We are aware that Goldman Sachs isToo Big To Fail just as its CEO, Lloyd Blankfein, is Too Big To Jail.
As Simon Johnson states in Bloomberg: "The problem of too-big-to-fail banks is alive and well, and looms over our financial future." Johnson says that the Federal Reserve (which regulates the TBTF banks) has a mostly positive view of the financial system as it now stands.
However, the banking system enjoys the implied subsidy of having a government guarantee which gives Wall Street banks like Goldman Sachs an unfair advantage (see page 6 of Statement of Committee on Financial Services.)
Fumbling Through the Fog Around Too Big To Fail
By Simon Johnson - Bloomberg View
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‘Safety Net’
As Tom Hoenig, the current FDIC vice chairman, put it at the hearing: “Short-term depositors and creditors continue to look to governments to assure repayment rather than to the strength of the firms’ balance sheets and capital. As a result, these companies are able to borrow more at lower costs than they otherwise could, and thus they are able increase their leverage far beyond what the market would otherwise permit. Their relative lower cost of capital also enables them to price their products more favorably than firms outside of the safety net can do.”
Unfortunately, the Fed’s Board of Governors seems unable to state the problem as clearly. And without the Fed Board, there is very little chance of progress within the existing Dodd-Frank framework.
In the absence of further legislative instruction, reform is stuck. The regulators could make use of their existing powers to do more, but they won’t. The last three years have taught us this.
Very large financial companies are likely to be rescued in future crises; the credit markets take this into effect when providing funding.
Fisher strongly advises that further steps be taken to make the banks simple enough and small enough to fail. He has some practical suggestions, such as limiting the official safety net to traditional commercial banking, while forcing everyone engaged in lending to higher risk trading or investment banking to acknowledge they have no downside protection from the government.
See the rest of the article here
Read the report of the Committee on Financial Services here
