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TBTF still 'alive and well' claims Bachus

Friday 14 January 2011 - by Andrew Hickley

The US Financial Services Committee chairman Spencer Bachus says that an investigation into the bailout of banking giant Citigroup proves that the concept of institutions being too big to fail has not been written out of Federal law.

Spencer Bachus's allegation comes on the back of a review by the special inspector general for the Troubled Asset Relief Program, which quotes US Treasury Secretary Timothy Geithner as saying that despite Dodd-Frank equipping authorities with "better tools…[i]n the future we may have to do exceptional things again".

Geithner admits in the investigation that without knowing the nature of a future shock to financial markets, it will be impossible to judge how systemic a problem may be - implying that taxpayer support for a bank may have to be called on again, in spite of new worldwide regulation aiming to eliminate this implicit guarantee.

Bachus says: "Secretary Geithner's acknowledgment that 'exceptional' action may be required again in spite of the Dodd-Frank Act being law confirms what Republicans have long contended - that the doctrine of 'too big to fail' unfortunately remains alive and well in Washington, D.C.

"Republicans believe the 'exceptional' action needed is to end bailouts and send a clear signal taxpayers will never again be forced to rescue or subsidise a failed financial company, its obligations, its creditors or counterparties."


The TARP scheme, set up by the Bush administration in 2008, involved the Treasury purchasing assets and equities from financial institutions to strengthen the financial sector.

In November 2008, Citigroup was provided with a $20bn (€15bn) capital infusion, on top of a previous injection of $25bn (€18.7bn) a month prior and a $300tr (€225bn) asset guarantee scheme in exchange for preferred shares, in an attempt to calm markets.

The report found that in spite of a "strikingly ad hoc" process leading to the conclusion that Citigroup had to be saved, the scheme worked well, stabilising markets and ultimately making the Treasury a $12bn (€9bn) profit on funds invested.

Commending Geithner's admission, it concludes that steps must be taken to ensure that banks will not face implicit government support, regardless of the riskiness of their behaviour.

The report says: "Unless and until institutions like Citigroup are either broken up so that they are no longer a threat to the financial system, or a structure is put in place to assure that they will be left to suffer the full consequences of their own folly, the prospect of more bailouts will potentially fuel more bad behaviour with potentially disastrous results."


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