“Too big to fail” too weak to work?

Last year’s Wall Street reform law bans government bailouts for major banks although many of them have grown in size and power, causing skepticism among investors and credit agencies that the government would not step in.

JP Morgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley controlled assets equal to 17 percent of the economy in 1995 ,while today their assets equal 64 percent of economic output, according to the Washington Times.

For years, major banks have enjoyed high credit ratings based on the expectation that if the bank failed, the government would step in. The fact that none of the top banks has been downgraded since the regulations were implemented is a concrete sign that banks still enjoy an implicit guarantee from the government, according to the Washington Times.

Standard & Poor’s Corp. has recently disputed Congress’s claim that the law ended “too big to fail” for major financial institutions.

“The government in a handful of situations may be forced to provide some sort of support to an institutions,” particularly in the situation that a bank’s failure threatens the economy and everyday Americans, Rodrigo Quantanilla, an S&P managing director, said, according to the Washington Times.

Rep. Barney Frank, (D-Mass.), co-author of the law, said any assertions that the law will change to permit bailouts are baseless.

“Any fair reading of the mood of the American public and the appetite of Congress suggests that there is absolutely no support for more bank bailouts,” Frank wrote in a letter to S&P last week, according to the Washington Times.

Joshua Rosner, a managing director of Graham Fisher & Co., said that Wall Street still believes that financial institutions with assets of more than $50 billion would be bailed out.

“In fact, the Dodd-Frank law reinforces the market perception that a small and elite group of large firms are different from the rest” by designating those banks as “systemically important,” Rosner said, according to the Washington Times.

The only way to ensure taxpayers they won’t have to rescue failed banks, Rosner said, is to break up the big banks so they’re no longer “too big to fail.”

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