Syestemic Risk May Be Hard To Control

See If You Liked Fannie and Freddie... You'll love Chris Dodd's latest reform proposal. It would make many more companies too big to fail and lead to far greater financial consolidation. From the WSJ, 3-18-10, p. A19. Excerpts:

"Although the Fed failed to anticipate the financial crisis, missed the significance of the developing housing bubble, and did not prevent our largest banks from taking excessive risks, it is rewarded in the bill with authority to control the rest of the financial system."

"The Fed's authority over all these firms will extend to setting standards for capital, liquidity, leverage and risk management."

"...the Fed may order a company to terminate one or more activities, impose conditions on how the company operates, or require the company to sell or transfer assets to unaffiliated parties."

" The innovation and risk taking that have always characterized the American financial system will be stifled beneath the Fed's bureaucratic blanket. The center of gravity of the U.S. financial system will move to Washington, where large firms will have to go hat in hand to gain Fed approval for every significant move. Moreover, by designating these firms as potential threats to financial stability, the bill clearly identifies them as too big to fail. This will ensure their competitive survival since it's unimaginable that the Fed will allow them to fail while under its control."

"The real significance of the too-big-to-fail designation, as every small banker knows, is that the implicit protection of the government confers a lower cost of funds and thus significant competitive advantages."

"Gradually, our competitive financial markets will consolidate into markets dominated by a few big firms."

It was by Peter Wallison, a senior fellow at the American Enterprise Institute.