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Will the Financial Reform Bill Prevent Future Crises?

Tuesday, July 6, 2010

The most important component of the bill is the new legal authority for authorities to resolve in an orderly manner large financial institutions that in 2008 were deemed to be too big to fail. As long as policymakers believe they have no option but to prevent certain large financial institutions from failing, we will always be vulnerable to a repeat of 2008. This policy change is complex and essential.

The core problem is that under this legislation there will still be too-big-to-fail institutions. If everything works perfectly, those institutions will be less likely to fail than they were in the past, and the rescue plan for when they do fail will be smoother. But in government everything does not work perfectly, even if regulators have additional information and new authorities. At some point there will be another Bear Stearns, another Lehman, or another AIG. Supervisors will once again miss the warning signals and will have to step in to prevent a disorderly failure.

Continue reading Keith Hennessey at The Motley Fool