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Treasury Near Deal On 'Too Big To Fail'
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Treasury Near Deal On 'Too Big To Fail'

Economy

Treasury Near Deal On 'Too Big To Fail'

Treasury Near Deal On 'Too Big To Fail'
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  • <iframe src="https://www.npr.org/player/embed/114195064/114195025" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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A year after the worst moments of the financial crisis, the House Financial Services Committee is moving this week to address shortcomings in the financial regulatory system. That includes the problems posed by firms that the government regards as "too big to fail." David Wessel of The Wall Street Journal, talks about the pending legislation with Renee Montagne.

RENEE MONTAGNE, host:

Another piece of major legislation working its way through Congress would regulate the financial system. This week, the House Financial Services Committee, headed by Massachusetts Democrat Barney Frank, is addressing problems posed by companies regarded as too big to fail. For insight, we turn to David Wessel. He's economics editor of The Wall Street Journal. Good morning.

Mr. DAVID WESSEL (The Wall Street Journal): Good morning, Renee.

MONTAGNE: And we have heard this phrase too big to fail so much over the last year, but would you mind briefly recapping for us exactly what the danger of an oversized financial firm might be.

Mr. WESSEL: Well, it's kind of a shorthand for an institution that is either too big, or involved in too many markets, or just too complicated for the government to allow it to fail, even if it gets in trouble. So, we saw with Lehman Brothers that Lehman Brothers apparently was so big and so interconnected that when it failed it nearly brought down the financial system.

So, now the government says we're not going to let that happen anymore. The problem is this encourages firms to get so big and so complicated they can borrow at favorable rates, because the people who lend the money know the government will bail them out. They take bigger risks than is probably prudent. They get the winnings if the company does well, and the taxpayers get the bill if it doesn't.

MONTAGNE: What then, is Barney Frank proposing?

Mr. WESSEL: Well, the final details of Barney Frank's proposal aren't out yet. He and the Obama administration have rejected the notion that the government should break up these big firms, or even limit the businesses they can be into. They're line is sort of, we're stuck with firms that are awfully big or awfully complicated, so let's do things that make it less likely that they'll fail and create a system so that if they get in trouble we have an alternative that's better than the bankruptcy of Lehman Brothers or the bailout of AIG.

MONTAGNE: But would that also include something that would put taxpayers still on the hook?

Mr. WESSEL: Well, the plan is that if a firm gets into trouble, the government could take them over, much the way they can take over a conventional bank today - and could decide who gets paid off and who doesn't. And the Frank legislation is going to say that the Treasury would come up with the money, initially, but after such a rescue the entire network of big financial firms would be assessed to pay for it to protect the taxpayers. Now, whether that'll work or not remains to be seen.

MONTAGNE: Yeah. Well, how does this fit in with other ideas that the administration has proposed to avoid a repeat of a financial crisis like we've just been through.

Mr. WESSEL: This thing is like a giant jigsaw puzzle with lots of different pieces. So, the House has, for instance, already accepted - although watered down some - President Obama's proposal to create a new consumer regulatory agency on the theory that the existing bank regulators weren't worried enough about consumers.

The committee is also working to change the way the government regulates these complicated securities called derivatives that were blamed for some of the crisis. And this week, Barney Frank's committee will also decide how much power should the Federal Reserve have and how much power should a new council of regulators have - to oversee the whole financial system.

Because one of the issues here, was that everybody was watching their little piece; no one was watching the whole, and that created an economic calamity.

MONTAGNE: Well, what about generally, what regulators can do, if you will, without congressional approval? I mean, what are their limits there?

Mr. WESSEL: Well, that's a good question. Actually, the regulators are doing quite a bit without congressional - they don't need Congress to do a lot of things. So, for instance, the Fed is working with other regulators around the world to force banks to hold more capital, bigger capital cushions, so that when they get into trouble, they can absorb more of the blows themselves, instead of laying them off on the taxpayers.

And there's a number of regulatory steps and supervisory steps that they're taking now, in order to tighten their oversight, even while they wait for Congress to finish its work.

MONTAGNE: And just - we have a few seconds here - let me go back to Barney Frank's proposal. He's, of course, in the House. How might, what you've been just describing, fare in the Senate?

Mr. WESSEL: We really don't know. The House is moving. They'll probably have a bill on the floor by the end of the year. The Senate is not moving very fast and is unlikely to get to this before the end of this calendar year.

MONTAGNE: David, thanks very much.

Mr. WESSEL: You're welcome.

MONTAGNE: David Wessel is economics editor of the Wall Street Journal.

(Soundbite of music)

MONTAGNE: This is MORNING EDITION from NPR News.

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