S&P says Dodd-Frank doesn't end "too big to fail"

Tue Jul 12, 2011 3:41pm EDT

* Dodd-Frank includes power to dismantle financial firms

* Power designed to remove idea some firms too big to fail

* S&P says extraordinary government support still possible

WASHINGTON, July 12 (Reuters) - The Dodd-Frank financial oversight law has not ended "too big to fail," and the U.S. government still may step in to save a toppling financial giant during the next crisis, Standard & Poor's said in a report on Tuesday.

The rating agency's report acknowledges policymakers' desire to make clear that the government in the future will not step in to bail out big financial firms.

But S&P says the government's long track record of finding ways to prop up critical financial firms trumps the intentions of the legislative framework.

"We believe that under certain circumstances and with selected systemically important financial institutions, future extraordinary government support is still possible," the report says.

Last year's Dodd-Frank law gives regulators the power to seize a large financial firm that is headed for disaster and dismantle it in a way that is less disruptive than either taxpayer bailouts or bankruptcy.

The crisis that peaked in the fall of 2008 pushed some of the most storied financial firms to the brink of collapse. Some, such as AIG (AIG.N), were bailed out by the government; others, such as Lehman Brothers, were not and went bankrupt.

So far, markets have been skeptical that this new so-called Orderly Liquidation Authority will ever be invoked, and even if it is, its detractors say that it will not work as intended.

Proponents led by recently departed Federal Deposit Insurance Corp Chairman Sheila Bair got a boost last month from Moody's Investors Service.

In a June 2 report, Moody's said it may downgrade the debt ratings of Bank of America Corp (BAC.N), Citigroup Inc (C.N) and Wells Fargo & Co (WFC.N), citing concerns about waning U.S. political willingness to offer support for the largest banks.

S&P, however, said on Tuesday that in the face of an unpredictable financial crisis, the liquidation authority may not work, and government may step in with support.

"Ultimately, in our views of new legislation and regulation, we need to consider the long track-record of extraordinary support that may be essential for a handful of institutions despite government reluctance to offer such support," S&P said. (Reporting by Karey Wutkowski; Editing by Tim Dobbyn)

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