Elizabeth Warren, Ben Bernanke Clash Over 'Too Big To Fail' - HuffPo [View all]

[WillyT]

Elizabeth Warren, Ben Bernanke Clash Over 'Too Big To Fail'
Mark Gongloff - HuffPo
Posted: 02/26/2013 1:44 pm EST | Updated: 02/26/2013 4:33 pm EST

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Newly minted Sen. Elizabeth Warren on Tuesday showed why big banks are not her biggest fans, grilling Federal Reserve Chairman Ben Bernanke about the risks and fairness of having banks that are "too big to fail." Warren (D-Mass.) questioned Bernanke during his latest semiannual appearance before the Senate Banking Committee to discuss the economy and monetary policy. Warren pressed the Fed chairman about whether the government would bail out the largest banks again, as it did during the financial crisis.

"We've now understood this problem for nearly five years," she said. "So when are we gonna get rid of 'too big to fail?'" Warren also asked whether big banks should repay taxpayers for the billions of dollars they save in borrowing costs because of the credit market's belief that they won't be allowed to fail, repeatedly citing a recent Bloomberg View study estimating that the biggest banks essentially get a government subsidy of $83 billion a year, nearly matching their annual profits.

Though Bernanke questioned the accuracy of the $83 billion figure, he admitted that big banks get some subsidy. But he said the market was wrong to give banks any subsidy at all (in the form of lower borrowing costs), insisting that the government will in fact let banks fail. The 2010 Dodd-Frank financial reform law has given policymakers the tools to safely shut down big, failing banks, he claimed.

But when repeatedly pressed by Warren, Bernanke's confidence seemed to waver. "The subsidy is coming because of market expectations that the government would bail out these firms if they failed," Bernanke said. "Those expectations are incorrect. We have an orderly liquidation authority. Even in the crisis, we -- uh, uh -- in the cases of AIG, for example, we wiped out the shareholders..."

"Excuse me, though, Mr. Chairman," Warren said. "You did not wipe out the shareholders of the largest financial institutions, did you, the big banks?

"Because we didn't have the tools," Bernanke replied. "Now we could -- now we have the tools."

Later, when pressed again by Warren...

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More: http://www.huffingtonpost.com/2013/02/26/elizabeth-warren-ben-bernanke_n_2766368.html