Gretchen Morgenson, NY Times

EVERY once in a while, Congress awakens from its lobbyist-induced torpor, realizes that the masses are cranky and sets out to appease them. Such a moment occurred last week when lawmakers finally got the message that Main Street is disgusted with Wall Street and wants them to do something about it.

Financial reform, which had been stumbling along, suddenly got traction. Bills and proposals began flying around Capitol Hill, andPresident Obama chided the bankers in an appearance in New York.

Unfortunately, the leading proposals would do little to cure the epidemic unleashed on American taxpayers by the lords of finance and their bailout partners. The central problem is that neither the Senate nor House bills would chop down big banks to a more manageable and less threatening size. The bills also don’t eliminate the prospect of future bailouts of interconnected and powerful companies.

Too big to fail is alive and well, alas. Indeed, several aspects of the legislative proposals sanction and codify the special status conferred on institutions that are seen as systemically important. Instead of reducing the number of behemoth firms assigned this special status, the bills would encourage smaller companies to grow large and dangerous so that they, too, could have a seat at the bailout buffet.

Here’s an example of this special treatment: Both bills would establish a specific process to resolve big-bank failures. Smaller institutions, by contrast, would be allowed to go bankrupt without a new resolution scheme.

This special resolution system is not only unfair; it also sends a pernicious signal to the market about large and intertwined institutions. The message is this: Subject as they will be to a newly codified “resolution authority,” these institutions and their investors and lenders can expect to be rescued if they get into trouble.

This perception delivers lucrative advantages to these institutions. The main perquisite is lower borrowing costs, a result of lenders’ assumptions that the giants are less risky because they will be in line for government assistance if they become imperiled. ThinkFannie Mae and Freddie Mac. And remember all those folks on Capitol Hill and elsewhere who assured taxpayers that we would never lose a dime on those companies?

It is disappointing that none of the current proposals call for breaking up institutions that are now too big or on their way there. Such is the view of Richard W. Fisher, president of the Federal Reserve Bank of Dallas.

“The social costs associated with these big financial institutions are much greater than any benefits they may provide,” Mr. Fisher said in an interview last week. “We need to find some international convention to limit their size.”

Read more here: http://www.nytimes.com/2010/04/25/business/economy/25gret.html