Posted by | April 13, 2011 11:16 | Filed under: Top Stories

by Stuart Shapiro

The phrase “Too Big To Fail” entered the lexicon as a result of the financial crisis.  The government bailed out a number of huge financial institutions because their failure would have likely led to a new Great Depression.  However, the knowledge that they will be bailed out if their risky financial decisions fail cannot help but affect decision-making by executives at companies that are “Too Big To Fail.”  Economists call this moral hazard.  And it was because of moral hazard that the Dodd-Frank financial reform bill required new regulations to punish executives of companies that collapse.  The initial look at those regulations?  Not good.

The details of this requirement are to be spelled out by the F.D.I.C., but the agency’s proposed rules destroy the law’s letter and spirit. . . The F.D.I.C. has thus set up a straw man, a definition that appears appropriate but will instead allow the executive to escape a clawback.

Regulations are where the rubber hits the road in policy-making.  They can help realize a statute’s intent or undermine it completely.  These regulations are among the first of over 200 required by the Dodd-Frank bill.  If the rest are as weak as this, the next financial disaster is just waiting to happen.

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Copyright 2011 Liberaland
By: Stuart Shapiro

Stuart is a professor and the Director of the Public Policy
program at the Bloustein School of Planning and Public Policy at Rutgers
University. He teaches economics and cost-benefit analysis and studies
regulation in the United States at both the federal and state levels.
Prior to coming to Rutgers, Stuart worked for five years at the Office
of Management and Budget in Washington under Presidents Clinton and
George W. Bush.