United Nations Radio

Banks that are "too big to fail"

PRES: The continued existence of so-called 'too big to fail' banks is, for many, evidence the US financial system has learnt little from the recession. Economist Robert Johnson believes these institutions challenge entire moral underpinnings of the capitalism. Kit Cockburn explains:

COCKBURN: US markets are stabilizing and moving from red to black. Rather than celebrating, however, some economic commentators are lamenting a lost opportunity for financial reform. Dr. Robert Johnson who serves on the United Nations Commission of Experts on Finance and International Monetary Reform, argues these institutions are eroding the integrity of the US and global financial systems.

JOHNSON: We have a situation where we have a handful of large banks, scheduled to make 30-35 billion dollars this year, who want to keep complex things on their balance sheet, so you can't resolve them; so it cheapens their funding costs; so they make a lot of profit. Yet, they run the risk that another shock to the system could make it deeper, and longer and more painful than it needs to be.

COCKBURN: Financial regulatory advisor, Josh Rosner, says that reform is being unnecessarily complicated.

ROSNER: That's part of why the industry wins, because they make things that are actually quite simple seem incredibly complex. The simple truth is if you're too big to fail then you pose a risk to us, then we should break you up or create incentives for you not to want to be so big.'

COCKBURN: Simplicity, however, has become a scarce commodity in the regulatory process. Dr. Johnson identifies the unchecked power of lobbyists in hindering meaningful change.

JOHNSON: When you see legislative hearings, now, most of the bills you see coming out of the press congress, not all but most, have a large part of the language written by bank lobbyists. Almost always what the lobbyists want will be chosen by whoever is in power. And so, there's almost no difference on financial regulation.

COCKBURN: So what should be done now? Dr. Johnson feels that if President Obama is serious about reforming 'too big to fail' banks, first and foremost he will have to do away with the trade in complex derivatives:

JOHNSON: Instead of being opaque and complex, they should be clear and simple. They should move to exchanges, not clearing houses, they should move to exchanges, where they can be seen for the size, the volume, the price, and each day real prices and real capital are set aside. The system is protected, and what everybody knows everyone has on their balance sheet becomes just a matter of looking at a spreadsheet, not some complex interpretation that requires a physics PhD to do the math.

Producer: Kit Cockburn
Duration: 2'27"