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Some Lawmakers Believe ‘Too Big to Fail’ Is Still Alive Seven Years After the Crisis

wall-stTwo years ago, U.S. Senators Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana) introduced a bipartisan bill in an attempt to end taxpayer bailouts. In May 2015, Vitter and Senator Elizabeth Warren (D-Massachusetts) authored similar bipartisan legislation, the Bailout Prevention Act, aimed at ending "Too Big to Fail."

Three weeks after the Vitter-Warren bill was introduced in the Senate, Reps. Scott Garrett (R-New Jersey) and Mike Capuano (D-Massachusetts) introduced a similar bill in the House that would limit the Fed's ability to bail out big banks in times of a crisis.

Some lawmakers are skeptical that Too Big to Fail has ended seven years after the crisis despite claims from some high-level government officials such as Treasury Secretary Jacob Lew that it has ended. The Government Accountability Office (GAO) released the results of a comprehensive study in July 2014 indicating that the larger national banks have not only received assistance from government bailout programs, but they enjoy a taxpayer backstop that community and regional banks do not, and that advantage widens during an economic crisis. The report was requested by Vitter and Brown two years earlier.

“(The GAO report) confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions," Vitter and Brown said in a joint statement. "Wall Street lobbyists may try to spin that the advantage has lessened. But if the Army Corps of Engineers came out with study that said a levee system works pretty well when it’s sunny – but couldn’t be trusted in a hurricane – we would take that as evidence we need to act. We can fix Too Big to Fail by passing our bipartisan legislation which would ensure that Wall Street megabanks – instead of taxpayers – have adequate capital to cover their losses in a crisis."

The GAO report suggested that under more normal credit conditions or if there was another financial crisis, investors would flock to the Too Big to Fail institutions. The report also confirmed that the large Wall Street banks enjoy roughly the same advantages as they did seven years ago, suggesting a lack of progress in ending Too Big to Fail.

Despite the findings of the GAO study and recent claims by lawmakers, Department of Treasury Secretary Jacob Lew said in an address at the Brookings Institution in July 2015 that companies designated as "systemically important financial institutions" (SIFIs) are held to higher standards for taxpayer protection, and that the law ended Too Big to Fail.

"To keep taxpayers from ever having to step in to save a financial firm again, Wall Street Reform ended 'too big to fail' as a matter of law," Lew told the audience at the Brookings Institution. "In addition, regulators now have modern, commonsense tools to protect taxpayers.  For example, the FSOC can designate large institutions as 'systematically important' and hold them to higher standards. Also, in the event of a crisis or a bankruptcy, regulators can seize large financial institutions and wind them down in an orderly way."

In July 2015, the House Financial Services Financial Institutions and Consumer Credit Subcommittee held a hearing to discuss the criteria for designating a company as a SIFI, criticizing the $50 billion asset threshold required by Dodd-Frank. Some members of that Subcommittee said in the hearing they believe that Dodd-Frank is codifying Too Big to Fail by continuing to designate companies as SIFIs. Also in July, the Senate Subcommittee on Financial Institutions and Consumer Protection held a hearing, to discuss strategies that would end to end Too Big to Fail.

"It's no secret that too big to fail is still around. If another financial crisis happened tomorrow–and that's still a real risk–nobody doubts that megabanks would be calling on the federal government to bail them out again," Vitter said in May when the Bailout Prevention Act was introduced. "Our legislation makes common sense reforms to the Fed's emergency lending powers to protect taxpayers the next time the megabanks lead us into another crisis."

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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