The Too Big to Fail, Too Big to Exist Act of 2009

To address the concept of ‘‘Too Big To Fail’’ with respect
to certain financial entities.

1     Be it enacted by the Senate and House of Representa-
2 tives of the United States of America in Congress assembled,
4     This Act may be cited as the ‘‘Too Big to Fail, Too
5 Big to Exist Act’’.
8     Notwithstanding any other provision of law, not later
9 than 90 days after the date of enactment of this Act, the
10 Secretary of the Treasury shall submit to Congress a list


1 of all commercial banks, investment banks, hedge funds,
2 and insurance companies that the Secretary believes are
3 too big to fail (in this Act referred to as the ‘‘Too Big
4 to Fail List’’).
6     Notwithstanding any other provision of law, begin-
7 ning 1 year after the date of enactment of this Act, the
8 Secretary of the Treasury shall break up entities included
9 on the Too Big To Fail List, so that their failure would
10 no longer cause a catastrophic effect on the United States
11 or global economy without a taxpayer bailout.
13     For purposes of this Act, the term ‘‘Too Big to Fail’’
14 means any entity that has grown so large that its failure
15 would have a catastrophic effect on the stability of either
16 the financial system or the United States economy without
17 substantial Government assistance.

Introduced by Senator Bernie Sanders of Vermont. That’s the entire bill.

Note that the bill puts the lie to the “interconnectedness” diversion I discussed last week. The administration’s own proposal requires the government to identify financial institutions that are “too [insert whatever adjective you want here] to fail” — the administration just calls them “Tier 1 Financial Holding Companies.” The Fed has called them “systemically important financial institutions.” Sanders basically says, you were making the list anyway, so you can’t use that as an excuse.

The bill says that Treasury can break up the institutions any way they want to, so long as the resulting entities do not individually threaten the financial system (and thereby our economic well-being). So opponents can throw out all those arguments about why separating commercial and investment banking is bad, or why banks have to be global (a bit of an embarrassment to Wells Fargo) — now they need to argue that a well-functioning financial system must include institutions that could take down the financial system.

Here’s Nemo’s take.

Bernie Sanders’s petition here.

By James Kwak

35 thoughts on “The Too Big to Fail, Too Big to Exist Act of 2009

  1. I love it.

    If we could ever in some alternate universe actually pass such a thing, though, the bill itself would need to delineate what’s TBTF rather than relying on some dubious character like the Treasury secretary to both define the concept and then make the list. You can never count on a particular official to be proactively any good.

    Unfortunately, since we have a system driven mad with corruption, legal solutions have no chance.

  2. Everyone knows, to a first approximation, exactly which institutions are on this list. So if Congress were ever to pass such a law, the Treasury would have little choice, I think.

    My own gripe is that I do not see anything in the bill to prevent the broken-up institutions from re-merging later.

    But these are details that could easily be fixed if our lawmakers had the will to do anything like this. Of course they do not because they are bought and paid for. The guys making seven- and eight-digit salaries simply care a lot more about this than we do, even if their opinions did not outweigh ours by 1000 to 1.

    Most of us do not even care enough to click through and “sign” a virtual petition.

    It is nice to dream, though.

  3. I also love it and just signed the petition. But I also worry that allowing the Treasury Secretary to determine who is who will somehow break up BofA but not Goldman.

  4. Splendid! But toothless.
    How about an “or else”, like “failure to do so will result in treble damages and time in the Iron Maiden or SOMETHING- Anything!!

  5. Bravo Bernie Sanders!

    Could we somehow get the message across to both houses of Congress that they should either pass this bill or start looking for another job in November 2010 after we replace them all in the mid-term election?

  6. It is true that Goldman Sachs’s D.C. branch office (formerly known as the “United States Department of The Treasury”) would be resistant to this.

    Still, to my knowledge this is the first time an actual lawmaker has used the phrase “too big to fail is too big to exist”, and he used it in the text of an actual bill. So this is a reasonably big story.

    Too bad it had to be the socialist, though, which gives this bill approximately zero chance of being taken seriously. If we want to see it go anywhere, we need to convince someone to the right of Bernie Sanders to support it. Maybe start with Feingold and work from there?

  7. I think everyone who believes in the general theme of this bill should support it. There is no reason to point out Bernie’s socialistic tendencies, as though we need to excuse them. There is no reason to quibble about the particulars, and worry about changes now.

    The opposition will do these things. The point is that we should just support it, and loudly.

    Put the opposition on the defensive! No bill is perfect. But at least this one is not written by Wall Street. This bill should be something we can actually rally around!

  8. So the solution to a corrupt Treasury that obviously shows favoritism to some firms is obviously to give them even more power. What could go wrong?

  9. James Kwak: “insert whatever adjective you want to here”
    I have some choice vulgarity I would like to place there.

    Does Bernie Sanders have to teach Larry Summers what fiduciary responsibility is, and how that makes your national economy stronger?? Or does Summers think never-ending big bank welfare spending paid by the taxpayer is the way to economic utopia???

  10. There needs to be something along the lines of, “No institution shall be eligible for funds from any special program of the Federal Reserve or Treasury, unless they have previously been designated as a Too Big To Fail institution through the provisions of this bill.”

    I am not sure about how exactly to word this–i.e. the meaning of “special provisions” and how you prevent an override in an Congressional Son-of-TARP, but you need to put the questions directly to the boards: do you want access to the Treasury and be broken up, or do you want to stay together and have access only to market capital at market rates?

    As the bill stands, a company can pay off whomever it needs to in order to stay off this list, and then still get money when the next crisis comes.

  11. Rather than give the government more power, lets take it into our own hands. Close all your accounts with Chase, Bank of America, Goldman Sachs, Wells Fargo, Citgroup, Morgan Stanley etc. and move your money to small local and regional institutions. Credit unions would be the best.

    Without deposits none of these firms could be too big to fail.

  12. Pragmatist: I’m with you wholeheartedly. But, how to organize the masses to actually DO this. That’s the burning question.

    If we, the poor schmucks – forgive me if I’ve incorrectly included you in my own financial status group – don’t act en masse, I’m afraid we cannot have a significant impact on the TBTFs.

    I’m assuming the wealthy (at least most) would have no interest in taking this action with us.

  13. Well, you have already transferred your money to a local bank or credit union, right? And the stats say that you probably know several people who still have deposits with TBTF banks, right? Talk to them. :)

  14. Those worried about Bernie Sanders being a socialist should worry more about Barney Frank being a $tooge. His derivatives reform bill is a complete sellout to bankster interests and will make the next collapse even bigger and just a matter of time. To understand why check out the written testimony of Rob Johnson before Barney’s House Committee on Nov 7.

    Where is Cotton Mather when we need him?

  15. This will turn out just like my single payer turned out. Money talks, BS walks. Washington DC is well over knee deep in lobbyist that will see to it they get whatever they want at any cost. They just sold out the elderly(medicare) and even got AARP to go along with it! This crap is crazy. We all know the problem standing in the way of change. It’s fat rich guys with not enough money.

  16. Is there any corollary with this TBTF applied to the financial industry and the AT&T break-up a few decades ago? Painful as it was, it re-energized the entire telecommunications industry at a point of an enormous technology break-through.

  17. Love the bill – except for giving the Treasury Sec the power to create the list.

    And, being realistic – TBTB will NEVER let this happen.

    We are doomed. Just best to prepare oneself for the collapse that has already started.b

  18. I care enough to sign it, but I still doubt that internet petitions hold *any* significance on any issue to this day. For some reason the reduced amount of effort required to create, promote, and sign one seems to make people unwilling to take them seriously. It’s like peoples’ genuine heartfelt opinions are somehow less valid on a computer screen.

  19. I am doing my part. Besides moving my money I am posting comments encouraging people. I also sent out a mass e-mail to one of those mailing lists that forwards me every right wing criticism of government.

  20. Oh, I’m all for TBTF being total BS. Having said that I can’t wait to see how they plan on defusing 200 trillion in derivatives that the big banks hold.

    Health Care and now this.

    F*&#ing genuses up there.

  21. Please, people, can we debate the merits of Sanders’ bill AFTER this year’s bonuses are paid out, OK?

  22. I hereby nominate Bernie Sanders to replace Tim Geithner, and Elizabeth Warren to head a new cabinet department entitled “The Fairness to Mainstreet Department” with the power to disallow any economic and financial practices which may be considered a threat to the ordinary citizen.

  23. This bill is media disguised as legislation. Sanders couldn’t get anyone in the media to stand up to the banks and just say what everyone is thinking, that too big to fail is too big to exist. He probably can’t even hold a press conference and have anyone show up and report that someone thinks too big to fail is too big to exist.

    But Sanders can craft a bill. And he can title it what he likes. And the MSM pretty much have to report it as such.

    Kinda funny.


  24. Good to see there’s still some common sense in government, even in the Senate. Unfortunately, I fear the institutional bias of the Congress is such that real, effective reform is an impossible dream. The Democrats are in the pocket of Wall Street, and if the Dems won’t impose some common sense solutions, the “free market” Republicans sure won’t.

  25. Great point, this is both the key issue and the logical way to put the option to banks. However, no bank would choose the break up option, assuming that when push comes to shove they will retain their position at the trough.

    Accordingly, a better way out of the box is to say that all banks that received funds in this crisis must be (according to both this and the prior administration) by definition too big to fail – after all, the FDIC has allowed all banks under its supervision to fail regardless of size. This, too brings us to an impasse – this list includes Goldman, there is no chance that such a definition will be used.

  26. Sadly, the “or else” is already there. If an institution is not included on the “list”, and left to operate as it has been operating, what happens when fails and we then find it was “too big to fail”? Would we then have to draw and quarter the person responsible for the “list”?

    What seems to be an appropriately conservative position would be to return to the legal structure that existed when we didn’t have to worry about the financial system itself being toxic.

  27. One of the problem is that Pres. Obama is surrounded by conventional thinkers. I mean, when was the last time Tim Geithner had lunch with an unemployed person in a main street eatery? Could anyone explain to me how Pres. Obama became so different from candidate Obama?

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