“Around Washington and Wall Street they have come to be known as TBTF — too big to fail. It’s not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that a single one’s collapse can create systemwide tremors that imperil the finances of millions of Americans.
With that fear in mind, the government stepped in to bail out Citigroup Inc., Bank of America Corp. and American International Group Inc. with tens of billions of public money last year.
Looking to avoid such a costly intervention, President Barack Obama’s regulatory plan calls for large, interconnected companies to pay a heavy price for the systemwide risk they pose. (…)
Under the administration’s proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn.
They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals — and burials.
Obama’s plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies. (…)
For those that qualify for top tier designation, the administration proposes a system that would dismantle them quickly if they get into financial trouble. Right now, the government has authority to step in and take down troubled banks, but not the conglomerates that pose greater risks to the economy. That lack of authority prevented the government from dissolving Bear Stearns Cos., Lehman Brothers and AIG in an orderly manner.
Under the administration’s plan, the Treasury could decide to take a company swiftly through a bankruptcy-like process, appointing the Federal Deposit Insurance Corp. as a conservator or receiver. The FDIC currently now only has the authority to take over troubled banks.”
This is really, really good news, if true. Lots of smaller banks have been, as Atrios says, EATED by the FDIC recently, and while I’m sure it hasn’t been pleasant for them, it also hasn’t had anything like the impact of, say, the demise of Lehman Bros. Having a quick procedure in place to deal with them, plus the additional capital requirements that will help smooth the process, is crucial. And making it less attractive to be big enough to pose systemic risk is also a very, very good thing.
I expect banks to be vehemently opposed to this. But this time, we should not let them win. One good long look down into the abyss has been more than enough.