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Discussion: (3 comments)

  1. Max Planck

    Dodd-Frank will do nothing of the kind, Mr. Wallison. Not that you have any credibility on ANY subject.

    However, once again, we have Romney or some AEI hack complaining how bad a situation is, without the merest hint of a policy idea to cure it. At least D-F does provide that banks draw up their own living will.

    While banks ARE getting smaller thanks to Dodd-Frank: the prop trading desks have been dialed back, to name one example, and Bank of America continues to lay off people in the tens of thousands and Citigroup sheds divisions- no one seems to any concrete idea on how to shrink SIFIs to the point where their failure would not cause a fiscal domino effect. Everyone bellyaches, from Neil Barofsky on, but I never see one concrete proposal that someone can put up and say “Yes, that’s it.”

    The only solution I would see is to undo the mergers and acquisitions that were allowed in the 1994 Gingrich/Clinton “compromise” that allowed banks to gobble each other up. If you’re wondering why banks like Norwest, Marine Midland, Core States, etc. are gone, one reason is due to the rule that prevented, or slowed, interstate expansion. Another footnote in the lead up to the crisis, but an important one.

  2. Michael P Stein

    There’s a difference between creating a problem and recognizing it. Lehmann Brothers was not designated too big to fail. Yet its collapse created such massive shock waves in the financial markets that in hindsight, bailing it out might have resulted in a better overall outcome. (Please note that I am absolutely not claiming this would have been the case, only that it is a reasonable possibility.) Dodd-Frank merely tries to recognize the reality that some firms are in a similar position.

    Now, I will agree that Dodd-Frank doesn’t really solve the problem of an institution being so big that its collapse threatens the entire financial system. It merely attempts to provide more oversight so that problems are detected and corrected before they reach crisis stage. To really fix the problem of a single institution being so big that its failure threatens to bring down the system, you’d have to force a breakup of the large institutions. Is Mr. Wallison actually proposing such a move as a preferable alternative to Dodd-Frank?

  3. Max Planck

    While Mr. Wallison makes his impassioned plea for MORE REGULATION, one thing we should keep in mind are the many good reforms in Dodd-Frank. On November 5th, Bank of America will redeem about $5 billion in Trust Preferred Securities. These were instruments bequeathed as a gift to the banking industry, which allowed them to issue preferred shares, with a generous tax credit, and a high coupon payout.

    The joke: The banks were permitted to count this as Tier 1 Capital.

    This is like you getting a home equity loan and calling it an “asset.” Dodd-Frank gives the banks until January 1, 2016 to rid themselves of these instruments. By the way, it WAS possible to follow the law and buy these at a sharp discount to the redemption price, reap a large coupon payment, and get a nice fat gain upon redemption.

    But then, you would have to be me.

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