.

Perhaps it would be better if regulators themselves put together the roadmaps for unraveling, says finance professor Kevin Jacques at Baldwin Wallace College.

KEVIN JACQUES: What you want is you want the government regulators to have a plan in place that basically says to these institutions, if you take too much risk, if you get yourself into too much trouble, we’re going to allow you to fail, and we’re going to unwind you.

The proposal will have a congressional hearing on Thursday.

In Washington, I’m John Dimsdale for Marketplace.

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