Fed's Tarullo: Rules Must Fix 'too Big To Fail'

DANIEL WAGNER

WASHINGTON (AP) — The Obama administration's financial overhaul must prevent banks from getting so large that the government would rather bail them out than see them fail, a Federal Reserve official says.

"The reform process cannot be judged a success unless it substantially reduces ... the too-big-to-fail problem," Fed Governor Daniel Tarullo told the Washington D.C., Exchequer Club Wednesday, according to remarks prepared for delivery.

Last fall's financial crisis led the government to save or help sell massive financial firms like Bear Stearns Cos. and American International Group Inc. Officials feared the firms were so large and so interconnected that one failure could set off a chain reaction, wreaking havoc on the global financial system.

There was no good way to dissolve the financial relationships of these companies and sell off their assets, so Fed and Treasury officials stepped in with trillions in loans, subsidies and guarantees.

In the speech, Tarullo endorsed some administration proposals, including creating a new way to dissolve large, failing banks, and making them hold more capital in reserve.