A funny thing happened on the way to financial reform in Washington. While the White House and Treasury were tinkering at the edges of reforming the financial system and paying lip service to Paul Volcker and others who urged a serious overhaul, Senator Chris Dodd of Connecticut was assembling financial regulation that goes a long way towards really tackling the excesses which led to last year’s crisis.
Dodd, who chairs the Senate Committee on Banking, Housing and Urban Affairs, introduced legislation earlier this week that finally takes seriously the issue of regulating banks deemed too big to fail.
Among other things, Dodd’s proposal imposes new capitol and leverage requirements on large financial and requires them to provide their own life support in case of financial crisis. Large, complex firms that pose a systematic risk would be forced to issue long-term debt securities to be used as capital in the event of a crisis.
These firms would also be required to write and periodically update their own funeral scenarios so that regulators would have a better understanding of how these firms are structured in the event they were forced to shut down. Regulators would be able to unwind these firms through receivership by charging firms holding assets of more than $10 billion for the cost of their unwinding. All of these measures would go a long way in protecting the taxpayers from footing yet another systemic bailout.
The bottom line is that most of the firms deemed too big to fail last year have only gotten bigger. Today, they play an even more outsized role than they did before the collapse, not only because many of those that are left standing have grown even bigger, but because there is the understanding that taxpayers continue to be the backstop of last resort. Wall Street firms are certainly entitled to their profits, but they are not entitled to put taxpayers at risk in the pursuit of their profits. Dodd’s legislation recognizes that the “head’s, we win, tails you lose” mentality so pervasive on Wall Street both before and after this crisis cannot continue.
Significantly, politicians of both parties recognize that the status quo cannot continue. On Wednesday, Republican Senator Bob Corker admitted on Squawk Boxthat there was “a lot of effort on both sides of the aisle to come up with legislation that stands the test of time,” and that Dodd’s legislation was an improvement over what the Administration had proposed. Corker is a key member of Dodd’s committee and his willingness to work in a bipartisan manner on financial regulation is a good sign that Congress will finally act to curb many of the excesses that led to the financial meltdown.
Dodd has his work cut out for him. Many on Wall Street learned little from last year’s debacle, other than the fact that taxpayers have been and should continue to be on the hook for their excesses. This is apparent when the CEO of Goldman Sachs publicly declares that he is doing “God’s work” and when big banks dispatch an army of lobbyists to Capitol Hill in order to prevent regulators from having breakup authority for systemically risky banks.
Free marketeers claim that the separation between finance and state should be as sacred as the separation between church and state. But the moment these firms accepted one dime in taxpayer bailouts, became bank holding companies with access to the Fed’s discount window and put the entire world economy at risk, they lost the right to demand that their behavior not be examined. Since they still refuse to hold themselves accountable, it is up to Chris Dodd and other elected officials to make sure that they never again grow too big to force another taxpayer funded bailout.
Julie Roginsky is a CNBC contributor who has extensive experience in government, politics and public relations on both the federal and state levels including serving as the Washington communications director for former Senator Jon Corzine.