Lest it be assumed that the Dodd-Frank
financial-reform Act, which became law in 2010, two years after the
financial crisis, would render it less probable that taxpayers would again be
faced with having to bail-out financial institutions even without strings
attached in order to keep the financial system intact and the American economy
from collapsing, Gretchen Morgenson of The New York Times wrote
two years after the Act's passage that “failing to confront the
too-big-to-fail question is a serious oversight.”[1] For one thing,
disproportionately increasing the amount of money that the biggest banks must
hold against a rainy day once again neglects the possibility that every bank is
having such a day on the same day and so none of the banks will loan to other
banks (i.e., the commercial paper market). When a financial system itself is
sick to the extent that it cannot stand, all the heavy dominoes may topple, one
after another, even though each has more support. Secondly, widening the
too-big-to-fail category enables more financial institutions to engage in risky
bets because the expanded net could limit any eventual downside. Sure enough,
Morgenson points out that the legislation “actually widened the federal
safety net for big institutions. Under the law, eight more giants were granted
the right to tap the Federal Reserve for funding when the next crisis hits.”[2]
Those institutions, including the Chicago Mercantile Exchange, the Intercontinental
Exchange, and the Options Clearing Corporation were even able to avoid the
penalties for failure specified in the Act. The clearinghouses had
successfully argued that even though only banks had been allowed to borrow from
the Fed’s discount window, the clearinghouses are not financial institutions;
rather, they are financial utilities. So, should they fail,
they should not have to be “wound down” by regulators. This is essentially
having it both ways and getting away with it. To explain this comfortable
arrangement, we would need to look under the hood, so to speak, where I suspect
we would find an exclusive world wherein vast private wealth is itself political
power even apart from any attendant lobbying activity.
1. Gretchen Morgenson, “One Safety
Net That Needs to Shrink,” The New York Times,
November 3, 2012.
