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Banks must be able to fail, Bernanke says

John Dimsdale Sep 2, 2010

Banks must be able to fail, Bernanke says

John Dimsdale Sep 2, 2010


Kai Ryssdal: Over to the bank sector now, where one of the hated phrases of the financial crisis is back with us — “too big to fail.” Federal Reserve Chairman Ben Bernanke told the Financial Crisis Inquiry Commission this morning that nobody who gets in trouble, no matter how big or how interconnected they may be, should be let off the hook.

Ben Bernanke: There has to be a credible way to let firms fail. In fact, require that they fail.

That’s great, but here’s the catch, though. Big banks have only gotten bigger since Lehman Brothers went under. So members of the commission were dubious, shall we say, that regulators would let a firm controlling hundreds of billions of dollars just fail.

Marketplace’s John Dimsdale reports.

John Dimsdale: Two bank regulators told the commission today “that too big to fail” is no longer possible. In testimony before the same commission FDIC chairman Sheila Bair said that thanks to Wall Street reforms, regulators can no longer bail big banks out.

Commission Chairman Phil Angelides seemed a little skeptical.

Phil Angelides: Do you really believe at this point that the market believes that the “too big to fail” doctrine has been broken?

Sheila Bair: Well, I think it’s up to us to effectively implement the new authorities that Congress has given us. The statute very specifically prohibits any kind of open institution assistance. So if it happens, it’s going to have to be Congress doing it.

But lawmakers may be challenged, because there’s already a precedent for propping up big banks, says Mary Bottari at the Center for Media and Democracy.

Mary Bottari: I find it very difficult to believe that if a giant institution that threatens the entirety of the U.S. economy was on the brink of collapse, that regulators and Congress wouldn’t try and rush to aid them in any way they could.

During the crisis, the government did let two big banks fail, Lehman Brothers and Washington Mutual. But after that, regulators got cold feet, says Christopher Whalen at Institutional Risk Analytics.

Christopher Whalen: Those two failures where the bond holders went into bankruptcy, the establishment, if you will, in all the industrialized countries reacted in horror. They just said, “Whoa, can’t do this any more.”

Whalen says the U.S. has to decide whether to protect big banks like Europe, or return to a free market where banks succeed or fail on their own.

In Washington, I’m John Dimsdale for Marketplace.

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