‘Too big to fail’ a risky policy, Volcker says
WASHINGTON - A top White House economic adviser says the Obama administration’s proposed overhaul of financial rules preserves the policy of “too big to fail,’’ and could lead to future bailouts.
Former Federal Reserve chairman Paul Volcker said yesterday that by designating some companies as critical to the broader financial system, the plans create an expectation that those firms enjoy government backing in tough times. That implies that they “will be sheltered by access to a federal safety net,’’ he said.
Lawmakers should make clear that nonbank companies will not be saved with federal money, he said.
Emergency measures by the Fed, Treasury, and Congress during last year’s financial crisis created the expectation the government would step in to protect failing companies, their bondholders, and stockholders, Volcker told the House Financial Services Committee.
Volcker said he does not differ with the administration on most of its proposals and takes “as a given’’ that banks will be bailed out in times of crisis. But he opposed bailouts of insurance companies like American International Group, automakers’ finance arms, and others.
“The safety net has been extended outside the banking system,’’ Volcker said. “That’s what I want to change.’’
He said the administration’s proposal to create a new system for winding down large nonbank companies would make that easier.
The administration should make it clearer that a “safety net’’ will apply only to traditional banks, not investment companies or others, he said. Investors must understand that if a nonbank company fails, stockholders and bondholders’ money would be at risk, he added, while endorsing other options for these companies, including forced mergers or liquidation.