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One goal of Obama's 'sweeping overhaul': prevent another AIG

The plan seeks to contain the risk of large-firm failure. It would also give regulators alternatives to costly AIG-style bailouts.

A number of large firms that were at risk, such as Bear Stearns, have been absorbed by other giants that were already among the top 10 banks in size. Citigroup, on the other hand, is trying to go the other way and sell some of its divisions.

John Gress/Reuters

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Even if President Obama gets his way on banking reforms, some financial firms will remain so huge that their collapse would put the whole economy at risk.

It's a problem called "too big to fail," and it stood at the center of the US financial crisis last fall.

Back then, the government found itself doing extraordinary things, such as becoming the 80 percent owner of America's largest insurance firm, rather than take the risk that a corporate failure might cascade into a wider meltdown.

Yet by stepping in to save firms like AIG, the government may have expanded the too-big-to-fail problem.

The largest firms have heard "no more Lehmans" become a mantra for policymakers. That refers to the bankruptcy of investment bank Lehman Brothers, which caused severe market disruptions last September.

Simply put, Wall Street titans know more clearly than ever that they won't be allowed to fail.

This is one reason that Mr. Obama says regulatory reform is needed, and soon. His plan seeks to contain the risk of large-firm failure. It would also give regulators alternatives to costly AIG-style bailouts if such a firm fails.

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