More on how to deal with Too Big To Fail

A nice, simply explanation from Simon Johnson on why breaking up Too Big To Fail, Too Complex To Manage banks makes loads of sense:

 Daniel Tarullo, a governor of the Federal Reserve System, spoke for the first time last week about potentially imposing a size cap on the largest U.S. banks. His language, naturally, was that of a central banker.

“To the extent that a growing systemic footprint increases perceptions of at least some residual too-big-to-fail quality in such a firm, notwithstanding the panoply of measures in Dodd- Frank and our regulations, there may be funding advantages for the firm, which reinforces the impulse to grow,” he said in a speech at the University of Pennsylvania Law School. “There is, then, a case to be made for specifying an upper bound.”

His point was simple and clear. Creditors to very large financial institutions believe they receive downside protection from the government — primarily through measures that the Fed would put in place in the event of financial distress. This gives large bank holding companies and other financial enterprises the ability and incentive to become even larger, which in turn increases the perceived subsidy and further lowers their funding costs.

My even simpler translation: Megabanks are a creatures of government, not the natural outcomes of market forces at work.

14 thoughts on “More on how to deal with Too Big To Fail

  1. “My even simpler translation: Megabanks are a creatures of government, not the natural outcomes of market forces at work.”

    That comment reveals the pathologies of its author. Also, his ignorance.

    “The interstate restrictions of the Bank Holding Company act were repealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA). The IBBEA allowed interstate mergers between “adequately capitalized and managed banks, subject to concentration limits, state laws and Community Reinvestment Act (CRA) evaluations.” Other restrictions which prohibited bank holding companies from owning other financial institutions were repealed in 1999 by Gramm-Leach-Bliley Act. In the United States, financial holding companies continue to be prohibited from owning non-financial corporations in contrast to Japan and continental Europe where this arrangement is common. Instead, private equity firms, which solicit funds and, in essence, provide commercial banking services, have taken advantage of the workaround available to acquire large ownership positions in a number of non-financial corporations, enabling the enterprise to obtain financing.”

      • It’s called “providing evidence” and “genuine history” as opposed to pulling lies out of one of several orifices. I don’t write scripts and melodramas to fit into a narrative consisting only of lies.


  2. After a $50 billion taxpayer bailout and getting their balance sheet wiped clean, GM now builds more cars, sells more cars and hires more people in China than it does in the USA. And all GM’s biggest expansion plans are outside our boarders.

    This is one big failure that would have served America’s best interests. Meanwhile, the taxpayer who did the bailing, is still in the hole.

  3. My even simpler translation: Megabanks are a creatures of government, not the natural outcomes of market forces at work.

    This is a very good point. Megabanks are well protected by the government. They love these complex regulations. And why shouldn’t they? Megabanks have the resources to navigate them; the little banks don’t.

    It is interesting how “too big to fail” didn’t become a problem until the government got involved in the banking sector.

    Canada doesn’t have nearly as many regulations in their banking sector as we do, and their banks not only didn’t have the financial problems ours did in 2008, but are also not megabanks (by US standards). Canada has no SEC and relatively few banking regulations, yet their banks are far more stable.

    Regulations don’t solve problems, they create them.

    • “It is interesting how “too big to fail” didn’t become a problem until the government got involved in the banking sector.”

      Right, genius. By repealing the very laws that PREVENTED them from getting that big. It was their LACK OF INVOLVEMENT that created these monsters.

      (Where do these people come from? How does democracy survive?)

  4. Not too big…just right !!

    Electric car battery maker, A123 Systems, with $250 million taxpayer dollars, just filed Chapter 11 bankruptcy.

    Meanwhile, the IRS is jumping all over Solyndra’s bankruptcy and tax avoidance fraud. According to the IRS, Chapter 11 is supposed to give the protected company a chance to recover; its not a vehicle to create tax avoidance credits. Surprise, surprise, this tax avoidance scheme benefits Obama’s money-bundler Kaiser with $350 million of such benefits.

    Counting the original $550 million SOLY received from us taxpayers, we now get to pay for this Obama scheme TWICE. This entire financial fraud is now kissing $1 billion.

    Bernie Madoff…you are a piker compared to our Oval Office pretender.

  5. JP,
    “Too big to fail” was conceived and implemented by our Gov. and certain WS bankster cartels to apply, exclusively, to those institutions that are run by mentally and financially corrupt banksters who are “too big to jail.” The rest is bs!
    Btw, certain commentators here seem to possess a retarded “penthouse.”

  6. Here’s my take:
    1) Break up the big banks into investment companies and conventional banks and limit leverage in both entities to 12 to 14 times capital (conservative).
    2) No off-balance sheet items—make everything clearly stated on the balance sheet.
    3) Put derivatives on exchanges and have banks/investment houses mark-to-market all hedging positions at the end of each day.
    4) Return to conventional banking and loan-making for newly split-off banks with low leverage requirements
    5) Make bankers responsible for bank failures. Pass laws to require jail time and salary claw-backs for serious “financial malfeasance.”

    With item 5), there is no need for DoddFrank. If a bank fails, the entire management team goes to jail.

    • Not bad at all. One thing about Dodd-Frank. A lot of what you want is already in the bill. D-F is not a bad piece of legislation. People have just been trained to hate legislation, that’s all.

      • When I read that it’s 1000s of pages long, I can reliably bet that they are trying to over-regulate and out-maneuver bankers. Bankers will find ways around overly prescriptive legislation. Bankers can understand “if you fail, you go to jail” better. Ok, thanks for the comment!

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