The House Solution to Private Firms that are Too-big-to-fail is to make them Public Government Sponsored Enterprises

My commentary this week runs a couple of different directions. First, I placed a letter to the editor in the Financial Times regarding cap and trade policy (http://www.ft.com/cms/s/0/7c973c56e84f-11de-8a02-00144feab49a.html). While many of you may think that the issue is unrelated to financial services, I assure you that many trading firms are looking at the sector and possible rents to be extracted in the U.S. approach as a vital component of their future business operations.

Of course, the Obama meeting with the bankers on Monday merits special attention, but not for the reasons advanced in the popular press. While I did get to weigh in on Fox Business News (http://www.foxnews.com/search-results/m/27910114/facilitating-financial-recovery.htm), I will take a moment to elucidate here.

To understand the importance of Obama’s emboldened requests of the industry, look no further than the House Wall Street Reform and Consumer Protection bill. Remember, the bill sets up a Financial Stability Council, that ensures stability not by closing institutions that are too-big-to-fail, but by awarding them subsidized finance to give them a competitive advantage over others. In exchange for that subsidized advantage, the firms will be subjected to “heightened oversight, standards, and regulation.” That is, firms that are too-big-to-fail will pay rents to the Executive branch that appoints the members of the oversight council. (Note further, the absence of any industry or other private representation on that council.)

The Dissolution Authority is unlikely to come in to play for those institutions, because they already have an industry advantage and – even if it does – we will not just have nineteen too-big-to-fail firms, but nineteen (or twenty-one, if you count the existing two) government-sponsored enterprises (GSEs).

In summary, the House’s solution to private firms that are too-big-to-fail is to make them GSEs that are too-big-to-fail. GSEs – like Fannie and Freddie – are tools of the Administration and are expected to be on board with policy directions. Hence, the CEOs of the banks that met on Monday had better be prepared to either fight these aspects of financial “reform” and stay private or find a better means of transportation to Washington for their regular meetings with the Executive branch.

† Hermann Moyse, Jr./Louisiana Bankers Association Professor of Finance, Louisiana State University, Senior Fellow at the Wharton School, and Partner, Empiris LLC. Contact information: [email protected]; (202) 683-8909 office. Copyright Joseph R. Mason, 2009. All rights reserved. Past commentaries and testimony are blogged on http://www.rgemonitor.com/financemarkets-monitor/bio/626/joseph_mason.