Dodd-Frank's too-big-to-fail dystopia

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(L-R) Federal Reserve Board Chairman Ben Bernanke, U.S. Secretary of the Treasury Timothy Geithner, acting chairman of Federal Deposit Insurance Corporation Martin Gruenberg, chairwoman of the Securities and Exchange Commission Mary Schapiro listen during an open session of a Financial Stability Oversight Council (FSOC) meeting April 3, 2012 at the Treasury Department in Washington, DC. The FSOC held a meeting to vote on a final rule and interpretive guidance on the council's authority to require supervision and regulation of certain nonbank financial companies; a final rule regarding the Freedom of Information Act.

Article Highlights

  • The government expands crony capitalism to insurers, securities firms and other non-banks

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  • Few recognize the FSOC's designations will spread #TooBigToFail beyond banking to every other financial industry

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  • One of the most surprising things about the SIFI designation process is how little attention it's received from smaller firms

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With the recent publication of its final rule, the federal government's Financial Stability Oversight Council is now in position to designate certain nonbank firms as "systemically important financial institutions" (SIFIs). Under the Dodd-Frank Act, that label can be attached to nonbank financial institutions—insurers, financial holding companies, hedge funds, finance companies, securities firms, perhaps even money-market mutual funds and private-equity firms—that will "pose a threat to the financial stability of the United States" if they fail.

This process has received relatively little attention in the media, but there is probably no aspect of the Dodd-Frank Act that will have more damaging effects on competition in the U.S. financial system.

Almost daily, we hear politicians and commentators complaining that large banks like J.P. Morgan Chase are too big to fail and put the taxpayers at risk. But few seem to recognize that the Oversight Council's designations will spread the too-big-to fail problem beyond banking to every other financial industry.

The full text of this article is available via subscription to The Wall Street Journal. It will be posted to AEI.org on Tuesday, May 29.

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Peter J.
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