Congress Takes Up 'Too Big to Fail': Where Will They Draw the Line?

Lots of trepidation about what Barney Frank and the White House will do to constrain the new mega banks. I find the idea of using tax payer guarantees to fund risk-taking relatively bad long term policy. Going back to Glass Steagall in some form continues to make a ton of sense to me. The difficult question relates to what activities do you firewall? Do you allow commercial banks to syndicate? Are there some financial innovations that should be allowed in commercial banks that were previously not allowed? Where do you draw the line? In terms of "investment banks, what is the yard stick these should be regulated by? How big does an investment bank have to be before it becomes "systemic"? Is leverage the best measure of systemic risk? Should it be the only one?
Via NYTimes:

Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near collapse of the financial system last year — how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble.

A senior administration official said on Sunday that after extensive consultations with Treasury Department officials, Representative Barney Frank, the chairman of the House Financial Services Committee, would introduce legislation as early as this week. The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution..

Comments

[StephanienMO]

I don't really understand how this is going to help, unless like one expert says it encourages the industry to regulate itself: www.newsy.com/videos/c...

2009 Oct 27 04:52 PM

[Ed Zimmer]

The obvious solution was not bailing them out in the first place. We don't need more lawyers, just some common sense about responsibility. Ban all lobbyist gifts would make more sense than phonebook sized laws that take 3 months just to read.

2009 Oct 28 09:43 AM