Fact and Fiction Behind Too Big to Fail

Taking the Paulson Challenge

A major, but poorly understood issue that faces the newest members of our Congress is financial reform. Systemic risk is as pervasive as before. Another financial collapse could happen within the near future. Little has changed. Whereas stupid decisions at major financial institutions, failures of oversight by regulators and faulty ratings from the credit rating agencies have been identified by Congress as three major contributors to the financial bubble that could be better managed, Dodd-Frank merely added an even greater burden on regulation and made the job of being a bank bank credit analyst much more difficult if not impossible.

Since only Congress can make the laws that provide the foundations for our financial markets, our newest Congressmen should take the Paulson challenge. I call it the Paulson challenge after its mention in former Treasury Secretary and Goldman Sachs executive Hank Paulson’s book, On the Brink (pages 69 and 70). Mr. Paulson quotes Chuck Prince’s remarks (among others) at a June 2007 dinner at the New York Fed. Mr. Prince at the time was CEO of Citigroup, the huge bank whose financial profile was among the most ravaged within the bubble. One thing Mr. Prince got right was that all these large banks compete intensely with one another, and in fact with the largest banks around the globe.

Mr. Prince asked then-Treasury-Secretary Paulson if something couldn’t be done by regulators to “tamp down” the impact of these competitive pressures and the use of “riskier practices”. As Mr. Paulson quoted Mr. Prince saying, “Isn’t there something you can do to order us not to take all of these risks?” They couldn’t help themselves. Mr. Paulson chose to put this quote in his book, so let’s call it The Paulson Challenge.

Anyone who understands the financial industry and who has also examined campaign donations from it knows that expecting real reform from either the Democrats or the Republicans is unrealistic. They depend on financial sector donations to be reelected, and being in Congress is a nice job in any economic environment. So this must be a challenge for the newbies. Some of them understand how badly this nation needs game-changing legislation. We can only hope that they take the Paulson challenge.

How can these most senior executives and their boards of directors continue to be so helpless in the face of competitive pressures, ones faced by all senior executives of public companies, yet also continue to have their decisions propped up by taxpayers? If they benefit from this extraordinary government support, shouldn’t they have some level of personal responsibility cast in law, not in regulation? When the bubbles collapse, it is law that is needed to have those who are responsible face some consequences. Without consequences, there will be no change.

Fairy Tale Capitalism: Fact and Fiction Behind Too Big to Fail

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Was the mortgage debacle the sole cause of the financial bubble's collapse? Do you believe those who say the elimination of Glass-Steagall barriers didn't contribute to its building? Fairy Tale Capitalism: Fact and Fiction Behind Too Big To Fail places the mortgage mess into a broader perspective. It explains how the Federal deposit guarantee was married to investment banking's trading intensity, why the Fed had no choice but to bail out the biggest banks and how derivatives played a poorly-understood, but equally important role in the crisis. In simple terms Emily Eisenlohr walks with those who live on Main Street down Wall Street's darker alleys.

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