Legislating "Too Big to Fail"

Congress is getting ready for the next crisis… in their own strange way: The House Financial Services Committee might introduce new “too big to fail” legislation as soon as this week. Led by our “favorite” representative Barney Frank, rumor has it that the new regulations would, in the words of the N.Y. Times, “make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.”

So rather than proposing legislation that might keep banks from becoming TBTF, Congress aims to make it easier to nationalize them upon their demise? We’ve even heard this rumored legislation explained as a “living will” for banks… scary.

“We should be phasing out the government guarantees of the banking system’s liabilities,” says Dan Amoss, armed with a viable alternative. “That, I assure you, would discourage foolish risk-taking among bankers. Case in point: Goldman Sachs behaved in a much more responsible, sustainable manner when it was a privately owned partnership without government guarantees, rather than the high-frequency trading, TLGP-hogging, heavily lobbying institution that it is today.

“Like an addictive drug, today’s fiscal and monetary policies have made everyone feel better, but have further weakened the structural health and sustainability of the economy. If you doubt this, just look at the horror in most investors’ eyes when they are confronted with the prospect of a fed funds rate above, say, 2% — up from today’s range of zero percent. The addiction to E-Z credit and government support everywhere you look is one of the clearest reasons that this economic recovery is an elaborate illusion.

“Yet we still see examples of extreme inefficiencies in the valuation of certain stocks. It feels eerily similar to the tech bubble, with investors behaving as if today is the last chance they’ll ever get to buy Amazon.com stock at less than 80 times earnings. Whether it’s the sky-high multiple on Amazon’s maturing business, which seems to be discounting that every Chinese citizen will own a Kindle within five years, or the expectation that banks employing creative accounting have seen the worst of their credit losses, many investors are putting real money behind their belief in a super-bullish economic environment.”