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Obama plan could trim financial powerhouses

WASHINGTON — They are the biggest of the big: the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn't want so many around anymore.

Financial regulations proposed by the president would result in leaner, simpler institutions that don't carry the weight of the system on their marble columns.

Around Washington and Wall Street they have come to be known as TBTF — too big to fail. It's not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that one's collapse can create systemwide tremors that imperil the finances of millions of Americans.

With that fear in mind, the government stepped in to bail out Citigroup Inc., Bank of America Corp. and American International Group Inc. with tens of billions of public money last year.

Looking to avoid such a costly intervention, President Barack Obama's regulatory plan calls for large, interconnected companies to pay a heavy price for the systemwide risk they pose.

So far, however, congressional debate has centered on the administration's plan to put the Federal Reserve in charge of these "systemically significant" companies. Less attention has been focused on the potential effect on the institutions and the financial system's hierarchy.

Under the administration's proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn.

They also would have to anticipate their demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals — and burials.

Obama's plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies.

"Without banning them, we're providing some pretty heavy penalties for entering" the top group of institutions that could pose a risk to the entire financial system, said Diana Farrell, deputy director of the White House's National Economic Council.

"The regulator might say to a large institution, 'Make sure there is very good reason to allow yourself to get that big, or that interconnected, or that complex, because the penalties will wipe out any advantages, such as lower cost of capital, you might have.' "

Some companies, such as Citi and Goldman Sachs, might bite the bullet and take on the added burden; in global capital markets, some firms need to be large.

Others might choose to reduce their financial footprint.

"It's a very sophisticated and very effective way to force institutions to deconsolidate," said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm that advises financial institutions

Under the administration's plan, the Treasury could decide to take a company swiftly through a bankruptcylike process, appointing the Federal Deposit Insurance Corp. as a conservator or receiver. The FDIC now has the authority only to take over troubled banks. The government would be aided by the failing company's plan to wind down.

Anil Kashyap, an economist at the University of Chicago School of Business, said simply creating a "funeral plan" could lead some companies to reconsider some of their business strategies.

Obama plan could trim financial powerhouses 07/05/09 [Last modified: Monday, November 7, 2011 4:51pm]
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