No More Too Big to Fail

Posted by: Matthew Goldstein on March 23

The Obama administration is on the verge of rolling out a series of new regulations to prevent a repeat of the still rampaging financial crisis. But it’s not enough for policy makers to simply propose expanding the Federal Reserve’s enforcement power, or putting forth new rules for regulating derivatives, exotic securities and hedge funds.

What’s needed now more than anything, is a plan to ensure that no financial institution is ever again “too big to fail.’’ The seemingly endless bailouts of American International Group(AIG), Citigroup(C)and Bank of America (BAC)are all premised on the fear that if any one of these financial services giants were to fail, the global economic fallout would be catastrophic. And as distasteful as it may be, regulators and policy makers are correct that there’s no other choice than to save these firms.

But once these financial behemoths no longer pose a systemic threat, they need to be dismantled and dramatically shrunken. And the same must go for banks that aren’t on the critical list. So far, JPMorgan Chase & Co. (JPM)has managed to avoid becoming a financial basket case like Citi or Bank of America. But the world economy cannot risk a situation where some future crisis puts JPMorgan on the edge of disaster. If that means forcing relatively healthy banks to get smaller—either through voluntary divestures or old-fashioned trust busting—so be it.

There’s precedent for putting constraints on the ambitions of US banks. Federal rules have long restricted any one bank from controlling more than 10% of the nation’s customer deposits. Maybe there should be a similar restriction on the dollar value of derivatives contracts that a bank can enter into. A cap on the number of off-balance sheet special purpose entities a bank can create might be worth considering too. A limitation on the number of nations a bank can operate in also might be worth a look.

Some will argue that these restrictions are anticompetitive and will put US banks at a disadvantage to foreign competitors. That may be so. But the current crisis has shown that the threat posed by megabanks—especially when they mess up—is simply too great for all of us to bear.

Reader Comments

staych

March 23, 2009 03:12 PM

Too Big to Fail Will remain to be FACT for many years to come no matter how you look at it here in the good ole USA !!!

Liz

March 23, 2009 03:19 PM

How about re-instating Glass-Steagall and the 15% leverage rule? (It worked well for over 70 years ... even during the go-go 80's.)

jjw

March 23, 2009 03:41 PM

The Glass-Steagall Act, regulating banks, was set up to deal with the banking problems during the Great Depression. It was repealed by the Gramm-Leach-Bliley Financial Services Modernization Act, which shattered the walls separating commercial banking, investment services and insurance, allowing banks to become "too big to fail." Be sure to thank the Republicans and in particular Sen Phil Gramm (Texas), Rep Jim Leach (Iowa), and Rep. Thomas Bliley (Virgina) for their wisdom and dedication in serving their constituents: the high-flying CEOs of the Financial "Industry". These are the people you should be angry at about these immense bailouts.

vijay

March 23, 2009 03:59 PM

Couldn't agree more. This is the best time to fix the "too big to fail" aka "robbing the average guy". Time for the government to devise regulations and be more active in breaking up companies that get too big and risk the country due to their recklessness.

Richard

March 23, 2009 04:09 PM

Clinton signed the law that tempted the banks with derivatives and gave us this terrible mess. It is time we put controls on it. I would echo the question about re-instating Glass-Steagall. Lastly, and to the point of the article, if any financial institution is too bit to fail, then it must also be an unfair monopoly. I think anything so big should be sized down. With the next financial melt down, the foreign banks will fail and America will still prove to be a safe haven.

FBEye

March 23, 2009 04:13 PM

It's far TOO LATE to change things now. The FED is now in control of the WORLD, & the WORLD ECONOMY, in my opinion. It's EXACTLY what they wanted, wouldn't you agree? 'Google' this- AMERICA: FREEDOM TO FASCISM, and watch that documentary on the web. It has ALL come true, right? I just want to know where I need to go & have a FED "computer-chip" inserted into my body. Does anyone know yet???

Christina

March 23, 2009 04:37 PM

JWJ, thank you for naming the correct names in this issue. I have to admit, that I too am wondering why we do not have anti trust investigations going on. Insurance companies are required to carry enough capital to insure that they can pay their claims no matter what. We have created these stock based insurance companies rather than leaving them mutualigized. Take a look at New York Life, they are doing just fine. But companies sould not be allowed to be this big unless they can sustain their own troubles.

libertyville

March 23, 2009 04:54 PM

Come on! Have they really been too big to fail? From where most of us sit, they have been too connected to fail.

Jer

March 23, 2009 05:39 PM

Don't count on a correction of the Glass-Steagall repeal stupidity. Geithner replied to the senators question when asked if he thought it was a screw up TO repeal it, his reply, NO. I think we're stuck.

hoover20

March 23, 2009 05:53 PM

JjW, Vijay, and Christina... you clearly enjoy pecking tidbits from an argument to work towards your advantage... accuse a select group of republicans for ten, twenty, thirty-plus of years of nationwide and worldwide failure,which incidentally has no real tie to partisan views, except for the ones you contrive. The continuation of your stance, like it or not, sounds something like, "... and the Democrats couldn't do anything about it because they were misinformed, uneducated, and poor." I'm confident you have been one the first in line to ask-for and take money from our government because you think you are entitled to it?!?! If you are so clairvoyant on the issue, why didn't you already fix it, or why can't you point to a resolution? Stop surfing the web and waiting for Uncle Sam to send you 'entitlement' checks, you're the reason why companies have to hire extra people to get a one-man job done.
And in case you didn't know, there are just as many rich democrats as there are republicans; what you don't get is that there aren't as many rich democrats with any balls to take responsibility for their actions, or to initiate actions of any substantance... they do, however, point a really convincing finger.
Quit blaming someone else, quit expecting to be taken care of, and get off your butt to make a positive change.

Hugo van Randwyck

March 23, 2009 06:05 PM

All of these TARP gambling bailout banks, could be demerged now! Easily into separate companies, one for each state, that's 50 so far, then for every country they are in, plus some more, so maybe 100 to 150 small businesses. The shareholders can then buy or sell shares as usual, some businesses may go bankrupt, others will prosper, some get bought out by management etc. Re-introduce free enterprise, and anti-trust legislation. Thank you for writing this article, maybe more like this, and how easy it is to demerge these banks - demerging is supposed to be one of their skills!

bill

March 23, 2009 07:00 PM

"A cap on the number of off-balance sheet special purpose entities.."

May I suggest: cap at zero. There's a reason we HAVE balance sheets!

Jay

March 23, 2009 10:54 PM

The pink elephant in the room is that our government is too BIG to fail, and yet they fail us each and every year. Things throughout our country have continued to decline from Clinton to Bush to Obama. I'd like Obama to succeed because it's good for America, but the fact of the matter is that the current administration is attempting to correct the hole we are in by digging deeper.

rich

March 24, 2009 11:54 PM

Well I really like President Obama but despite him getting elected by the people the fixed card game is still going on in DC. republicans voting no across the board and now we have conservadems?? The bull*@#! NEVER STOPS DOES IT!!!! How the hell did the Gramm-Leach-Bliley Financial Services Modernization Act pass thru congress??? Bottom line we don't go golfing with our representatives big business does!!

rich

Jim

March 25, 2009 09:18 AM

Too big to fail should be a rallying cry for the Teddy Roosevelt Dems and Reps. Bring back Glass-Steagall, along with other reforms. Are you listening Eric Holder?

Jim

March 25, 2009 09:18 AM

Too big to fail should be a rallying cry for the Teddy Roosevelt Dems and Reps. Bring back Glass-Steagall, along with other reforms. Are you listening Eric Holder?

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