'Too Big To Fail' Banks: Bigger, Badder... and Here To Stay

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'Too Big To Fail' Banks: Bigger, Badder... and Here To Stay

Dodd-Frank regulations have done little or nothing to diminish systemic threat of large financial institutions as FDIC and Fed regulators say "living wills" are inadequate to avoid repeat of 2008 disaster

A hand painted sign on the pavement at Zuccotti Park in 2011 reads: "No such thing as too big to fail." (Photo: Stan Alcorn/Marketplace)

Nearly six years after the financial crisis of 2008 that helped spur a global economic meltdown, federal regulators in the U.S. on Tuesday declared that much-touted reforms designed to curb the threat of so-called 'Too Big To Fail' banks have done not nearly enough to end the prospect that taxpayers will be left holding the bag when the next bubble bursts or a new wave of Wall Street disasters strikes.

Presented in a joint review by the Governors of the Federal Reserve System and the Board of Directors of the Federal Deposit Insurance Corporation (FDIC), the two financial regulatory bodies say that resolution plans (so-called "living wills") submitted by eleven large banks—which included Wall Street titans Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp., and UBS—shared common flaws that make the institutions a continued threat to the overall economy.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, included provisions meant to avoid a repeat of what happened in 2008, when a collapse of the mortgage market sent a shockwave through the financial services industry and U.S. tax dollars were used to backstop the nation's largest banks from defaults that Wall Street claimed would cause even more severe damage to the economy. Portions of Dodd-Frank compelled these large institutions to create 'resolution plans' so that in the event of a similar crisis, the banks would be dismantled in a more orderly fashion and large-scale government intervention would not be necessary—nor in theory, allowed.

The problem, according to the Fed and the FDIC, is that the plans put together by the big banks simply won't work.

"Each plan being [put forth] is deficient and fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis," said FDIC vice chairman Thomas Hoenig in a statement. "Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support."

As the Huffington Post's  Shahien Nasiripour explains:

The phenomenon known as too big to fail is based on the notion that government officials will always rescue a failing financial company when it believes the failure would cause financial chaos. Since investors in the company believe they'd be bailed out, they accept a lower return for funding the company's operations. That in turn enables the too big to fail company to enjoy a taxpayer-provided subsidy unavailable to its smaller rivals.

Tuesday's announcement by federal regulators that the 11 banks' living wills were inadequate strikes at the heart of the argument that the banks are no longer too big to fail.

Last week, a report by Government Accountability Office came to similar conclusions as the FDIC and Fed governors after it was asked to look into the impact that Dodd-Frank has had on the 'too big to fail' institutions. As Gretchen Morgensen at the New York Times reported, the GAO findings—despite being "muddled" in some respects—make it clear

that some institutions remain too complex and interconnected to be unwound quickly and efficiently if they get into trouble.

It is also clear that this status confers financial benefits on those institutions. Stated simply, there is an enormous value in a bank’s ability to tap the taxpayer for a bailout rather than being forced to go through bankruptcy.

Even more troubling, since 2008, the largest banks in the U.S. have gotten larger, not smaller.

As the FDIC's Hoenig conceded on Tuesday, "These firms are generally larger, more complicated, and more interconnected than they were prior to the crisis of 2008. They have only marginally strengthened their balance sheet to facilitate their resolvability, should it be necessary. They remain excessively leveraged."

Though Congress has continued to take a back seat on stronger regulations of Wall Street, Sen. Elizabeth Warren (D-Mass.) has stood out as she has a consistently challenged federal regulators and bank managers over the 'too big to fail' problem.

"Who would have thought five years ago, after we witnessed firsthand the dangers of an overly concentrated financial system, that the Too Big to Fail problem would only have gotten worse?" Warren asked last year  while speaking at an event organized by the Roosevelt Institute and Americans for Financial Reform. "Today, the four biggest banks are 30% larger than they were five years ago. And the five largest banks now hold more than half of the total banking assets in the country. One study earlier this year showed that the Too Big to Fail status is giving the 10 biggest U.S. banks an annual taxpayer subsidy of $83 billion."

And as economist Anat Admati, who has also testified to Congress on the matter, explained to journalist Bill Moyers last month:

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