The head of the Dallas Fed lays out a persuasive case for why it has to stop:
Rosenblum lists many reasons why he thinks the TBTF banks must be broken up, but the one that might be the most damning is his criticism of the Dodd-Frank financial reform bill, which ostensibly created a mechanism for winding down troubled TBTF institutions with reduced cost to the taxpayer. Under Dodd-Frank, banks are supposed to create “living wills” that contain plans for orderly wind-downs in the case of a Lehmanesque disaster.
But in his criticism of Dodd-Frank, Rosenbaum points to what Josh Rosner in our recent Bank of America piece called “the worst-kept secret on Wall Street”: the high probability that when “the big one” finally hits, no one in government will have the guts to let a TBTF company go down the drain. Why? Because these firms are so deeply intertwined and interconnected that when one of them starts taking water, they essentially all do — and so any president who chooses to refuse to reach into the cookie jar for a big bailout would likely be signing off on the political suicide of a broad systemic collapse.
“In all likelihood,” Rosenbaum writes, “TBTF could again become TMTF – too many to fail, as happened in 2008.” He adds that, “For all its bluster, Dodd-Frank leaves TBTF entrenched.”
The significance of the Dallas Fed report isn’t that yet another person has come out to make public note of the impossible-to-miss, gigantic, oozing wart on the face of American capitalism that is the TBTF system. What’s significant is that we’re moving closer to a time when the extremely critical view of TBTF, and the demand for an end to the system, becomes bipartisan consensus.