Will Senate Bill Fix 'Too Big to Fail'?

President Obama hailed the Senate’s passage of financial-reform legislation as a measure that would “prevent financial institutions from becoming ‘too big to fail,’” but will it? Noam Scheiber says it may, “but not quite in the way the bill’s supporters suggest.” The new legislation will allow the government to seize wobbling firms, fire their executives, and run their operations until it can sell them off in pieces; bondholders will not be paid back until after the government recoups its losses, eliminating the moral hazard. Scheiber says this is “unquestionably an improvement over the status quo,” but he warns that there are loopholes and the Senate ignored several better options, like taxing large banks for a bailout fund and limiting their proprietary trading. Still, Scheiber argues, “perhaps unwittingly, the upshot of financial reform will have been to make it costlier to be a big bank relative to being a small or medium-sized bank—which is to say, it has effectively taxed bigness.”