Some of the blow-back on the Obama reform plan is based on quick reads – if reads were even done.  In fact, the plan is different not only from headline assumptions about it, but also from the systemic-risk framework Geithner laid out in March.  Critically, the new plan – very much unlike the old one – will break up big financial institutions and significantly reduce the chances that any of them will be rescued.  For the first time, the plan favors bankruptcy, not rescue, for the very biggest institutions – assuming any are left standing once the plan’s new capital, activity and prudential restrictions are put in place.

First Key Point:  the Obama plan creates “Tier 1 FHCs,” firms that would then come under very, very tough new standards.  We know that it isn’t clear that the FRB will govern these Tier 1 FHCs – that will play out as Congress gets to work.  However, regardless of who regulates them, these big firms will be regulated very much along the lines detailed n the plan.  We’ve said it before and we’ll reiterate here:  if bank regulators can’t limit shadow banks directly with the powers of new law, then they’ll do it indirectly under current authority by slapping tough rules on banks doing business with non-banks.  Result:  choking off capital to big non-banks whether or not they come under the FRB as “Tier 1 FHCs.”  

So, with or without legislation, there will be far fewer systemic-risk institutions.  The Obama plan doesn’t take on too big to fail directly by express provisions to dismantle them, but it might as well do so.  All of the new rules – see, for example, the little-noticed ones on inter-affiliate transactions – will combine to break up the big boys.

Second Key Point:  For those who are left and non-banks that catch regulators unawares, the plan does include a new resolution regime but it’s sharply different from the March Geithner plan.  Instead of giving the FDIC carte blanche to bail out anybody any way, the new approach is predicated on receivership.  This is the equivalent of bankruptcy and thus ensures that shareholders, counterparties and other risk-takers would in fact feel the pain if any firm remains big enough to trigger the systemic-risk resolution process.