A Bill to End "Too Big Too Fail"?

By: Ken Millstone
Topics: Bailouts

(CBS)

A few phrases will likely stick with us, even when the economic collapse of the last two years begins to fade and the Great Recession of '09 becomes part of economic history. "Subprime" has entered the national lexicon. So has "credit default swap" for those who were paying closer attention. But perhaps chief among them is the one that everyone can understand – "Too big to fail."

Americans were told again and again that even though it was companies' own irresponsible behaviors that brought on the crisis, they had to be saved because the alternative was much, much worse (see "moral hazard"). A few were deemed not-quite-too-big-to-fail (Bear Stearns, Lehman Brothers), but there were many more Citgiroups and AIGs.

What "too big to fail" really meant was "too complex to fail." They had fingers in too many pies, were counterparties in too many transactions. They were foundational pieces in our Jenga tower financial system.

Now lawmakers are considering a measure aimed at preventing financial companies from becoming so large and complex – and breaking up the ones that already are. The bill resurrects provisions of a 75-year-old law – the Glass-Steagall Act – that was dismantled in 1999.

Glass-Steagall created the FDIC. It also prevented deposit-taking banks from operating brokerages, selling insurance, and underwriting securities – activities that bankers made infinitely more complex and risky in the last century, and particularly the last decade.

The new law is sponsored by Senators John McCain, R-Ariz., and Maria Cantwell, D-Wash., and could go before the Senate Banking Committee in January. A companion bill has been introduced in the House.

"Splitting banking functions needed for the smooth operation of the economy from riskier securities and trading activities was proposed earlier this year by the Group of Thirty, a nonprofit organization made up of former government officials and bankers, including Paul Volcker, a former Fed chairman and head of the president's Economic Recovery Advisory Board," Bloomberg News reports.

Bankers, lobbyists and some economists are lining up against the measure, noting that it wouldn't have saved Bear or Lehman (both pure investment banks) and would have handcuffed the government in some of its rescue efforts.

But that's chicken-and-egg stuff when it comes to a bill that might have prevented the need for rescues.

Ken Millstone
Ken Millstone is an assignment editor at CBSNews.com

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by rank_n_file December 30, 2009 2:20 PM EST: Any business\corporate entity that is "Too big to fail" is, by definition, a violation of anti-trust laws and should have been dismembered long BEFORE it reached the point where it could single-handedly jeopardize this Nation's economic stability and security by its irresponsible and often illegal practices.; Reply to this comment


by rockcutr December 30, 2009 9:37 AM EST: Too big to fail only works if you are a one legged man in a butt kicking contest.; Reply to this comment


by rockcutr December 30, 2009 9:35 AM EST: Too big to fail only works if you are a one legged man in a butt kicking contest.; Reply to this comment


by bmirarck2 December 28, 2009 10:07 PM EST: The original law was rendered obsolete by CONgress. Now they act as if it's news to them!! Wake up people. For ajvw; the dismantling of the Glass-Steagall Act was led by the "less regulation" repubs, idiot!!; Reply to this comment


by smac761 December 28, 2009 8:17 PM EST: If a firm is deemed to big to fail it is government code language code for they bought my re-election or I'm making good money off that just the way it is.; Reply to this comment


by sjc_1 December 28, 2009 5:50 PM EST: The Savings and Loans were destroyed with deregulation in the 80s and their charter was home mortgages. Then you saw companies like Countrywide that appeared with no regulations at all. Then we had subprimes, CDOs and CDSs, which brought all the rest down. I thought that "if it is not broke don't fix it" was a Republican motto. I guess they fixed it so that some could profit while the whole economy came crashing down.; Reply to this comment


by captdavepanama December 28, 2009 3:27 PM EST: If a firm is too big to fail then it is inferred that the government provides a guaranty against failure (like insurance). If the government is providing insurance, it should charge a fee, based on size and risk. This would also discourage mega mergers. Many small firms are competitive (which is good), a few large firms are a monopoly (which is bad). For proof of this, see AIG and banks too big to lend to businesses.; Reply to this comment


by ajvw December 28, 2009 3:05 PM EST: slobering barney and his buddy chris dodd will never sign on; Reply to this comment


by ctb4679 December 28, 2009 2:37 PM EST: Good for Cantwell and McCain! This bill is needed. Good to see politicians not afraid to rock the boat.; Reply to this comment