Solution to 'Too-Big-to-Fail' Banks: Break Up Firms, Avoid Future Bailouts, Public Citizen to Tell Congress

Giant
banking firms should be broken up, rules should be reinstated
prohibiting commercial banks from risky speculative ventures and new
"resolution authority" for non-bank financial institutions should be
created, Public Citizen will tell Congress today.

Those
are just a few solutions to deal with institutions that are deemed "too
big to fail," Robert Weissman, president of Public Citizen, will tell
the House Judiciary Committee's Subcommittee on Commercial and Administrative Law.

"It
is hard to look at what was done over the past year and a half and
conclude it was anything less than disastrous," Weissman says. "The
bailout strategy is unacceptable. It unjustifiably plunders the public
treasury to support failed, reckless enterprises while reinforcing the
cycles that lead to periodic failure and ever-larger bailouts."

Congress
should take a page out of the book of antitrust law, Weissman says.
Antitrust offers a good approach to addressing Wall Street abuses
because it looks at industry structure, rather than just setting rules
for market participants, he says. The antitrust approach asks not how
regulatory agencies can monitor the mammoth financial institutions, but
whether those institutions exist at all.

Weissman recommends that:

• The
  government should break up "too-big-to-fail" firms. This would take
  place over time, with regulators managing the process. Or the
  government could instruct the mega-institutions to sell off operations
  or spin off subsidiaries;
• Congress
  should reinstate the Glass-Steagall Act, which kept commercial banks
  separate from investment banks and other enterprises that undertake
  risky investments;
• Congress
  should enforce the existing 10 percent concentration limit for
  depository institutions, and consider lowering the threshold. This
  means that a bank cannot acquire another bank if the acquisition gives
  it more than 10 percent of deposits nationwide;
• Congress should assess what constitutes appropriate size or interconnected limits for non-depository assets;
• If Congress
  doesn't want to immediately start breaking up firms or reinstate
  Glass-Steagall, it should create an independent commission to assess
  the structure and risks posed by the financial services industry;
• Congress
  should impose a fee on the too-big-to-fail institutions to capture for
  the public the subsidy these corporations are receiving in credit
  markets;
• Special rules
  of conduct designed to deter risky behavior and enable effective
  monitoring by government regulators should be applied to the largest
  financial institutions. These should prohibit the use of offshore tax
  havens, mandate that executive compensation and bonuses be linked to
  long-term performance, enhance consumer protection standards, enhance
  obligations to serve underserved communities, and more.

The
problem with the bailout, Weissman explains, is that the government has
not required reciprocity from any of the bailed-out firms. Nor has it
demanded the firms change the behaviors that led to the collapse.

The
government needs "resolution authority" that would give it the tools it
needs to act quickly and with flexibility when large financial firms
are about to go under and jeopardize the whole system, Weissman says.

This
authority would provide structured government intervention, rather than
the haphazard approach we have seen. It should draw on the assets of
the failing institution, rather than on government assets, when dealing
with crises. It should provide officials with the power to merge a
failing financial firm into another institution, or sell off pieces of
the failing firm. It also should provide the power to maintain
ownership of a resolved firm if doing so is in the public interest.

"Wall
Street is now populated by a handful of dominant mega-corporations - a
smaller group of larger firms than existed even before the current
financial crisis," Weissman says. "Many - including many who believe
the too-big-to-fail problem is a looming, ongoing, long-term and
recurring threat to financial stability - believe this state of affairs
is a fait accompli. The antitrust tradition teaches us that it need not
be so."

LEARN MORE about what Public Citizen is doing to enhance financial accountability.