Congress Plans “Too Big To Fail” Witch Hunts

Now Congress really is out for blood. Yesterday, the House Financial Services Committee moved a step closer to giving regulators the power to break apart companies if they are considered too big to fail. The Committee is currently discussing the creation of a Financial Services Oversight Council that would be the systemic risk watch dog in the overhaul of Wall St. rules.

Here is the crazy part: under the proposed legislation, the FSOC would be allowed to take apart big firms, even if they were well-capitalized and not displaying any signs of weakness.

With such unbridled authority, the potential for political games is palpable. Just think about all the rage that directed towards Goldman Sachs these days. Are they in danger of collapsing right now? Almost assuredly not. Woud their collapse negatively impact the financial system? I’m sure a host of Hill staffers could make an impassioned case for that. So it would just be a matter of time before an entrenched political war began between the systemic risk regulator and Goldman over the question of whether the firm should be taken apart “for the good of the whole.”

It doesn’t take a Randian stretch to imagine excuses like “to expand competition” or “to create a fair playing field” rolling off the tongues of council spokesmen on the attack. Before long, the witch hunts, partially to exact vengeance for the financial crisis, partially out of of political ideology, will start. And the meantime, the threat of having the government gunning for the overly successful will be sure to be a disincentive to growth.

The provision passed yesterday is similar to one recently unveiled in the Dodd plan for financial services reform in the Senate. That plan would create an independent Agency for Financial Stability to manage systemic risk and go after big companies.