Law Commons^™

Spoe + Tlac = More Bailouts For Wall Street, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

A primary goal of the Dodd-Frank Act is to end “too big to fail” (TBTF) bailouts for systemically important financial institutions (SIFIs) and their creditors. Title II of Dodd-Frank establishes the Orderly Liquidation Authority (OLA), which empowers the Secretary of the Treasury to appoint the Federal Deposit Insurance Corporation (FDIC) as receiver for failed SIFIs. Title II requires the FDIC to liquidate failed SIFIs and to impose any resulting losses on their shareholders and creditors. Title II establishes a liquidation-only mandate because Congress did not want a failed megabank to emerge from an OLA receivership as a “rehabilitated” SIFI.

The …

The Financial Industry's Plan For Resolving Failed Megabanks Will Ensure Future Bailouts For Wall Street, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

The high-risk business model of large financial conglomerates (frequently called “universal banks”) was an important cause of the financial crisis. Universal banks rely on cheap funding from deposits and shadow banking liabilities to finance their speculative activities in the capital markets. By combining deposit-taking and short-term borrowing with underwriting, market making, and trading in securities and derivatives, the universal banking model creates a strong likelihood that serious problems occurring in one sector of the financial industry will spread to other sectors. To prevent such contagion, federal regulators have powerful incentives to bail out universal banks and protect all of their …

A Two-Tiered System Of Regulation Is Needed To Preserve The Viability Of Community Banks And Reduce The Risks Of Megabanks, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

The financial crisis of 2007-2009 and its aftermath have accelerated a consolidation trend that has transformed the U.S. banking system during the past three decades. During that period, the number of community banks and their share of the banking industry’s assets have fallen by more than half, while the largest banks have captured much of the industry’s assets. In responding to the financial crisis, the federal government encouraged further consolidation by adopting extraordinary assistance programs and forbearance measures designed to ensure the survival of the biggest institutions. In contrast, federal officials gave little help to community banks and subjected them …

Narrow Banking As A Structural Remedy For The Problem Of Systemic Risk: A Comment On Professor Schwarcz's Ring-Fencing, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

In a recent article, Professor Steven Schwarcz describes the concept of "ring-fencing" as a "potential regulatory solution to problems in banking, finance, public utilities, and insurance." Ring-fencing has gained particular prominence in recent years as a strategy for limiting the systemic risk of large financial conglomerates (also known as "universal banks"). Professor Schwarcz’s article describes several ring-fencing plans that have been adopted or proposed in the United States, the United Kingdom, and the European Union.

This Comment argues that "narrow banking" is a highly promising ring-fencing remedy for the risks created by universal banks. As the Comment explains, narrow banking …

Turning A Blind Eye: Why Washington Keeps Giving In To Wall Street, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

As the Dodd–Frank Act approached its third anniversary in mid-2013, federal regulators failed to meet statutory deadlines for more than 60% of the required implementing rules. The financial industry has undermined Dodd–Frank by lobbying regulators to delay or weaken rules, by suing to overturn completed rules, and by pushing for legislation to freeze agency budgets and to repeal Dodd–Frank’s key mandates. The financial industry did not succeed in its efforts to prevent President Obama’s re-election in 2012. Even so, the Obama Administration has continued to court Wall Street’s leaders and has not placed a high priority on implementing Dodd–Frank.

At …

Citigroup: A Case Study In Managerial And Regulatory Failures, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

Citigroup has served as the poster child for the elusive promises and manifold pitfalls of universal banking. When Citicorp merged with Travelers to form Citigroup in 1998, Citigroup’s leaders and supporters asserted that the new financial conglomerate would offer unparalleled convenience to its customers through “one-stop shopping” for banking, securities and insurance services. They also claimed that Citigroup would have a superior ability to withstand financial shocks due to its broadly diversified activities.

During its early years, Citigroup was embroiled in a series of high-profile scandals, including tainted transactions with Enron and WorldCom, biased research advice, corrupt allocations of shares …

Narrow Banking: An Overdue Reform That Could Solve The Too-Big-To-Fail Problem And Align U.S. And U.K. Regulation Of Financial Conglomerates, Arthur E. Wilmarth Jr.

GW Law Faculty Publications & Other Works

This article is based on testimony presented on December 7, 2011, before the Subcommittee on Financial Institutions and Consumer Protection of the Senate Committee on Banking, Housing, and Urban Affairs. The article provides an update and extension of my previous work showing that: (1) the U.S., U.K. and other developed nations provided enormous subsidies for “too-big-to-fail” (“TBTF”) financial institutions during the financial crisis, thereby creating dangerous distortions in our financial markets and economies; (2) large financial conglomerates follow a hazardous business model that is riddled with conflicts of interest and prone to speculative risk-taking; (3) the Dodd-Frank Wall Street Reform …