I feel like I give Congress a lot of credit when it comes to dilly-dallying, lobbyist-kowtowing, and just general ineffectiveness. But this past week, the folks in the Senate took governing idiocy to a whole new level.

Late last month, fellow Fools Morgan Housel and Ilan Moscovitz highlighted a great financial reform amendment dubbed the SAFE Banking Act. In short, the amendment was designed to end "too big to fail" by not letting banks grow beyond a certain reasonable size.

That amendment was voted down by an impressive 61-33 vote on Thursday, with 27 Democrats voting against the bill. Included in the Democrat naysaying was Senate reform bill architect Chris Dodd. Glad to see he's on board for real reform after all.

But wait, it gets better! The prior day, the Senate overwhelmingly approved two other amendments to the reform package. One explicitly bars the use of taxpayer funds to rescue failing financial institutions, while the other does away with the $50 billion industry-supported cleanup fund for unwinding a failing financial hulk.

So essentially, what they've done is given giant financial institutions like Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) the green light to keep right on being too big to fail, while severing the firehoses that could have doused financial bonfires.

I held little hope that we'd see true reform. But Congress has really outdone itself this time, actually managing to make the financial system even more dangerous.

I get it, I get it
I know Americans are mad about the fact that firms such as Goldman Sachs (NYSE: GS) -- which apparently has been doing some smarmy, if not downright illegal business -- were handed taxpayer money during the financial crisis. And I also understand that the reaction for many people is, "We should have just let them fail."

But the reality's not quite that simple. Take a look at some of the liabilities on the big banks' most recent balance sheets.



Federal Funds, Repos, and Other Short-Term Borrowing


Trading Liabilities

Long Term Debt


Citigroup (NYSE: C)

$828 billion

$305 billion

$55 billion

$143 billion

$439 billion

$154 billion

Goldman Sachs

$39 billion

$156 billion

$185 billion

$129 billion

$234 billion

$71 billion

Morgan Stanley (NYSE: MS)

$64 billion

$219 billion

$136 billion

$143 billion

$189 billion

$55 billion

Bank of America

$976 billion

$356 billion

$136 billion

$130 billion

$512 billion

$230 billion


$925 billion

$345 billion

$153 billion

$141 billion

$405 billion

$165 billion

Source: Company filings. All liabilities may not be included.

When most people think about letting a bank fail, they probably envision the shareholders in that bank suddenly clutching worthless share certificates. And that's A-OK. However, looking at the rightmost column of the table, we can see that equity accounts for a rather small portion of the banks' total financing. If we're really talking about one of these banks failing, we'd likely see the equity demolished, while losses start to eat into other liabilities.

Those other liabilities are spread throughout the financial system in a crazy mess of agreements with mutual funds, pension funds, other big banks, smaller banks, insurance companies, and more. If any one of these big banks fail, banks and financial companies throughout the system may suddenly take big hits to their capital base. And if tough economic times already had them on shaky footing, you can see how one major failure could lock up the entire system.

The poet John Donne said, "No man is an island." The same holds true for the major financial firms. Given their size and the nature of their business, none of them would be able to fail without sending huge shockwaves through the rest of the system.

Absolute nonsense
If we want to keep having massive financial institutions, we need some way to stave off systemic meltdown if one of them fails. On the other hand, if we don't want to end up bailing out failing financial institutions, we have to make sure that they're all small enough that the system can easily absorb their failure. We can't have it both ways.

As it stands, it's easy to see what will happen here. Congress will try to please both constituents (with no taxpayer bailouts) and lobbyists (with no size caps) and put all of this nonsense into law. Then, when we end up playing the same financial meltdown record all over again -- and we will -- somebody, somewhere in government will find some loophole or claim some overriding power to allow them to use taxpayer funds after all.

"We had no choice," they'll whine. "The entire system was at risk because the failing bank was just too big."

But while the SAFE Banking Act may be sleeping with the fishes now, the final chapter has yet to be written on financial reform. That means there's still time to get on the horn with your Senators and tell them how important it is that we put an end to "too big to fail."

Once you've done that, head down to the comments section below and share your thoughts on financial reform.

Wall Street tends to like things that are new, flashy, and risky -- and to forget about classic wealth-building wisdom.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.