During the late summer of 2008, the financial markets were unraveling. Lehman Brothers failed, which precipitated general panic in the markets and the potential failure of other large financial institutions. When the panic hit jumbo worldwide insurer AIG based out of New York, the government blinked with an over hundred billion dollar bailout. This bailout was justified with the logic that should AIG fail, it would wreck havoc on the entire world’ s financial markets. Thus, we had the concept of “too big to fail”.
It is impossible in hindsight to determine if AIG were allowed to fail we would have had the threatened financial Armageddon. However, it is inarguable that the AIG bailout, as well as that of other firms, benefited some individuals and corporations at the expense of others. Since the bailouts, we have had the weakest recovery from a recession of modern times. It is likely that the bailouts and ongoing poor shape of the economy are connected.
The panic and financial markets’ turmoil played huge roles in the election of Barack Obama to the presidency, as well as giving Democrats large majorities in both houses of Congress. With the mandate, Democrats set out to implement changes in our financial system that would purportedly eliminate future financial crisis. The result was the infamous Dodd–Frank Bill with far-reaching implications to the financial world.
Ex-Citigroup CEO, Sandy Weil, was responsible for making Citigroup a large mega bank through mergers and acquisitions. This week Weil came out against allowing these large banks to continue in their current state and recommended that they be broken up, separating their brokerage businesses from regular commercial banking functions. In explaining his position Weil indicated that this back to the future approach would eliminate future risk to taxpayers of bailouts since no bank would be then too big to fail.
After Sandy Weil went public with his position, CNBC reporter Maria Bartiromo interviewed Congressman Barney Frank, Democrat from Massachusetts who was one of the co-authors of the Dodd-Frank Bill. She correctly raised weaknesses of the Bill including the fact that more than two years after its passage, important rules relating to the Bill are yet to be written. Instead of addressing the Bartiromo’s questions, Frank became defensive and obnoxious, as evidenced in the video.
Barney Frank is the same Congressman that refused to place more controls on Fannie Mae and Freddie Mac during the bubble years. He was famously quoted then saying that these government-backed corporations were financially solid and needed no further government oversight. After the bubble popped these corporations needed billions in taxpayer bailouts and will likely require more. Add to this Frank’s performance in the video below and it is easy to understand why Washington’s interference in the economy typically makes bad situations worse.