Yesterday, Congressman Brad Sherman (D -- CA), reintroduced the "Too Big to Fail, Too Big to Exist Act," (HR 4963) in the 112th Congress. The legislation was cosigned by Congressman Maurice Hinchey (D-NY). Senator Bernie Sanders (I --VT) introduced similar legislation in the Senate during the last Congress. Under this legislation, any institution that is too big to fail will be broken up and reorganized to avoid more Government bailouts and future risk to our economy.
"Too big to fail should be too big to exist," said Congressman Sherman who has advocated this position since 2008. "Never again should a financial institution be able to demand a federal bailout. They claim; "if we go down, the economy is going down with us.' By breaking up these institutions long before they face a crisis, we ensure a healthy financial system where medium sized institutions can compete in the free market." Sherman continued, "No longer should giant financial institutions be able to get low-cost capital by telling investors that even if the institution is mismanaged and faces financial default, by virtue of its sheer size it will be able to obtain a bailout from the federal government. Every financial institution should compete for capital based on the soundness of its balance sheet, and no financial institution should be able to claim that there is a special federal safety net available to its investors because of the institutions sheer size."
"Most of the huge financial institutions still standing have become even bigger -- so big that the four largest banks in America (JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup) now issue one out of every two mortgages; two out of three credit cards; and hold $4 out of every $10 in bank deposits in the entire country," said Senator Sanders, when he introduced his version of the legislation last Congress.
"If any of these financial institutions were to get into major trouble again, taxpayers would be on the hook for another massive bailout. We cannot let that happen. We need to do exactly what Teddy Roosevelt did back in the trust-busting days and break up these big banks."
This legislation would require the Secretary of the Treasury to submit to Congress a list of all commercial banks, investment banks, hedge funds, and insurance companies that the Secretary believes have become too big to fail. Those entities deemed too large would then be broken up in a managed process of reorganization, so a single failure would no longer cause a catastrophic effect on the United States or global economy without a taxpayer bailout. ""Too Big to Fail'' refers to any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy.
During consideration of the Dodd-Frank Wall Street Reform and Consumer Protection Act in the House Financial Services Committee, Congressman Sherman strongly supported an amendment offered by Rep. Paul Kanjorski that gave federal regulators the authority, but not the obligation to break up the largest banks and other financial institutions that impact every facet of our economy. Thus far federal regulators have not taken that step to protect our economy. By mandating that these massive entities be reorganized, the "Too Big to Fail Act" is the next logical step in the process of eliminating the unwanted risk massive financial firms pose to our economy.