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TBTF: Coming to a Company Near You Soon



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We’ve just passed the third anniversary of the other piece of Leviathan legislation passed during President Obama’s first term — the Dodd-Frank Act. Just like Obamacare, its full horrors are only now beginning to come to light. Perhaps the worst of all the terrible aspects of this law is the capacity of the Financial Stability Oversight Council (FSOC) to designate firms as “systemically important financial institutions” (SIFIs) that receive funding advantages owing to their size. The idea of this designation was to end Too Big To Fail (TBTF) and thereby end bailouts, but it appears to have had the reverse effect and entrenched TBTF firms (I wrote about the phenomenon last year).

As usual, rather than recognizing the problem, the administration has doubled down. As AEI’s resident financial genius Peter Wallison explains today, the FSOC has just extended the TBTF problem beyond banks:

If indeed the large banks receive funding benefits because market participants believe that they will not be allowed to fail, then these three firms will now also receive that advantage. Indeed, Robert Benmosche, the president and CEO of AIG, has already recognized this, noting in an interview recently that he is looking forward to the FSOC’s designation because “when we go out and say we’re strong, we’ll have [the FSOC] as a voice of the good housekeeping seal that says they are strong.”

Pity the firms that will have to compete with this. Smaller insurance firms may find that GE Capital and AIG are spreading the word that they are considered special by the government. Not only are they regulated by the Federal Reserve, but they have also been designated as systemically important and are thus too big to fail. The implication is that the Fed’s regulation will keep them financially strong, but if in the future they should become weak for any reason, their customers and their creditors can have some confidence that the government will step up to be sure that they meet their financial obligations.  

What the FSOC has done will be seen in the future as the most damaging action taken under the authority of Dodd-Frank. It has the potential to turn what are today competitive industries into financial sectors dominated by large, government-backed firms, exhibiting all the indicia of crony capitalism. The fact that it was done in the shadow of our disastrous experience with Fannie Mae and Freddie Mac, and while Congress was concerned about firms that are too big to fail, only demonstrates how mindless it really was.

The precedent of the administration essentially deciding auto manufacturers like GM and Chrysler were also TBTF is not encouraging for the future application of this rule. The age of Mega-Corporations imagined in so many dystopian sci-fi stories may be upon us, but they won’t be the creation of private enterprise, and the sci-fi element will actually be SIFI.



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