Bailed-out big banks remain a problem

President Obama was on Wall Street, calling for a new regulatory regime to prevent a financial panic like the one set off a year ago. "We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis," he said.

But there are doubters. Far from the granite canyons of southern Manhattan comes sharp criticism about the plans for new regulations and, not unrelated, who would do the regulating. The skeptics argue that the too-big-to-fail philosophy that saved the hides of Citigroup, Bank of America and AIG remains in force and will make another meltdown inevitable.

The president of the Kansas City Federal Reserve Bank, Thomas Hoenig, turned heads last June when he characterized the lack of action in addressing this fundamental weakness as "regulatory malpractice."

And he warned, "If we hesitate to make needed changes, we will perpetuate an oligarchy of interest." In other words, the financial Mr. Bigs will be running everything from their East Coast party circuit.

On Wall Street, Obama outlined some fine reforms, but he gave only lip service to ending the assumption that some institutions are too big to fail. He mainly said that stockholders in these financial companies would have to bear the cost of their poor management.

Well, stockholders already do. The crisis sent their shares plunging to single digits. (Your writer speaks from sad experience.) The bailout did stop the stock prices from going to zero and enabled a partial recovery of their earlier value, but believe me, the shareholders didn't get away with much.

The big bucks went to the executives who vanished with their kingly bonuses and let others clean up the mess made by their reckless risk-taking. I don't recall their reimbursing the taxpayers. If anything, the government's response over the last year has made the players more smug. The proven deal is "heads I win, tails I'm bailed out."

And that's Hoenig's point.

When the feds stepped in to save the largest institutions, the argument went that America was facing a financial Armageddon. Their collapse would have unleashed another Great Depression.

But Hoenig doesn't endorse letting big banks go splat on the pavement, but rather letting them fail in an orderly manner. That could mean putting them under new ownership or closing them by stages. There are ways to do it.

Instead, sick banks were merged into larger ones. That made the big banks bigger. The top 20 banks now own 70 percent of banks' assets. Therefore, they would expose the system to even more risk if they should get into trouble.

As already noted, banks deemed too big to fail enjoy an implied subsidy. They get sweeter terms from lenders and investors, who know that however badly the companies are managed, the government won't let them go under. That sends money flowing not to the safer banks but to the bigger ones.

This critique extends beyond the concentration of financial power among a few banks. It also concerns a concentration of regulatory power in Washington. There's worry that clout is being taken away from the 12 regional Federal Reserve banks, which serve a purpose in being outside those cozy circles.

The view sees Fed Chairman Ben Bernanke as too chummy with the Treasury. After all, presidents appoint treasury secretaries (often from Wall Street), and the Fed is supposed to be independent of politics.

A year after the panic following the collapse of Lehman Brothers, little has changed. Banks still peddle unregulated derivatives. The big bonuses are back. And the taxpayers are still holding a safety net under the whole enterprise. That's not a very good situation — for the taxpayers, that is.

Providence Journal columnist Froma Harrop's column appears regularly on editorial pages of The Times. Her e-mail address is fharrop@projo.com