In his recent testimony before the Senate Banking Committee, former Federal Reserve Chairman Paul Volcker said the size and activities of financial institutions should be limited and that financial institutions should be allowed to profit and fail, without any expectation of government support. Volcker’s stance was sobering; current and potential too-big-to-fail (TBTF) policies are corrupting our financial system.
The recent entry of TBTF into our nation’s popular lexicon is ominous because TBTF implies that large, complex and highly interconnected financial institutions can rely on bailouts from small investors and taxpayers when their obscenely overleveraged and risky transactions go awry.
If we are to undertake real reform and fix our broken financial system we should heed Volcker’s warnings and stop perpetuating the notion that institutions are TBTF, instead choosing to address the root causes of the economic crisis. Current misguided proposals include recklessly imposing fees and assessments on financial service companies with over $50 billion of customer assets under management in major pension funds and mutual funds to support a “Resolution Fund” (a new bailout fund).
This misguided fee is unfortunately already making its way toward implementation. It recently passed through the House of Representatives and is on its way to the Senate for further consideration. Yet this fee, motivated by the notion that its somehow acceptable to underwrite the failure of institutions, would be less than successful at staving off the financial crisis and will adversely affect investors from many levels. Fees on institutions with over $50 billion in assets—which would support failing financial institutions—would only perpetuate this newfound theme in Washington that the government will provide a bailout in the cases of mismanagement. Policymakers would be wise not to buy into this notion and would be well advised to reform such proposals. In addition, imposing new fees and taxes on the financial system as the economy remains unstable is already an unwise proposition.
Financial reform should instead be implemented toward addressing overleveraged banks that have grown to out of control proportions, stopping government policies that encourage risk taking and perpetuating the notion that certain financial institutions are TBTF. Most importantly, we must cut off a seemingly endless supply of bailout funds that are financed on the backs of small investors and taxpayers, who, inarguably, have been ineffective at abating the crisis and won’t fix Wall Street.
Stop Too Big to Fail, a project of the Indiana-based Consumers for Competitive Choice, seeks to promote real reform that addresses these root causes of the economic crisis. Over the coming months Stop Too Big to Fail will propose real and viable alternatives to the proposals for more bank bailouts and hidden taxes that are currently making their way through the halls of Congress.
The current financial crisis is the result of the misdeeds of a few oversized banks with overleveraged balance sheets. In order to prevent these TBTF financial institutions from threatening our financial security again, we must undertake real reform efforts that address the immediate threat these institutions represent. The Stop Too Big to Fail project has developed specific recommendations to be incorporated into regulatory reform legislation.
A few of Stop Too Big to Fail’s recommendations include limiting the leverage of financial institutions, so that small losses do not reverberate through the entire economy; breaking up too big to fail institutions that pose an immediate and systemic threat to our economy; creating tangible incentives against becoming too big to fail, such as raising capital thresholds on institutions’ deposit levels to a point of self-regulation; and taking steps to ensure that big banks can’t just pass the costs of reform onto small investors. For instance, transaction taxes on financial institutions to recover what was borrowed from the Trouble Asset Relief Program (TARP) should not penalize small investors. The goal of our recommendations is to take a sensible approach to our current financial woes, engaging in real reform that has a real impact on the lives of small investors, tax payers, and consumers. More and bigger bailouts for TBTF institutions are not the answer.
Congress should work toward a bipartisan solution. This financial crisis has affected everyone, destroying lives, taking homes, and eliminating jobs; every day Americans should not be called on again to subsidize policies that have not worked. With all that Congress has on its agenda this year, the last thing our elected officials should be doing is engaging in partisan wrangling which get in the way of discussing thoughtful pro-market reform. Ending a “Too Big to Fail” policy will put this nation back on the path to recovery.
Sam Zamarripa is Chair and Co-Founder of Stop Too Big to Fail, a former Georgia State Senator and President of Zamarripa Capital, a private equity corporation focused on lower middle market companies in the Southeastern U.S.