Congress is considering legislation that would give the Treasury and FDIC broad new legal powers to resolve failed banks, broker-dealers and insurance underwriters, as well as the companies that own them. While most observers agree that we need a better way to resolve insolvent financial firms, the current proposals do not really address the core public policy concern.

The entire concept of "too big to fail" is based on the belief that unwinding large multinational financial firms via a traditional bankruptcy is operationally impractical and politically disruptive. The market shock caused by the failures of Lehman Brothers, American International Group and Washington Mutual is pointed to as evidence of the veracity of the "too big to fail" doctrine. While reasonable people can differ on this point, let's assume that from a public policy perspective, sudden liquidation of a complex firm is the least desirable option.

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