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William Black’s Proposal for “Systemically Dangerous Institutions”

Tony Wikrent's picture

George Washington of Washington’s Blog, posted Black's recent proposal on Naked Capitalism. Black is Associate Professor of Economics and Law at the University of Missouri – Kansas City, and the former head S&L regulator, and author of the book, The Best Way to Rob a Bank is to Own One. Black' has been a lonely voice in the wilderness warning that the entire financial collapse, from sub-prime mortgages, to rating agencies, to the creation and handling of credit default swaps, is fraught with criminal fraud that both the Bush and now the Obama administrations have refused to deal with.

The Obama administration is continuing the Bush administration policy of refusing to comply with the Prompt Corrective Action (PCA) law. Both administrations twisted a deeply flawed doctrine – “too big to fail” – into a policy enshrining crony capitalism.


The Treasury has fundamentally mischaracterized the nature of institutions it deems “too big to fail.” These institutions are not massive because greater size brings efficiency. They are massive because size brings market and political power. Their size makes them inefficient and dangerous.

Under the current regulatory system banks that are too big to fail pose a clear and present danger to the economy. They are not national assets. A bank that is too big to fail is too big to operate safely and too big to regulate. It poses a systemic risk. These banks are not “systemically important”, they are “systemically dangerous.”

Black writes that the "too big to fail" financial firms are better called "Systemically Dangerous Institutions" And here are just a few of the twenty specific policy proposals Black makes for dealing with "Systemically Dangerous Institutions":

1. Not be permitted to acquire other firms

3. Be subject to a premium federal corporate income tax rate that increases with asset size

4. Be subject to comprehensive federal and state regulation, including:

c. Annual tax audits by the IRS

d. An annual forensic (anti-fraud) audit by a firm chosen by their primary federal regulator

9. A ban (which becomes effective in 18 months) on having an equity interest in any affiliate that is headquartered in or doing business in any tax haven (designated by the IRS) or engaging in any transaction with an entity located in any tax haven

10. A ban on lobbying any governmental entity

11. Consolidation of all affiliates, including SIVs, so that the SDI could not evade leverage or capital requirements

14. A ban on the purchase, sale, or guarantee of any new OTC financial derivative

18. A requirement to establish “hot lines” encouraging whistleblowing

I think this has to be trumpeted all over the tubez: "These institutions are not massive because greater size brings efficiency. They are massive because size brings market and political power. Their size makes them inefficient and dangerous."



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jumpjet's picture
Submitted by jumpjet on

Abolish traditional banking in this country altogether. Outlaw the lending of money at interest. Go to an interest-free scheme of banking, like the Muslims use. It ends the entire debt-based miasma that created this mess and will create more.

Submitted by Randall Kohn on

Because living under Islam would be so kewl for all of us.

Submitted by lambert on

Jumpjet said nothing about living under Islam; the coment is about adopting their system of banking.

In a sane political environment, the idea of separating "boring" banking (Paul Krugman) from gambling would be mainstream; as would the idea of making banks regulated public utilities.

Submitted by lambert on

We should really try to keep him in the public eye, especially as the Dems are about to butcher financial reform even worse than they've butchered health care insurance reform.

quixote's picture
Submitted by quixote on

is an especially good idea! Pulling that thread would make the whole Gordian knot fall apart. I'd never heard of this guy before. Good post.