Thread: Reaganomics
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Old August 10th, 2012, 08:45 PM   #33 (permalink)
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Originally Posted by OutofDate1980 View Post
How so ?
Dodd-Frank's Too-Big-to-Fail Dystopia:

The capital markets are not populated by fools. When the council has declared that a firm is "systemically important"—that its failure poses a threat to U.S. financial stability—the U.S. government is effectively saying that it will do whatever it takes to prevent the firm from failing. This means that a loan to a "systemically important" institution is going to be safer than a loan to a smaller competitor without that designation.

This is not speculation. The banking industry is already made up of a host of smaller banks and a few huge banks that are widely considered too big to fail—and the biggest banks have a lower cost of funds than their small competitors, as Thomas Hoenig (then of the Kansas City Federal Reserve Bank, now of the Federal Deposit Insurance Corporation) and others have shown. Fannie Mae and Freddie Mac, thanks to their government backing, also had advantageous funding, so much so that they drove even the biggest banks from much of mortgage market.

In testimony last week to a House subcommittee, MetLife executive William Wheeler put it clearly: "A SIFI designation would be the federal government's signal that we are indeed 'too big to fail,' and that if we got into financial trouble, federal funds would be used to rescue the firm. The implicit backing of the federal government could strengthen perceptions of our creditworthiness and may give us a significantly cheaper cost of funds than our peers."
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