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Bailout Architect: Dodd-Frank Won’t Stop Another “Reactor Meltdown“

The financial reforms won’t prevent federal officials from extending publicly-funded emergency lifelines to industry actors.

(Photo: Financial Crisis via Shutterstock)

The president of the Minneapolis Federal Reserve and a former Treasury Department official who helped craft the 2008 Wall Street bailout warned that Dodd-Frank financial reforms won’t stop the US government from rescuing “Too Big to Fail” banks.

Neel Kashkari said Tuesday in Washington that the landmark legislation has helped “strengthen our financial system” with a variety of new regulations, but that they won’t prevent federal officials from extending publicly-funded emergency lifelines to crucial industry actors.

“[N]o rational policymaker would risk restructuring large firms and forcing losses on creditors and counterparties using the new tools in a risky environment, let alone in a crisis environment like we experienced in 2008,” Kashkari said.

He described financial crises as being like a nuclear “reactor melt down,” and said the US remains vulnerable to another one, with only a handful of banks still dominating the financial sector.

Kashkari called on Congress to to reduce this system-wide hazard by passing legislation. He said it should consider hiking taxes on risky behavior, breaking up the largest banks “into smaller, less connected, less important entities,” and “turning large banks into public utilities…with regulation akin to that of a nuclear power plant.”

“Options such as these have been mentioned before, but in my view, policymakers and legislators have not yet seriously considered the need to implement them in the near term,” he remarked. Kashkari additionally noted that “the financial sector has lobbied hard to preserve its current structure,” but that “the economy is stronger now, and the time has come to move past parochial interests and solve this problem.”

Kashkari first joined the Treasury Department in 2006, moving from Goldman Sachs to the public sector alongside former Treasury Secretary Hank Paulson. Paulson was nominated to the cabinet position that same year, and picked Kashkari to be an aide.

In the autumn of 2008, Kashkari was chosen by President George W. Bush to administer the Troubled Asset Relief Program—a widely-unpopular $700 billion bailout package that helped contain the Wall Street collapse.

Although the financial collapse has been an issue in the Democratic presidential primaries—the party’s first contest for a White House nomination since the crash—Kashkari is a Republican. In 2014, he finished second to Gov. Jerry Brown (D-Calif.) as a party nominee in California’s gubernatorial contest.

Last week, the issue of “too big to fail” persisting under the Obama administration came up in a Senate Banking Committee oversight hearing. Sens. Sherrod Brown (D-Ohio) and Elizabeth Warren (D-Mass.) pressed Fed Chair Janet Yellen to answer questions about Dodd-Frank rules that were supposed to decrease the possibility of future bailouts—by forcing financial institutions with more than $50 billion in assets to craft “living wills.”

The plans, which were supposed to have been completed by the end of 2013, are supposed to detail how the banks would be liquidated with minimal disruption to markets, in the event of bankruptcy.

In 2014, the Federal Deposit Insurance Corporation (FDIC) and the Fed told eleven banks that their plans were unsatisfactory. Those “living wills” are currently under review. Firms that are being examined include Bank of America, Citigroup, Goldman Sachs, and JP Morgan.

Sen. Warren pointed out that the Fed, unlike the FDIC, did not definitively find the plans to be unsatisfactory—and that the move prevents regulators from taking steps to break up, downsize, or rein in the banks.

Yellen replied, claiming as she did last year, that the Fed would be “prepared to make findings that a living will is deficient.”

“It’s a completely new process and we felt the banks need to understand what expectations were in terms of what we wanted to see,” she said. “We had felt that we had not given sufficiently clear guidance to make the decision at that time.”

She also noted that the Fed would rule on the latest living will submissions “in the not too distant future.”

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