A proposal by Rep. Paul E. Kanjorski (D-PA) was voted for 38 to 29 in legislation on Wednesday. It would allow regulators to break up big companies deemed ‘Too Big to Fail’ before their failure becomes imminent. These massive financial firms pose a great potential risk to the economy if they fail. The Obama administration sees this as necessary to prevent another scenario like what happened when American International Group Inc (AIG) collapsed last year, when the firm needed to be bailed out for fears that their failure would cause a domino effect of economic chaos.

Broken-piggy-bankUnder this new legislation, there would be a council of regulators that have the authority to take apart large financial operations. It would require the Treasury secretary’s approval to force a break down of assets worth at least $10 billion. If it is necessary to have a break up of a corporation worth more than $100 billion, then it would require consultation with the president.

Stiff Opposition

As should be expected, Republicans have voiced their discontent with the proposal calling it “draconian” and “unconstitutional”. Rep. Randy Neugebauer (R-Texas) was quoted as saying “When the government says you are too big and we’re going to make you dismantle, that is a taking of private property rights in this country.”

There are also some large financial firms voicing their concern over this new reform. Jamie Dimon, chief executive of JPMorgan Chase & Co., said that he would have no problem with allowing for the orderly dismantling of a large financial company on the brink of collapse. However, he believes that financial firms should not be capped because they will not be able to compete with massive foreign banks.

Some Strong Support

On the other hand this proposal is also gaining steam. Both Former Federal Reserve Chairmen Paul Volcker and Alan Greenspan have recently backed the proposal. Even the Bank of England endorsed the idea, so there are definitely some out there that want this to come to fruition. The Obama administration also backs this proposal but wants even tougher rules (for big financial firms) such as requiring them to have more capital at hand in case of losses. It will be interesting to see what happens, but do not expect everything to get passed in one smooth process.

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