DURING the financial crisis of 2008, it became abundantly clear that America's banking system was not equipped to handle the failure of a large, systemically-important financial institution; the bankruptcy of Lehman Brothers nearly brought down the global financial system. The government's response, however—to bail out large banks lest they destroy the broader economy—wasn't particularly satisfactory. It created substantial moral hazard problems and brought risks of its own, including taxpayer exposure to large bank losses and corruption concerns.
After the dust settled, Congress set to work devising new banking rules designed to ensure that in the future too-big-to-fail banks could be allowed to fail. The resulting law has come to be known as Dodd-Frank. And one day, perhaps sooner than we'd prefer, the machinery of Dodd-Frank will be put to the test.
To demonstrate how that might work, The Economist convened an all-star cast—including Larry Summers as Treasury secretary and Donald Kohn as head of the Federal Reserve—to participate in a simulation of a banking crisis, held at last week's Buttonwood Gathering in New York. A hypothetical large bank is on the brink of failure, and the invited experts are tasked with playing out the crisis' resolution within the constraints of the new regulatory framework. The simulation makes for fascinating, and instructive, watching. It is long, about two hours all told, but I cannot recommend it highly enough. The first clip is below, and remaining clips are below the jump.
Here's Part 2:
And Part 4: