http://baselinescenario.com/2010/03/25/financial-reform-will-we-even-have-a-debate/
March 25, 2010 at 5:47 am
The Baseline Scenario
Financial Reform: Will We Even Have A Debate?
By Simon Johnson
<snip>
This matters, because there is more than a small problem with the
Dodd-White House strategy: the bill makes no sense.
Of course, officials are lining up to solemnly confirm that "too big to
fail" will be history once the Dodd bill passes.
But this is simply incorrect. Focus on this: How can any approach
based on a US resolution authority end the issues around large complex
cross-border financial institutions? It cannot.
The resolution authority, you recall, is the ability of the government
to apply a form of FDIC-type intervention (or modified bankruptcy
procedure) to all financial institutions, rather than just banks with
federally-insured deposits as is the case today. The notion is fine
for purely US entities, but there is no cross-border agreement on
resolution process and procedure - and no prospect of the same in
sight.
This is not a left-wing view or a right-wing view, although there are
people from both ends of the political spectrum who agree on this point
(look at the endorsements for 13 Bankers). This is simply the
technocratic assessment - ask your favorite lawyer, financial markets
expert, finance professor, economist, or anyone else who has worked on
these issues and does not have skin in this particular legislative
game.
Why exactly do you think big banks, such as JP Morgan Chase and Goldman
Sachs, have been so outspoken in support of a "resolution authority"?
They know it would allow them to continue not just at their current
size - but actually to get bigger. Nothing could be better for them
than this kind of regulatory smokescreen. This is exactly the kind of
game that they have played well over the past 20 years - in fact, it's
from the same playbook that brought them great power and us great
danger in the run-up to 2008.
When a major bank fails, in the years after the Dodd bill passes, we
will face the exact same potential chaos as after the collapse of
Lehman.
<end blog excerpt>
Michael