Too Big to Fail: Has the Fed Finally Learned Its Lesson?
The Federal Reserve is on the war path against fifteen banks and financial institutions to make sure it doesn’t blow the doors off the economy again.
As a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010 by President Barack Obama, this act allows the Fed to create the Large Institution Supervision Coordinating Committee, which is chaired by the director of the Board’s Division of Banking Supervision and Regulation, according to the Federal Reserve, and is tasked with overseeing the supervision of the largest, most systemically important financial institutions in the United States.
The committee’s goals, according to the Fed, will be to provide strategic and policy direction for supervisory activities across the Fed, continue to enhance the consistency and quality of supervision, and incorporate systemic risk considerations into the supervision program.
The Fed also notes that it plans on facilitating consideration of views from various disciplines including research economists, market specialists, supervisors, and other at the Board and Reserve Banks while more effectively incorporating quantitative analysis.
Many of these firms posed a great deal of systemic risk back during the financial crisis of 2008, and this has been a part of the government’s response to trying to regulate the economy more closely.
Before being indicted in August 2013 by the Department of Justice for violations in federal security laws in offerings of subprime and Alt-A residential mortgage securities leading up to the financial crisis in 2008, according to Reuters, JPMorgan Chase (NYSE:JPM) was pushed by Fed and Treasury officials to buy up the bumbling Bear Stearns in a $2.00 per share stock swap or around $240 million pending shareholder approval scheduled within ninety days, The Financial Times recorded. This joining, The Times said, would guarantee all Bear Stearns trades and business process follow.
American International Group (NYSE:AIG) had been selling credit protection through its London branch in the form of credit default swaps on collateralized debt obligations, according to The New York Times, and while it declined in value, AIG tried to enter into those default swaps to insure the $441 billion worth of securities originally rated AAA, of which $57.8 billion were structured debt securities backed by those old reliable subprime mortgage loans. The Federal Reserve would have to step in to rescue it, which occurred in September 2008 when it announced the created of a secured credit facility of up to $85 billion to prevent the company’s collapse, The New York Times said, and this enabled AIG to deliver additional collateral to its credit default swap trading partners.
Recently, Bank of America (NYSE:BAC) committed an egregious financial error and found itself up to its ears in problems. Regulators from the Fed announced they had suspended Bank of America’s plan to buy back $4 million more shares from the bank while raising its divided when BofA discovered accounting issues with regards to its structured notes upon its latest stress test submission.
But BofA weren’t the only ones that failed those tests because, according to CBS News, Citigroup (NYSE:C) was one of four financial institutions that also failed its stress tests in March 2012, and it followed suit again recently last March being among five firms to flunk the test, according to The New York Times.
Dodd-Frank is certainly not something that is good for the growth of the banks. This bill hammers away a bunch of new regulations and costs for it that many feel it doesn’t need, and it is difficult to say whether it is just or not. But given everything the financial system has gone through and the way it has affected many people across the board, especially commercial real estate developers, residential real estate developers, and homeowners, the question is: do we need more protection from the actions we take or do we need less?
Certainly in the past, we always felt less; that an economy unburdened by regulation and taxes is the best. But now, that conversation might be changing for the future — and perhaps for the better.