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The Ruse of Too Big to Fail

Yes, systemic risks exist and interconnectivity extends risk into the fabric of our lives and businesses, but how did that risk get transferred to the federal government, then to you and me?
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Lately, I have been perplexed that so few business leaders from the financial services industry have spoken out forcefully against the concept of "too big to fail." I generally have a very high opinion of business people and believe they are motivated by the American brand of competition and are energized by innovation, entrepreneurship and progress. But after weeks of waiting for financial business leaders to speak up against taxpayer bailout, it has finally it dawned on me that I had missed something.

I missed something fundamental. The "stop too big to fail" mantra is not an affront to most capitalists in the financial industry. They like it. In fact, they have every reason to embrace it because it is a perfect strategy for big banks. Consider the benefits: the strategy permits elaborate risks with guaranteed returns and provides for unlimited growth while also stifling competition. As important, the strategy can be sustained politically as it fuels an anxiety and fear, limiting choices and options for reform. Like all half truths, the too big to fail mantra is a devious logic that self perpetuates and manipulates the fair minded. It is the perfect "something-for-nothing" ruse.

If you break it down, the most important driver of big box bankers is not American style competition or love for the free market. Neither do they embrace entrepreneurship and innovation. Big banks are motivated to have an unfair advantage and to keep that advantage for as long as possible. For the captains of the big banks, there are no rules and no principles -- just a clear-eyed focus on the economics of getting bigger and bigger with larger and larger paydays. If that sounds like pure capitalism, it is.

It's time for Congress to clearly see the too big to fail ruse for the manipulative, pure capitalism that it is. Yes, systemic risks exist and interconnectivity extends risk into the fabric of our lives and businesses, but how did that risk get transferred to the federal government, then to you and me? Yes, it is very difficult to fully regulate the overnight credit repos of corporate finance, but does that mean we should pay if it fails? Financial products will continue to become more and more complicated but why do we subsidize the risk? In essence, how did the big bank problem become a problem for you and me? How did the banks transfer the risk from their balance sheet to the taxpayers? Fix that, and you have real reform.

Senator Dodd unveiled his reform package on Monday and I look forward to delving into the thousand-plus page bill. We at Stop Too Big to Fail look for a hard line on dissolution measures, unique provisions in bankruptcy to replace management and harsh financial penalties on management, directors, shareholders and creditors for banks as well as non-banks that go into dissolution. If a bank is broke, we should treat management like we treat students with college loans, with liens and unforgivable notes. We will be looking for a clear signal that the risk has been transferred away from you and me to the failing business.

When regulators make it too expensive for owners and creditors of big banks to fail, the idea of too big to fail will settle into the grave yard of dead clichés and clever ruses. We cannot accept the premise that somehow you and I created the risks associated with too big to fail. We need reform that changes the game and make the cost of too big to fail, too expense for the big banks and their owners. It's that simple.

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Twitter: @stop2big2fail

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