Not Too Big To Fail

Said Fed Governor Daniel Tarullo:
"Bank stability's hitting a new low.
We must limit the size
Of those mega bank guys,
Since our power to save them is too low."

The Fed's thought leader on bank policy believes that regulators should address the problem of too-big-to-fail banks by directly limiting their size. In a speech at the University of Pennsylvania Law School, Federal Reserve Governor Daniel K. Tarullo laid out his thoughts on safeguarding the stability of the financial system. Mr. Tarullo, whose day job is that of Professor of Law at Georgetown University, suggests that banks may not grow too big to fail if their non-deposit liabilities are limited to a fixed percentage of the nation's GDP. Such liabilities would include interbank borrowing and other short- and long-term debts, but not customer deposits.

Notwithstanding the appealing simplicity of Mr. Tarullo's proposal, a banking industry spokesman warned of "unintended consequences." In this case, one has to wonder if he isn't more concerned about the intended consequences.

Hat tip to Sallie Krawcheck.

Acquirer's Remorse

A dealmaker second to none
Out of many firms, brought about one;
When it nearly collapsed,
He allowed that, perhaps,
What he did would be better undone.

Sandy Weill, former chairman of Citigroup, stunned the finance world when he opined during a CNBC interview that commercial and investment banks should be split up. Weill, of course, was the serial dealmaker whose entire career was dedicated to creating a bigger and more diversified "Financial Supermarket," culminating in the $70 billion merger of Travelers and Citicorp to form Citigroup in 1999. Not yet legal at the time it was agreed, this merger required a waiver from the Fed as well as the ultimate overturning of the Glass-Steagall Act through the Gramm-Leach-Bliley Act in order to be consummated. Weill retired before the financial crisis, in which his financial supermarket became the largest of the "too big to fail" banks to require a federal bailout. "I think the earlier model was right for that time," he said on CNBC. "I don't think it's right anymore."

Banking Bair

Sheila Bair, no longer at leisure,
Said: "The banks have collective amnesia,
As they're not really fit
For the capital hit
That would come with the next global seizure."

Former FDIC head Sheila Bair has come out of semi-retirement to head a new watchdog group, the Systemic Risk Council. Backed by the Pew Charitable Trusts, the Council will monitor and encourage financial regulatory reform. In an interview with Kai Ryssdal of Marketplace, Ms. Bair voices concern that the major banks have forgotten the lessons of the financial crisis, and spend more time trying to water down reforms than strengthening themselves for the next crash. In a related piece, Marketplace's Heidi Moore explains that the major US banks alone require $500 billion of additional capital to withstand a major shock. In this, America is just the tip of the iceberg, as the greatest global systemic risk lies with banks in Europe and Japan.