Making Wall St. 'pay the tab' sounds nice until we try it

In addition, the Federal Deposit Insurance Corp., which will have the authority to wind up too-big-to-fail firms, may be able to spread the special charges to more institutions, such as hedge funds, that have more than US$10 billion in assets.

Still, the bills could get pretty big, and quickly. That's especially a worry if shareholders and creditors of the firms tagged to pay the special charge get spooked. That may lead to broader sell-offs and losses that further erode equity.

This sort of death spiral is just the type of contagion the government is hoping to avoid by overhauling financial regulation and trying to tackle the too-big-to-fail issue.

There's also the likelihood that if one firm is in trouble, a whole bunch of others are going to be teetering. Last fall, for example, the fear was that the failure of Lehman and subsequent takeover of Merrill Lynch & Co. would be followed by runs on Morgan Stanley and then Goldman.

“If there's a financial problem that destroys JPMorgan, it is very likely that Citigroup or Bank of America or Goldman Sachs will be in no shape to help,” former Securities and Exchange Commission Chairman Arthur Levitt said during an interview Tuesday on Bloomberg radio.

“These are things that don't generally strike just one company, they're systemic, they strike the whole community,” said Levitt, who is an adviser to Goldman Sachs and also sits on the board of Bloomberg LP, parent of Bloomberg News.

In response, Congress may suggest that the charge to other financial firms, if it is indeed quite large, be spread over many years, or maybe decades.

The result: taxpayers will still foot the bill for the bailouts as they await payment. Under the plan, the FDIC would initially cover the mopping-up costs by using a line of credit from the Treasury.

And while the public should eventually get paid back, the banks might lobby for forgiveness or use the intervening years to somehow sidestep this obligation.

Making Wall Street pay is a great idea. It will only serve as a deterrent and punishment, though, if it works.

Otherwise, this well-intentioned fix will give a false sense that we've reined in too-big-to-fail firms. It would be better to make them small enough to fail on their own.

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