Big Bank Downgrades Demonstrate Dodd-Frank Failure

July 2, 2012 by · Leave a Comment
Filed under: Financial Reform, Moodys 

In a recent editorial, the Wall Street Journal reacted to Moody’s downgrade of 15 banks, including some of the largest in the world (e.g., Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, and others), as evidence of the folly of Dodd-Frank.

“Two years ago, President Obama and Congressional Democrats told Americans they had strengthened the banking system and revoked too-big-to-fail privileges from the financial giants.” The editors continue, “The law’s signature achievements are higher costs, reduced opportunities and weaker banks.”

They point out that Moody’s downgrades were rooted in banks’ inability to “generate earnings to offset the inevitable losses” because, ironically, they have “higher capital buffers and have more liquidity than they used to have.” This enhanced capital position helps taxpayers avoid the risk of a bailout, but limits banks’ ability to make money.

The Wall Street Journal argues that banks should be free to take on more risk—risk that the editors believe will generate greater earnings and overall economic growth. “The goal of financial reform should not be weak banks, but strong banks that are independent of the taxpayer.”

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