Too many banks are still 'too big to fail'

Posted at 4:37 PM, Jan 21, 2015
and last updated 2015-01-27 11:00:14-05

It was the height of the financial crisis in 2008, and Washington had to make a deal with the devil: Bail out banks that were “too big to fail,” or let them implode and watch the already depressed U.S. economy freeze up even more.

But despite President Obama’s promise in 2010 to reign in mega-banks so they don’t pose systemic threats, many say financial institutions such as Citigroup and Bank of America still pose the same risk to the U.S. economy.

“It’s true that they’re so big that they are too big to fail, just as they were before. In fact, even more so,” Robert Shapiro, a Senior Fellow at Georgetown University School of Business who advised President Clinton, says of today’s megabanks.

Among those who acknowledge the ongoing problem is the president himself, who introduced a sizable tax hike on big banks in Tuesday night’s State of the Union speech. The proposed tax would apply to the biggest 100 financial firms, and would “help reduce the probability of major defaults that can have widespread economic costs,” the White House said in a fact sheet.

The Dodd-Frank Wall Street and Consumer Protection Act was supposed to address that problem. When the bill became law in 2010, it gave regulators more authority, demanded that banks hold a bigger pile of cash and banned big banks from making risky trades.

But were those changes enough?

Shapiro explains that while Dodd-Frank makes it “a little less likely” that large banks will fail, the legislation does little to reduce banks’ size or their centrality to the financial system.

Yet banks are still lobbying for the rules stipulated in Dodd-Frank to be loosened. Republicans have been leading the charge, attaching rollbacks to the law to must-pass bills, such as legislation to fund the government. In his State of the Union address, the president vowed to veto any efforts that would weaken Dodd-Frank.

And what about the White House’s big bank tax proposal? Like almost everything pitched during State of the Union addresses, it is likely to go nowhere.

The White House first floated a big bank tax in 2010, when anti-Wall Street sentiment was raging. But when Rep. Dave Camp, R-Mich., floated a similar proposal last year, it was met with intense opposition by Wall Street firms, which threatened to turn off the spigot of campaign contributions.

Shapiro’s not sure that the big bank tax would do anything to prevent Wall Street from taking outsized risks, but he supports the proposal for a different reason.

“From my point of view they have the money,” he said. “They can afford it.”

[Also by Isaac Wolf: Judges rarely take action, even when prosecutors withhold evidence from defense]

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