Too Big to Fail Not Fixed, Despite Dodd-Frank: Simon Johnson

Oct. 10 (Bloomberg) -- Here we go again. Major shockspotentially threaten the solvency of some of the world’s largestfinancial institutions. Concerns grow over the ability ofEuropean leaders to shore up their banks, which are reeling froma sovereign-debt crisis. In the U.S., the shares of some largebanks are trading at less than book value, while creditorconfidence crumbles.

Private conversations among economists, regulators and fundmanagers turn naturally to so-called resolution powers -- theexpanded ability to take over and wind down private financialcompanies granted to federal regulators by the Dodd-Frankfinancial reform law. The proponents of these powers, includingTim Geithner and Henry Paulson, the current and former U.S.Treasury secretaries, argue that the absence of such authorityin the fall of 2008 contributed to the financial panic.According to this line of thought, if only the Federal DepositInsurance Corp. had the power to manage the orderly liquidationof big banks and nonbank financial companies, the governmentcould have decided which creditors to protect and on what basis.This would have helped restore confidence, it is argued.