Posted by Brian Redhead
The Obama administration is on the verge of rolling out a series of new regulations to prevent a repeat of the still rampaging financial crisis. But it’s not enough for policy makers to simply propose expanding the Federal Reserve’s enforcement power, or putting forth new rules for regulating derivatives, exotic securities and hedge funds.
What’s needed now more than anything, is a plan to ensure that no financial institution is ever again “too big to fail.’’ The seemingly endless bailouts of American International Group(AIG), Citigroup(C)and Bank of America (BAC)are all premised on the fear that if any one of these financial services giants were to fail, the global economic fallout would be catastrophic. And as distasteful as it may be, regulators and policy makers are correct that there’s no other choice than to save these firms.
But once these financial behemoths no longer pose a systemic threat, they need to be dismantled and dramatically shrunken. And the same must go for banks that aren’t on the critical list. So far, JPMorgan Chase & Co. (JPM)has managed to avoid becoming a financial basket case like Citi or Bank of America. But the world economy cannot risk a situation where some future crisis puts JPMorgan on the edge of disaster. If that means forcing relatively healthy banks to get smaller—either through voluntary divestures or old-fashioned trust busting—so be it.
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