To help prevent a replay of 2008, when a market meltdown spurred a global crisis, large broker-dealers should receive access to Federal Reserve loans to enhance liquidity in the sector, according to a new report.

A task force convened by the Bipartisan Policy Center, a Washington think tank, to examine the financial collapse and the government’s response has concluded that broker-dealers need to be better insulated from the runs and panic that paralyzed global markets six years ago.

“Runs beget panics, and panics beget systemic collapse,” Cantwell Muckenfuss, a partner at the law firm Gibson, Dunn & Crutcher and one of the report’s co-authors, said last month at an event marking the release of the study.

“This is not, from my perspective, about the idea of bailing out the big guys. It is about avoiding the potential for panic turning into systemic collapse,” Muckenfuss adds.

The report identifies the accumulation of “money-like liabilities” in nonbank institutions such as

Bear Stearns and Lehman Brothers that made those outfits susceptible to runs without the government oversight and relationship with banking regulators.

“Panics result from runs on short-term financial liabilities, and in our modern financial system runs no longer just occur on bank deposits,” says Martin Baily, a senior fellow at the Brookings Institution and the co-chair of the BPC’s financial regulatory reform initiative. “We saw this in the crisis when runs occurred on instruments like money market mutual funds, repos and commercial paper.”

In addition to the broker-dealer provisions, the authors of the report note some inherent limitations in the ability of U.S. regulators to respond to a crisis when put alongside their global counterparts. Such is the nature of a sprawling bureaucracy, perhaps best exemplified by the provisions in the Dodd-Frank bill that established the Financial Stability Oversight Council, a consortium of nine agencies with various responsibilities in policing the financial sector.

“Nobody has as splintered and balkanized a system as we do. Nobody would set up the system from scratch that we have,” says report co-author John Dugan, a partner at the law firm Covington & Burling and the former comptroller of the currency at the Treasury Department. “I do think that regulators in other countries, while far from perfect, are able to act more easily because there are just fewer decision makers.”

Indeed, Peter Fisher, another co-author of the report and a senior fellow at Dartmouth College’s Center for Global Business and Government, notes that Germany, Canada, the UK and Australia all react more nimbly to the onset of a crisis and limit the contagion thanks to a more streamlined bureaucracy. “I think they work better in a crisis in extremes,” he says. “I think they operate faster and we operate the slowest. So we can do better.”

The authors of the report acknowledge that the composition of the financial bureaucracy is unlikely to change structurally, but recommend that the FSOC, imperfect though it may be, be given the authority to issue regulations in times of stress when its member agencies are unable to act. At the same time, the report calls for greater transparency in FSOC proceedings, an area where the council has been roundly criticized by many lawmakers and industry officials.


Another recommendation in the report calls for the FSOC to oversee nonbanking entities that are designated as systemically important financial institutions—or SIFIs—differently from banks. Already, the FSOC has designated Prudential Financial, AIG and General Electric Capital Corp. as SIFIs, and is actively considering extending that label—and the Federal Reserve regulation it entails—to other firms, a frightening prospect for fund companies such as Vanguard.

“While it is possible for nonbank companies to present the type of systemic risk that warrants designation as nonbank SIFIs, the risks presented by such institutions are likely to be different from the ones presented by predominantly banking organizations,” the authors of the report write. “As a result, the consolidated supervision of such institutions ought to be tailored to address those different risks, even if the resulting requirements are different from those that apply to bank SIFIs.”

The report recommends that Congress undo a provision of Dodd-Frank and restore the ability of the Fed to issue one-time emergency loans to individual nonbank financial institutions, recalling the rescue of AIG and Bear Stearns. It also calls for lawmakers to roll back the requirement that the Fed obtain congressional approval before extending emergency guarantees on debt issued by depository institutions and their affiliates, another Dodd-Frank rule.

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