Senator Proposes Bill to Dissolve ”Too Big to Fail” Financial Institutions

Senator Bernard Sanders (I-VT) and Representative Brad Sherman (D-CA) introduced legislation (S. 1206) that is intended to address the “concept of ‘Too Big to Fail.'” The title of the bill is the “Too Big to Fail, Too Big to Exist Act.”

From the moment of its passage, the bill would give the Financial Stability Oversight Council (“FSOC”) 90 days to compile and submit a list of the entities it deemed “Too Big To Fail” to the Department of the Treasury, Congress and the President. Then, no later than one year after the enactment of the bill, the Secretary of the Treasury would “break up” the entities included in the “Too Big to Fail” list. The bill also would stipulate that any entity included in the “Too Big to Fail” list would be prohibited from using Federal Reserve financing and insured deposits (if the entity were an insured depository institution).

The bill was read twice and referred to the Committee on Banking, Housing and Urban Affairs.

Lofchie Comment: One ironic aspect of this document is that the principal entities that are deemed too big to fail are the swaps clearinghouses that were created by Dodd-Frank. It would be interesting to know whether Senator Sanders acknowledges that the passage of his proposal would unwind Dodd-Frank significantly.

Oddly, the proposed bill does not specify that the required breakup is limited to financial institutions. Although the preamble to the bill refers to “financial entities” (a term that is not defined in the bill), it defines an entity as “too big to fail” if the entity’s failure, “due to its size, exposure to counterparties, liquidity position, interdependencies, role in critical markets, or other characteristics or factors, would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.” Read literally, the bill could compel FSOC to lard its list with entities such as General Motors, which received government assistance during the financial crisis to prevent the damage that its complete failure would have done to the economy.