New financial regulations under consideration

July 6, 2009 2:44:07 PM PDT
They are the biggest of the big - the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn't want so many around anymore. Financial regulations proposed by the president would result in leaner and simpler institutions that don't carry the weight of the system on their marble columns.

Around Washington and Wall Street they have come to be known as TBTF - too big to fail. It's not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that a single one's collapse can create systemwide tremors that imperil the finances of millions of Americans.

With that fear in mind, the government stepped in to bail out Citigroup Inc., Bank of America Corp. and American International Group Inc. with tens of billions of public money last year.

Looking to avoid such a costly intervention, President Barack Obama's regulatory plan calls for large, interconnected companies to pay a heavy price for the systemwide risk they pose.

So far, however, congressional debate has centered on the administration's plan to put the Federal Reserve in charge of these "systemically significant" companies. Less attention has focused on the potential effect on the institutions and the financial system's hierarchy.

Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn.

They also would have to anticipate their conglomerates that pose greater risks to the economy. That lack of authority prevented the government from dissolving Bear Stearns Cos., Lehman Brothers and AIG in an orderly manner.

Under the administration's plan, the Treasury could decide to take a company swiftly through a bankruptcy-like process, appointing the Federal Deposit Insurance Corp. as a conservator or receiver. The FDIC currently now only has the authority to take over troubled banks.

If a swift end could cause a systemwide risk, the administration would allow a government intervention that still could require taxpayer money up front. The administration recommends that the cost of any taxpayer infusion be paid later with fees assessed on bank holding companies. Farrell noted that capitalization requirements for the companies would help lessen the infusion of government money.

The government would be aided by the failing company's own plan to wind down.

Anil Kashyap, an economist at the University of Chicago School of Business, said simply creating a "funeral plan" could lead some companies to reconsider some of their business strategies.

"The ones that would be more complicated would have to explain to their shareholders why they are so complicated and why they would have to have more capital" to cover their dissolution, Kashyap said. "That would be a very productive outcome."