Is There an Actual 'Too Big to Fail' List?

Recently I was visiting with a friend of mine who happened to discuss a "too big to fail" list that the federal government has created and sanctioned. He assumed I knew about it, and I thought there were general guidelines that would be required to make a company compliant with some "too big to fail" rules, but I had no idea there was a codified list. You learn something new every day.

The Financial Stability Oversight Council of the Department of Treasury has created "designations" that make up just such a list of "lucky businesses" that seem exempt to failure because of their size or influence. It is made up of two designations: Nonbank Financial Company Designations and Financial Market Utility Designations.

Under the "Nonbank" category there are:

MetLife, Inc.
American International Group, Inc.
General Electric Capital Corporation, Inc.
Prudential Financial, Inc.

These are among the most influential businesses in their respective verticals. American International Group, for example, is the largest insurance company in the world, General Electric is the poster child of crony capitalism, figuring out how to pay taxes in the lowest of single digits, and the list goes on. It should be no surprise that companies such as these are among the biggest financiers of lobbyists in the country. They have so much to gain -- including being able to avoid failure, regardless of how irresponsible it chooses to be.

Meanwhile, those companies with "Financial Market Utility Designations" are:

The Clearing House Payments Company L.L.C. on the basis of its role as operator of the Clearing House Interbank Payments System
CLS Bank International
Chicago Mercantile Exchange, Inc.
The Depository Trust Company
Fixed Income Clearing Corporation
ICE Clear Credit LLC
National Securities Clearing Corporation
The Options Clearing Corporation

All of these companies received their designations under the guidelines established by the sweeping legislation now known as Dodd-Frank. That legislation is famous for one of its principal architect's, Sen. Chris Dodd (D-CT) declaring he wasn't sure what that legislation would do, but that it would "change" everything. It is also famous for how the two men behind the bill (Dodd and his colleague, Barney Frank, a Democrat Congressman from Massachusets) quickly ended their Congressional careers almost immediately after its passage, while being pursued with ethics issues.

This list reminds me of the important work found in Too Big to Save? by Robert Pozen. This book's subtitle is "How to Fix the US Financial System" and it offers an agenda to do that and so more. It is too bad the Treasury Department didn't consider his sobering advice when they developed its guidelines to avoid such problems in the future. Pozen offers sanity in an industry that has lost its moral compass and he provides direction going forward. His book is filled with some important facts that cannot help but wake one up to the causes of our financial crisis and how to solve (and even avoid) such problems in the future.

The book is filled with common sense arguments that are built on the idea of restoring the integrity of financial institutions, rather than promoting political agendas or codifying indefinitely crony capitalism with prohibitions against failure. He notes that:

  • Up until 2008, no housing slump in any country had ever caused a worldwide financial crisis.

  • Until mid-2008, the Federal Housing Administration offered loans that required just a 3 percent down payment. In spite of this low sum, many nonprofits sprung up (and funded by construction developers and home builders) to cover the cost. It was a house of cards waiting to fall.
  • The stock market crash became even worse after Congress authorized the Treasury to spend billions of dollars "resolving" the financial crisis. Many rightly argue that the worse may still be yet to come.
  • Instead of addressing the systemic issues like the ones listed above, the government instead prohibited failure with a "too big to fail" list, which (knowing the history of government) will essentially assure that something like failure will happen.