Sunday, April 25, 2010

Financial "Reform" Will Benefit the Big Banks

Not surprising is the fact that the big banks through their lobbyists have captured the financial reform movement. If you create a power center, the powerful will move in to take control of it for their own benefit. The solution is not new power center, but less power centers, so that industry has to compete based on the services they provide versus how efficent they are at capturing and controlling the power center, Here's Gretchen Morgenson on what is going on with financial "reform":

The bills...don’t eliminate the prospect of future bailouts of interconnected and powerful companies.

Too big to fail is alive and well, alas. Indeed, several aspects of the legislative proposals sanction and codify the special status conferred on institutions that are seen as systemically important. Instead of reducing the number of behemoth firms assigned this special status, the bills would encourage smaller companies to grow large and dangerous so that they, too, could have a seat at the bailout buffet.

Here’s an example of this special treatment: Both bills would establish a specific process to resolve big-bank failures. Smaller institutions, by contrast, would be allowed to go bankrupt without a new resolution scheme.

This special resolution system is not only unfair; it also sends a pernicious signal to the market about large and intertwined institutions. The message is this: Subject as they will be to a newly codified “resolution authority,” these institutions and their investors and lenders can expect to be rescued if they get into trouble.

This perception delivers lucrative advantages to these institutions. The main perquisite is lower borrowing costs, a result of lenders’ assumptions that the giants are less risky because they will be in line for government assistance if they become imperiled. Think Fannie Mae and Freddie Mac. And remember all those folks on Capitol Hill and elsewhere who assured taxpayers that we would never lose a dime on those companies?

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