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Bangladesh and Banks: Why Both May No Longer Be Too Big to Fail

News   •   May 13, 2013 12:20 EDT

What do the recent tragedy in Bangladesh and the state of this country’s banking industry have in common? At first blush you might say nothing, but scratch just below the surface and you will see there are many parallels.

First Bangladesh – which we all know by now is a corrupt country being run by an ineffective government where rich factory owners sit in Parliament thumbing their collective noses at building codes that no one enforces.

Then, there are the “too big to fail” banks whose CEOs know that, by virtue of their size, the government won’t let them fail for fear they will, just like the garment factory in Bangladesh, come crashing down taking the innocent with them.

Last month’s accident, which killed more than 1,000, isn’t the first one involving garment factory workers. Still, the Bangladesh government has done little to protect those who are just squeaking out a living in what’s estimated to be a $20 billion industry that accounts for more than 75 percent of the country’s exports.

Why are these things allowed to happen? The answer is simple – much like the banking industry in the U.S., the garment industry in Bangladesh is too big to fail.

But the tide may be turning, both in Bangladesh and in the U.S.

In Bangladesh there’s been a groundswell of protests with factories being burned to the ground, and demands for regulation. Those demands, which not only are being heard overseas, but also in this country where many retailers rely on those factories for cheap labor, may serve as a bellwether for the future. In the wake of massive public outcry some retailers are scrambling to respond. But for those who died, it’s too little, too late.

It’s not much different for the banking industry. While no lives have been lost as a direct result of the banks’ committing fraud, many people’s lives have been financially ruined.

In the U.S., efforts have been made in the past to rein in banks with half-baked attempts at regulation that failed miserably in Congress. But that may be about to change. Last month Democratic Sen. Sherrod Brown of Ohio and Louisiana Republican David Vitter introduced the “Terminating Bailouts for Taxpayer Fairness Act of 2013 Act.”

Instead of cutting banks down in size, it requires that those banks with more than $500 billion in assets maintain higher capital reserves than they have to right now. That basically means they have to have more money in their coffers to ensure they are financially sound, serving as a buffer against any future loses. The idea is to create a more level playing field between the Wells Fargo and Bank of Americas of the world and smaller, less powerful financial institutions.

If the bill passes, and that’s a big if, many of the large banks likely would divest themselves of assets and shrink to a size that would not require them to hold additional capital.

Some suggest the groundswell of anti-big-bank sentiment of the last year may be enough for the legislation to pass, while others believe the banks still have enough power to hold off such legislation.

Regardless of whether this piece of legislation passes, one thing is for sure, the tide is turning and too-big-to-fail U.S. banks and the Bangladesh garment factories are going to have a hard time justifying their existence in the future.

Oppenheim Law's practice areas includes defending homeowners and investors from foreclosure, arranging short-sales, loan modifications and "short-refi's", consumer related class actions, personal injury, commercial litigation, real estate and business related matters. The firm is regularly defending homeowners from foreclosure, we are general counsel to myriad  residential and commercial developers, coordinating all legal related matters.

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