‘Too Big to Fail’ Institutions Should Be Prosecuted

Friday, 22 Mar 2013 07:41 AM

By Barry Elias

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Finally, more than five years after the most serious financial disaster in the past 80 years, former C-Suite members of the largest banks now recognize their zeal to repeal Glass-Steagall was a huge mistake — one that needs to be reversed so we can minimize the possibility of future financial and economic calamities.

These financial luminaries include Sanford Weill, John Reed and Sallie Krawcheck of Citigroup, Phil Purcell of Morgan Stanley and David Komansky of Merrill Lynch. Perhaps they will soon come to the conclusion that deregulating the over-the-counter derivative market was equally disastrous.

At best, these financial giants executed a strategy that profited themselves greatly at the expense of the general public. Now that they have left these positions, they may have more liberty to express their true beliefs. Their testimony is the best evidence that these flaws in the financial system need to be corrected, and more importantly that these large institutions must be held accountable for the damage they perpetuated.

According to Forbes, in recent testimony before the U.S. Senate Judiciary Committee, U.S. Attorney General Eric Holder said, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, and I think that is a function of the fact that some of these institutions have become too large.”

I disagree with Holder’s assessment. I believe we can prosecute these large institutions by amortizing the penalties over a long period of time to ameliorate any adverse circumstances. Eliminating the potential for prosecution, as Holder recommends, would further incentivize these institutions to continue practices that benefit themselves at the expense of the public.

Having a stable medium of exchange would significantly reduce the probability of future failures, since credit and debt formation would be more commensurate with debt service capacity.

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