JPMorgan Chase & Co. (JPM), Bank of America Corp (BAC), Citigroup Inc. (C): Sheila Bair Calls End of “Too Big To Fail”

Point 3: Dodd Frank has fallen victim to Capital Hill Re-Writes

The Dodd Frank legislation was passed nearly 3 years ago and is still being negotiated, revised, rewritten, and changed today. The original draft called for over $400 million in annual fees for each of the nation’s largest banks.

On Monday, the Fed revealed its final plan to implement these fees, including details of the final formula to be used to calculate the fee. Under the new formula, Citigroup Inc. (NYSE:C), for example, would be charged $28 million annually as a tax for being considered “too big to fail.” For context, Citigroup reported revenue of over $20 billion just for the 1st quarter of 2013.

Bair stated in an interview on Tuesday that “There’s an explicit ban on future taxpayer bailouts in Dodd-Frank,” but she then points to the new government controlled bankruptcy process as justification of her point.

The problem though, is that if Citigroup Inc. (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) or another mega bank  finds itself in front of a bankruptcy court, then it’s already too late. The new bankruptcy processes will provide a structured way to unwind the business, but the shock waves in the market will travel in front of the process, not behind it.

An unfortunate conclusion

All this, it seems, paints an unfortunate picture.

The big banks are still very, very big (much bigger in fact than they were in 2007). The markets still price in significant safety at the largest banks relative to their smaller competitors which gives a distinct competitive advantage and incentivizes financial institutions to grow as much as possible. Regulations, at least at this point in time, appear to be emerging from the negotiation process on Capital Hill toothless, the victim of political posturing and very effective industry lobbying.

I am in agreement with Ms. Bair that a system with 3 or 4 “too big to fail” players concentrates far too much risk in the hands of so few companies. But the evidence today indicates that we have failed to take action on the lessons learned from the Financial Crisis. Any talk today of a meaningfully reformed system is still just wishful thinking.

The article Sheila Bair Calls End of “Too Big To Fail” originally appeared on Fool.com and is written by Jay Jenkins.

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