After the passage of financial reform last year, President Obama and Fed Chairman Ben Bernanke declared the "resolution authority" in Dodd-Frank would eliminate the need for future bailouts.
Richmond Fed President Jeffrey Lacker deviated from the party line Thursday, suggesting big banks remain 'too big to fail' -- or at least believe they're too big to fail, which may lead them to take excessive risks again.
"The precedents set by intervention during this most recent crisis led to a significant increase in the scope of the safety net," Lacker said. "It is not clear that recent reforms have succeeded at closing the gap or liming the safety net."
In addition to expanding the safety net and reinforcing the notion of "too big to fail", the 2008 bailouts resulted in an even greater concentration of risk in the financial system as, most notably, JP Morgan absorbed Bear Stearns and Washington Mutual; Bank of America took over Countrywide and Merrill Lynch; and Wells Fargo took over Wachovia.
"It's a recipe for trouble," says investigative reporter Roddy Boyd, author of Fatal Risk: A Cautionary Tale of AIG's Corporate Suicide. "Something's gotta give."
Despite the 100s of billions of bailouts, Boyd says regulators haven't addressed the fundamental issues of too much leverage in the banking system and what he calls "'the Glass-Steagall problem' — we don't have it anymore."
Rather than raise capital requirements — which JP Morgan Chairman and CEO Jamie Dimon says would be a "nail in the coffin" for America's big banks — or other regulatory handcuffs, Boyd says the government should "lovingly apply a scalpel" to the biggest banks; in other words, "break 'em up."
Because of the continued use of leverage and interconnectedness of financial firms, more bailouts are likely if and when another crisis hits the system, whether it's triggered by U.S. real estate, Europe's debt crisis, currency markets or upheaval in China, as Dan and I discuss with Boyd in the accompanying clip.
- JP Morgan
- President Obama
- Fed Chairman Ben Bernanke
- Bear Stearns
- Jamie Dimon