Central Bank Activism

Bernie Sanders Voted For “Too Big To Fail” But Now Sponsors Shoddy Bill To End it

Sometimes things just don’t work out the way you want them to. Sen. Bernie Sanders (I-Vt.) introduced legislation earlier this month that would end “too big to fail” banks even though he’d previously supported legislation that did the opposite. If passed, Sanders’s “Too Big to Fail, Too Big to Exist Act” would dissolve the nation’s largest banks, forcing those with total assets that exceed three percent of gross domestic product to restructure and downsize within two years.

Q3 hedge fund letters, conference, scoops etc

Bernie Sanders Too Big To Fail

cegoh / Pixabay

Too Big to Fail?

Today, three percent of gross domestic product amounts to roughly $584 billion, so the law would break up banks like Goldman Sachs and Wells Fargo, just to name a few. Yet the law would not only apply to banks but also other large financial institutions—including insurance companies like Prudential and AIG, and even Warren Buffet’s multinational conglomerate Berkshire Hathaway.

This idea of “too big to fail” lies in the notion that the potential collapse of a bank would be so detrimental to the national economy that it necessitates government intervention. During the financial collapse of 2008 and 2009, this type of bailout cost American taxpayers $631.4 billion.

Large banks must be allowed to exist—and, therefore, be allowed to fail. Despite the irony of his role in overseeing the bank bailouts, former Treasury Secretary Tim Geithner put it best: “No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure.” One would expect Sen. Sanders to agree with this statement given his open hatred for banks, but that isn’t so.

The Flip-Flop

Despite his anti-Wall Street rhetoric, Sen. Sanders did them a favor by voting to codify “too big to fail” when he supported the Dodd–Frank Act in 2010. Passed and signed into law in the wake of the financial collapse, Dodd-Frank permanently legitimized “too big to fail” by creating a statutory taxpayer backstop for distressed banks.

Title II of the law established the Orderly Liquidation Authority (OLA) as a government-run alternative to traditional bankruptcy proceedings. After approval from the Treasury and Federal Reserve, a bank in default and on the brink of insolvency is seized by the government and liquidated by the Federal Deposit Insurance Corporation (FDIC). When carrying out these proceedings, the bank falls into FDIC receivership where the government assumes their bad assets, and the FDIC is further authorized “to use taxpayer funds to carry out OLA liquidations,” leaving taxpayers with the bill for a bank’s bad decisions.

The OLA also creates a moral hazard in the financial system where profits are privatized and losses socialized. With the OLA in place, market participants know the government will step in to keep a failing bank afloat instead of allowing the free market to take its course. This only enables and excuses the overly-risky behavior of investors, which is exactly what Sen. Sanders believes was a large contributor to the financial collapse in the first place.

It’s Not about Size

Sen. Sanders’ “Too Big to Fail, Too Big to Exist” proposal ignores that size has little to do with how dangerous a bank is to the economy. We can find much better indicators of a bank’s risk in its interconnectedness, complexity, liquidity, and substitutability. While complex, there are other regulations in place that take these into account and make sure banks are adequately capitalized. For example, risk-weighted capital ratios require banks to reserve a certain amount of money based on the riskiness of their assets, accounting for more than just size alone. This summer, a series of stress tests by the Federal Reserve found regulations like these enough to ensure the safety and soundness of the nation’s largest banks.

It’s one thing for Sen. Sanders to introduce a bill aimed at ending “too big to fail.” But it’s another for him to deliberately overlook the fact that he voted to make the “too big to fail” law, though perhaps this explains why he later took $55,000 directly from Wall Street in his 2016 presidential run. A better solution for ending “too big to fail” is House Financial Services Chairman Jeb Hensarling’s (R-TX) “Financial CHOICE” Act, which would permanently eliminate the OLA, ensuring taxpayers never have to pony-up and rescue floundering banks. Despite passing the House last year, Democratic senators refused to take up the bill.

Bernie’s hypocrisy is sickening. If he and his Democratic colleagues truly cared for ending “too big to fail,” they would work towards ending taxpayer-funded bank bailouts. Instead, they introduce signaling bills used to pander to the left and their anti-Wall Street sentiments.


Matthew Adams

Matthew Adams is a senior at American University in Washington, D.C., and a contributor for Young Voices.


This article was originally published on FEE.org. Read the original article.


Saved Articles
X
TextTExtLInkTextTExtLInk

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted for being a sophisticated and loyal reader.

Sign up for ValueWalkPremium today and get our exclusive content for 35% off.

Use coupon code vip19 or click on the button below

Limited time offer only ENDS 12/31/2019 or after next 25 subscribers take advantage whichever comes first – please do not share this discount with others

 

0