newjerseynewsroom.com

BY GERALD J. ROBINSON

NEWJERSEYNEWSROOM.COM

COMMENTARY

The just passed financial reform bill was supposed to end the "too big to fail" threat.

It didn't.

Now for a failing giant what we have is a bailout in disguise called "resolution authority" that is supposed to carry out an ""orderly liquidation." Under this ersatz "reform" approach, once the horse is out of the barn and a disaster occurs, the FDIC would step in with liquidation authority to mitigate the fallout by taking over the failed financial giant and "safely unwinding" it in an orderly way.

It's preposterous.

How could the FDIC take over and run a megabank like Citigroup with over 200,000 employees, operations and offices in 140 countries, and a huge range of complex, sophisticated financial services and operations? Where would FDIC get the staff, the experienced executives, the knowledge of operations? In reality, the FDIC would have to preserve and prop up Citigroup largely in its existing form with taxpayer dollars indefinitely.

And even if it could wind down its operations, would the FDIC decline to pay Citigroup's creditors and risk the failure of the creditors, then the potentially ensuing domino effect on other institutions? Of course not.

What this means then is that the "reform" act institutionalizes bailouts, making them even worse by placing the power to intervene in the payment of creditors in government hands, subject to the baneful political influence of the Washington/Wall Street plutocracy. The problem of "too big to fail" remains and the cozy relationships between the megabanks and the government that previously existed still exists.

The problem is worse now than ever. The financial crisis and bailouts have only made the megabanks larger and more powerful by acquiring their rivals. JPMorgan Chase acquired Washington Mutual and Bear Stearns, Bank of America acquired Merrill Lynch and Wells Fargo acquired Wachovia, while competition from Lehman disappeared with its demise.

But is breaking up the biggest banks the answer?

Some prominent economists think so. Nobel-Prize winning economist Joseph E. Stiglitz testified in a Congressional hearing that it would be far better to break up the too-big-to-fail institutions rather than to try to control them through regulation. Former chief economist of the International Monetary Fund and Professor of Entrepreneurship at MIT Simon Johnson agrees. In his recent book about the financial meltdown, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, he was blunt. "A central pillar of reform must be breaking up the megabanks that dominate our financial system and have the ability to hold our entire economy hostage."

Even laissez-faire former Fed Chairman Alan Greenspan has seen the light. "If they're too big to fail, they're too big," he said. "In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole. Maybe that's what we need to do."

In a curiously underreported attempt to amend the reform act, 33 senators took a shot at breaking up the major banks.

The amendment, sponsored by Democratic Senators Sherrod Brown and Ted Kaufman, would have required the megabanks to be reduced in size and capped so that the failure of any one of them would not bring down the entire system. No bank could hold more than 10 percent of the total amount of insured deposits and no bank's liabilities could exceed 2 percent of GDP.

In effect, the amendment would have caused the six biggest banks — Citigroup, Bank of America, JP Morgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley — to substantially reduce their size.

Washington/Wall Street plutocracy-backed Senators defeated the amendment by a vote of 61 to 33.

Gerald J. Robinson, Esq., formerly tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He received his B.A. degree from Cornell University, an LL.B. from the University of Maryland and an LL.M. in Taxation from New York University. Prior to entering private practice he served in the Office of Chief Counsel, Internal Revenue Service. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition, and wrote the monthly newsletter, Real Estate Tax Ideas, both published by Warren, Gorham & Lamont. He is also a frequent lecturer and contributor to various professional journals.