Articles that appeared recently in The Financial Times and on Bloomberg.com highlighted the systemic problems that arise when financial entities are deemed too big to allow to fail. As the first anniversary of the failure of Lehman Brothers Holdings, Inc. is being observed, there seems to be no plan to address this aspect of the financial crisis. Ironically, the financial crisis has resulted in even greater concentration. There is a danger that the new motto of market participants will become “Being too-big-to-fail means never having to say you’re sorry. . . and never having to admit you were wrong.”
In their opinion article in The Financial Times, John McFall (Chairman of the Commons Treasury Committee) and Philip Augar (a former investment banker and the author of Chasing Alpha) advocate breaking up “a defective business model,” which they described using the following colorful language:
"Conflict of interest is embedded and this is unfair on other market users. It is 'heads we win, tails you lose' as the banks make off like bandits in the good times and become pious onlookers as the taxpayer foots the bill when it all goes wrong."
The article in Bloomberg.com is entitled “Lehman Monday Morning Lesson Lost with Obama Regulator-in-Chief," and it points out that the Obama Administration’s Plan for a financial regulatory overhaul would not force the largest financial entities “to shrink or simplify their structure.” The article includes the following interesting quotations:
Niall Ferguson, a professor of history at Harvard University, is quoted as follows: “The system is essentially unchanged, except that post-Lehman, the survivors have ‘too big to fail’ tattooed on their chests.” Simon H. Johnson, a former chief economist at the IMF, described the Obama Administration’s proposal as follows: “The biggest problem is it doesn’t deal with too-big-to-fail. It doesn’t say anything. You have to make things a lot smaller.” Former Federal Reserve Chairman Paul A. Volcker argued in a speech delivered on April 8, 2008, that a “demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole, needs repair and reform.” FDIC Chairman Sheila Bair told the Senate Banking Committee in May of 2009 that a financial system “characterized by a handful of giant institutions with global reach and a single regulator is making a huge bet that those few banks and their regulator over a long period of time will always make the right decisions.” Camden R. Fine, President of the Independent Community Bankers of America, asked “Does anyone think it’s a coincidence that less than 10 years after they repealed Glass-Steagall, the financial markets collapsed?”
If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.
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