According to Peter Wallison at AEI, writing in the Financial Post, Dodd-Frank has completely destroyed any separation of government and the financial services industry (not that they weren’t plenty cozy before Dodd-Frank).
The Treasury Secretary need only raise an eyebrow now at a firm to take it down.
The question is whether a firm represents “systematic risk.” If the Treasury Secretary thinks that it does he or she can seize the firm and then liquidate it through the FDIC.
This may sound good to some, but what is likely to happen is that this power will be used to manipulate the marketplace to the advantage of the very best connected firms. I just don’t see Goldman Sachs being taken to the woodshed.
There is a growing group of people who think that the concept of “too big to fail” is nonsense.
David Stockman for instance argues that the panic of 2008 would have been limited largely to the big investment banks on Wall Street, that life would have gone on if they had died.(As they deserved to.) Money would still have come out of ATMs, etc. John Allison, former CEO of BB&T, argues a similar point in his recent book.
The big banks could have failed, should have failed, and the economy would likely be better off for it now.
However, with TBTF officially sanctioned as a concept in Dodd-Frank the macro game, is not who will provide the best services for clients, it will be who is the chummiest with the government. And, sadly, which firm can get their guy into the Treasury Secretary job.
(From the Financial Post)
If you are worried about crony capitalism, this is where it starts. Because of Dodd-Frank, Wall Street and the financial services industry generally will now be firmly in the control of the government. In the future, as long as the act remains in force, we can expect that Wall Street firms will be solid supporters of the administration in power. No CEO will risk the possibility that opposing administration policy will bring an adverse regulatory finding or an enforcement action.
However, that isn’t all. Under Dodd-Frank, if the secretary of the treasury believes that a financial firm in danger of failing could cause instability in the U.S. financial system, he has the power to seize the firm and turn it over to the FDIC for liquidation. If the company objects, the secretary can invoke the power of a court, but the court has only one day to decide whether the secretary’s act was reasonable. If the court does not act in that one day, the firm is turned over to the FDIC “by operation of law.” It does not take much political savvy for financial firms to realize that opposing the secretary of the treasury could be dangerous to their continued existence. All that has to happen is a rumour that the treasury is considering the possibility of a seizure and the firm is toast.