If they are too big to fail, make them smaller.”

-Nixon Treasury Secretary George Shultz about Fannie Mae and Freddie Mac

>

This Sunday NYT seems to be all about one of our favorite crisis whipping boys: The concept of TBTF — “Too Big to Fail.”  There are numerous articles, stories, blog posts on this pernicious policy, including our own “Too Big to Succeed” meme (aka chapter 18: Too Big to Succeed? in Bailout Nation).

• Gretchen Morgenson asks: Too Big to Fail, or Too Big to Handle?:

Rather than propose ways to shrink these companies and the risks they pose, the Geithner plan argues instead for enhanced regulatory oversight of the behemoths. This suggests the taxpayer safety net will be larger after our national financial train wreck, not smaller.

More than two years after the crisis began, “too big to fail” remains “too problematic to address” with anything other than more souped-up regulation. Given that earlier efforts at policing these entities failed so miserably, why should anyone think that a new-and-improved regulatory approach will fare better?

• Eric Dash asks If It’s Too Big to Fail, Is It Too Big to Exist?:

Today, amid the wreckage of the gravest financial crisis since the Great Depression, bigness is one of our biggest problems. Major banks, the Detroit automakers, the financial basket case that is the American International Group — the only reason these giant, sclerotic companies are still standing is that they have been deemed “too big to fail.”

Or, more precisely, too big to be allowed to fail. Policy makers fear companies like these are so enormous and so intertwined in the fabric of the economy that their collapse would be catastrophic. Hence, all those multibillion-dollar, taxpayer-financed bailouts.

In its overhaul of financial regulation last week, the Obama administration proposed several measures to try to contain the biggest of America’s big banks. But it stopped far short of calling for the dismantling of those institutions.”

Paul Krugman gets meta on the idea — Too big to fail FAIL — and surprisingly argues that we can never eliminate TBTF:

“I’m a big advocate of much strengthened financial regulation. One argument I don’t buy, however, is that we should try to shrink financial institutions down to the point where nobody is too big to fail. Basically, it’s just not possible . . .

So I think of the pursuit of a world in which everyone is small enough to fail as the pursuit of a golden age that never was. Regulate and supervise, then rescue if necessary; there’s no way to make this automatic.”

I totally disagree — size is problem, for it not only creates companies too large to effectively practice risk management with, the mere size creates other issues.  The fact that CitiGroup was able to get Glass Steagall repealed, but did so by forcing the government’s hand via a technically illegal merger is quite telling.

When companies get to be that large, their vast wealth buys influence and power and corrupts the political system. Despite the crisis caused by the banks, just look at how successful their lobbying effort was. Their enormous pushback effectively neutered any true regulation of the finacial sector.

I think that from now on, I will be referring to the President as Barack W. Obama — since he is adopting Bush’s economic policies, he might as well as adopt his middle initial.

>

Previously:
Too Big To Succeed . . . (January 14th, 2009)

http://www.ritholtz.com/blog/2009/01/too-big-to-succeed/

Obama Reform Plan Fails to Fix Whats Broken (June 18th, 2009)

http://www.ritholtz.com/blog/2009/06/obama-reform-plan-fails-to-fix-whats-broken/

Sources:
Too Big to Fail, or Too Big to Handle?
GRETCHEN MORGENSON
NYT, June 20, 2009

http://www.nytimes.com/2009/06/21/business/21gret.html

If It’s Too Big to Fail, Is It Too Big to Exist?
ERIC DASH
NYT, June 20, 2009

http://www.nytimes.com/2009/06/21/weekinreview/21dash.html

Too big to fail FAIL
Paul Krugman
June 18, 2009, 9:10 PM

http://krugman.blogs.nytimes.com/2009/06/18/too-big-to-fail-fail/

See also:
Too Big to Fail’ Policy Must End, F.D.I.C. Chief Says
Dealbook, June 19, 2009

http://dealbook.blogs.nytimes.com/2009/06/19/too-big-to-fail-policy-must-end-fdic-chair-says/

Chief Says BlackRock Isn’t ‘Too Big to Fail’
Dealbook, June 17, 2009

http://dealbook.blogs.nytimes.com/2009/06/17/chief-says-blackrock-isnt-too-big-to-fail/

Category: Bailout Nation, Bailouts, M&A, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “Too Big to Fail: Special NYT edition”

  1. VennData says:

    There is a negative externality regarding “too big to fail.” We need to get as close as we can to quantifying it. Then, for example, make banks hold more capital as they get larger – thereby reducing profit.

    So the regulatory regime would rationally price “too big to fail” into the financial institution’s FDIC payments. This is rather trivial in a universe without lobbyists and free market fundamentalists.

  2. Totally agree

    The TBTF idea is horrific.

    First securtization, then Reagan, now this: The list of things I disagree with Professor Krugman about continues to grow . . .

  3. dead hobo says:

    My expectations are at the low minimal level. The only think more useless than a Democratic majority is an insane, lying Republican majority. One’s afraid of everything and the other wants to be America’s mullahs. Our banks don’t need to fear much.

  4. BR:
    Barack is one “R”, not two. As far as his economic policies, his CoS belongs (or at least did belong) to the DLC. Just lets say that a lot of people on the left dislike the DLC and their policies towards business(which indeed look just like Republican policies).

    ~~~

    BR: Fixed

  5. bizprof says:

    I’m with VennData on the need to more precisely define TBTF from a policy standpoint. Krugman seems to point at the notion that we can’t simply pledge to shrink institutions we think are TBTF because that definition is socially constructed and is based in way too many different variables (“larger” can mean lots of different things) as opposed to empirically constructed from easy to monitor metrics. But policymakers should have the wisdom to pick the metrics that make sense and prohibit institutions from holding more of these than the limits.

    Does anyone have good suggestions for a more precise policy definition of TBTF?

  6. Cap the depository assets of FDIC insured banks at 2%of total US assets

  7. matt says:

    Strengthened financial regulation (at least what has been proposed over the past year) seems to be targeting the side effects of too big to fail instead of addressing the root cause.

    What happened to Krugman? For a while there, he was making sense; now he seems to be spewing more and more Ben Steinery.

  8. willid3 says:

    curious question. in a capitalist society how do we keep companies from getting TBTF? we had a hard time defining monopolies and even more trouble trying to keep them under control (and still do). and even then we are dependent on how regulators act (or not). some will see nothing as ever being a monopoly or TBTF. while others might over react. how do we ensure they actually when they need to, but don’t avoid acting at all?

  9. Quantifying TBTF:

    How about something similar to Herfindahl-Hirschman Index that is already used to regulate the size of other industries?

    I also think Krugman is wrong on this. With his logic, there would be no need for anti-trust regulation.

  10. Pete from CA says:

    From the Krugman article:

    “finance is deeply interconnected, even a moderately large player can take down the system if it implodes. Remember, it was Lehman — not Citi or B of A — that brought the world to the brink.”

    Is this really inevitable? If so, what does this “deeply interconnected finance” buy us?

    Maybe this is tantamount to blasphemy around here but prior to their collapse I didn’t even know Lehman existed. From my perspective they were an insignificant, unimportant part of the world. Certainly nothing I would consider valuable. So if these Lehman-like institutions pose an inherent threat to civilization, then I’d say let’s eradicate them.

    What am I missing?

  11. donna says:

    I think there’s also the idea of lack of consumer choice — what do you do when all these big banks come in and buy up every local bank? It’s like when Starbucks chased out our three local coffee shops, or Walmart killing so many of our local retailers…

    Thank goodness for credit unions, which have been my banking source for over twenty five years now. I hate banks.

    Agree with you, BR, there have to be some limits on size, or we lose regulatory AND competitive controls on companies.

  12. rmasand says:

    >When companies get to be that large, their vast wealth buys influence and power and corrupts the political system. Despite the crisis caused by the banks, just look at how successful their lobbying effort was. Their enormous pushback effectively neutered any true regulation of the finacial sector.

    Size is not the problem here. Campaign reform, by limiting the influence of special interests, will archive the same end – without violating the fabric of capitalism.

  13. Marcus Aurelius says:

    Too big to fail is too big to trust, and too big to allow.

  14. The Curmudgeon says:

    Is the Fed and the Federal Government “too big to fail”? Of course not. Empires come and go. It happens all the time.

    But that is the premise behind the notion of TBTF, i.e., that there is one entity (the Fed/Fed Gov) that isn’t going to fail. Foundations built on false premises (like the one that housing prices never decline) tend to crumble and fail, along, of course, with the edifice they are supporting.

    TBTF my ass. Nothing is ever TBTF.

  15. DL says:

    TBTF is here to stay. The large banks are too powerful, and the creation of a means to eliminate TBTF institutions is not going to be a significant campaign issue in the next election (or the one after that). So we are left to ponder the consequences, both from the investment standpoint and from the perspective of the overall economy.

    On the plus side, odds are that the next major banking crisis is at least 20 years in the future.

  16. Dear Leader says:

    ….. “W” …

    too funny

    Dear Leader may take offense to that

  17. Marcus Aurelius says:

    In the end, who are the beneficiaries, and who are the victims, of deregulation? An honest examination of the benefits and detriments of governance and regulation is merited when exploring this question. Unregulated capitalism inevitably leads to plutocracy. That’s what we’re witnessing. We cannot allow it.

  18. Marcus Aurelius says:

    DL: the next major banking crises are on our doorstep, in the form of Alt-A and Option ARM resets, and CRE/CC defaults.

  19. Ned Bushong says:

    Geithner just wants to protect all his buddy’s incomes: “Goldman Sachs staff can look forward to the biggest bonus payouts in the firm’s 140-year history after a spectacular first half of the year … Staff in London were briefed last week on the banking and securities company’s prospects and told they could look forward to bumper bonuses if, as predicted, it completed its most profitable year ever.”

  20. S Brennan says:

    Unfortunately, Paul Krugman went to the White House and got absorbed into the Obamatron and as now spouts administration talking points on this subject…very sad, he was a voice of sanity, RIP Paul

  21. km4 says:

    > from now on, I will be referring to the President as Barack W. Obama — since he is adopting Bush’s economic policies, he might as well as adopt his middle initial.

    Yes I agree !

    And it didn’t have to be this.

    Bush did it with Iraq war

    Obama is doing it with the 19 too big too fail banks

    The US financial ponzi scheme is a racket…..Obama and his Wall St bought and paid for economic team have put all their chips on the Banking Oligarchs. It is conducted for the benefit of the very few at the expense of the very many ( the American taxpayers). Obama’s objective with his Wall St bought and paid for economic team is to pump up great chunks of the Big Shitpile that’s essentially worthless unless the peak real estate values of the bubble can be miraculously restored.

    Obamanomics is where
    1) The government champions funds
    2) Funds champion corporations
    3) Corporations champion markets and industries
    4) The people ( American taxpayers ) get the tab

    Charles Ponzi is laughing out loud at the greatest swindle in American history !

    Gorbachev warns that the world’s current economic model, created by “America’s elite,” is “cracking” As it comes undone, many will suffer, he predicted. “Including the United States.”

    In many respects he’s right but most Americans today are too ignorant or complacent to demand REAL change ;)

    Perhaps when it’s too late i.e. America becomes a much BIGGER version of Argentina or Mexico in the near future they will wake up and say what the f*ck happened !

  22. km4 says:

    > from now on, I will be referring to the President as Barack W. Obama — since he is adopting Bush’s economic policies, he might as well as adopt his middle initial.

    Yes I agree and it didn’t have to be this way…

    Bush did it with Iraq war

    Obama is doing it with the 19 too big too fail banks

    The US financial ponzi scheme is a racket…..Obama and his Wall St bought and paid for economic team have put all their chips on the Banking Oligarchs. It is conducted for the benefit of the very few at the expense of the very many ( the American taxpayers). Obama’s objective with his Wall St bought and paid for economic team is to pump up great chunks of the Big Shitpile that’s essentially worthless unless the peak real estate values of the bubble can be miraculously restored.

    Obamanomics is where
    1) The government champions funds
    2) Funds champion corporations
    3) Corporations champion markets and industries
    4) The people ( American taxpayers ) get the tab

    Charles Ponzi is laughing out loud at the greatest swindle in American history !

    Gorbachev warns that the world’s current economic model, created by “America’s elite,” is “cracking” As it comes undone, many will suffer, he predicted. “Including the United States.”

    In many respects he’s right but most Americans today are too ignorant or complacent to demand REAL change ;)

    Perhaps when it’s too late i.e. America becomes a much BIGGER version of Argentina or Mexico in the near future they will wake up and say what the f*ck happened !

  23. Winston Munn says:

    I would submit that Obama rather than being a Bush clone has turned out to be a much smoother, souped up, and slimier version – a real snake in the grass. Hence, the new name for Obama should be: President Bushmaster.

  24. The Curmudgeon says:

    @WM, imagine the damage Bush could have done had he Obama’s command of the language. Now we have the nuclear, not nuk-ler option. I suppose it sounds better if you can actually pronounce the word upon which the fate of the world depends. But along with perfect enunciation comes the dangerous ability for you mouth to make promises (to us and for us) that there is no chance of keeping.

  25. Dan Duncan says:

    Give ‘em what they want:

    There will be no imposition of regulation designed to curb Too Big To Fail…

    BUT…

    Since banks abhor regulation so much, there will also be no regulation on Too Small To Succeed, either. Therefore, there will be no minimum capital requirements in order to be a bank. Any person or company with a clean criminal record is eligible. Banks will be incorporated like a Professional Corporation…so no matter how large or small a bank may be, shareholders cannot shield liabilities behind a corporate veil—just like a doctor or a lawyer (theoretically) cannot shield. If the bank fails, all its shareholders face personal liabilities in the form of a non-bankruptable IRS-like debt that will never go away.

    Give them that deal and watch their lobby machines go into overdrive–demanding legislation to protect themselves…against themselves.

    It’ll be nauseating reality TV…a sorry season of “The Biggest Loser—Bankers’ Vaults”.

    I can just see it now: A bunch of pale, pasty fatasses begging to have their waistlines trimmed….and in the prologue, Ken Lewis will be interviewed…and in between disturbingly aggressive bites into the bacon double-cheese burger held in his left hand…he’ll be explaining his bloated plight to all the viewers…and with tears in his eyes he’ll explain:

    “I’m actually this way because…{lower lip quiver…break in voice}…because of my…{dramatic pause}…my thyroid condition.”

  26. Mike in Nola says:

    We don’t need another FDR. We need another Roosevelt: Teddy.

  27. insaneclownposse says:

    how about not letting an insurance company – AIG – become the center of the financial universe? It turns out they were the glue holding the entire system together via CDS contracts.
    Common-sense regulation could go a long way in solving much of the instability.

  28. willid3 says:

    well the problem with AIG was writing what are really insurance contracts (CDS) without following the rules for insurance. but not following the rules allowed them to make billions. but it has cost all of the rest of us trillions to clean up the mess that CDS have made.

  29. [...] Barack W. Obama Written by Mike Walsh on June 21, 2009 – 1:16 pm – From Barry Ritholtz’s excellent financial blog: The Big Picture [...]

  30. Onlooker from Troy says:

    Well obviously there’s no one solution that fixes all that went wrong and is still wrong, but I agree totally that limiting the size, and therefore the influence, of these companies is vital to reducing systemic risk and keeping a healthy amount of competition. We can do both; limit size and regulate, to reduce systemic risk and let those who make terrible business decisions fail, thus rewarding the more prudent and wise.

    I don’t get Krugman either. I always thought he was too political to take seriously, and don’t like his Keynesian economics, but he’s really hard to figure out lately.

  31. Onlooker from Troy says:

    Goldman Sachs to make all-time record bonus payouts
    http://www.guardian.co.uk/business/2009/jun/21/goldman-sachs-bonus-payments

    Soup kitchen queues grow as US teeters on brink of new downturn
    http://www.guardian.co.uk/business/2009/jun/21/surge-in-demand-us-soup-kitchens

    Gotta love the juxtaposition of these two stories, eh? Ah yes, it’s good to be a bankster. Especially with Goldman Sachs.

  32. willid3 says:

    i think letting them fail (TBTF) is fine as long as they don’t take me down with them. but how do we make it so they can’t take every one else with them? thats the only reason we rescued them. their failure can be fatal to the rest of us who had nothing do with what they did. or didn;’t do

  33. thetanman says:

    We’re essentially screwed. If more trouble shows up, then more power for the people responsible. If not, then its “we fixed it.” We crossed over a long time ago: the system is totally incapable of self reform. Its quite clear that this bloated and corrupt system will be propped up until total failure. The kleptocrats will continue to suck capital out of the economy to be used for disastrous investments ie themselves. History is crystal clear on that!

  34. DL says:

    willid3 @ 2:19
    “…how do we make it so they can’t take every one else with them?”

    I think that the bailout advocates engaged in fear mongering for their own ends. Citigroup should have been broken up into enough pieces so that none of the pieces individually could threaten the system. And AIG most certainly should have been put into bankruptcy. If a brief period (3-6 months) of nationalization is necessary to facilitate the breakup or bankruptcy, then so be it.

    I think we would all be much better off now, and in the future, had Citi been broken up.
    The banksters would have learned that there is a price to be paid for folly.

  35. willid3 says:

    dl, there are no laws or regs that would have allowed the break up of AIG or Citi, though that might have helped reduce their potential to destabilize us. but that would have had to be done long before 2007

    are you (or some one else) going to guarantee that the failure of AIG or Citi or BOFA or Chase or any othe rest will not impact the rest of us? otherwise it sound more like i am not getting my way, so destroy it all, i don’t care
    cause thats what has to be done. no if ands or buts. some one must absolutely guarantee that if one of these TBTF fails, that it only takes them down and nobody else. ever

    if we can’t do that, we need to work to make it so they don’t become such threats to every one else.
    and we have enough trouble making sure monopolies don’t become such threats, never mind these

  36. call me ahab says:

    M in Nola-

    I agree with your idea of an other Teddy Roosevelt- someone looking out for the common man would a nice change up-

    also – saw your post from another thread- no worries- I had strayed off the beaten path a few times- but pretty travel savvy- but did like that name though-Marijuana- reminds me of a loan i did many years ago-

    a mother and daughter- names were Jupiter and Uranus- if you can believe it.

  37. DL says:

    willid3 @ 2:57

    As for laws to break up Citi, government agencies have been dealing with bank failures ever since we’ve had banks. The FDIC has seized assets of hundreds of banks over the years, and probably thousands. As for AIG, we do have laws which would have permitted bankruptcy. George Bush didn’t want to put them into bankruptcy, probably because it would have been inconvenient for him. Furthermore, Bush and Obama have (together) figured out a way to, in effect, nationalize both AIG and GM. It’s already happened, but not in the way that will do the country the most good.

    You’ve got to be willing to do a cost-benefit analysis for whatever you’re proposing, as well as whatever I’m proposing. I’m not suggesting that failure would be painless. It would not. But you’ve got to consider the cost of what TARP has wrought, not just in the year 2009, but over the course of the next 10 years. We’ve got to put up a lot money now (for TARP); equally important, we’ve sent a message to the executives at all the large banks that they can take all the risk that they want, and they’ll be bailed out; at the same time, we’ve told the managers at the smaller banks that if they take too much risk, they’ll be allowed to fail.

    Bear in mind that, for a politician, “the long term” is the time between now and the next election. Just because the politicians don’t care about the long term doesn’t mean that the rest of us shouldn’t.

  38. franklin411 says:

    Barry,
    Have you considered hiring a political analyst? I think you really need one, because your ignorance of political reality is appalling. Do yourself a favor. Ask yourself this question:

    “Could he get a fill-in-the-blank alternative through the Senate?”

    You’ll find that, 9 times out of 10, no. He could not. You constantly ignore the fact that no political party controls the Senate. There are 40 hardcore Republicans, 40 hardcore Democrats, and roughly 20 Republicans in Democratic clothing.

    So Barry, next time how about just the teeniest bit of political reality in your critiques? I know it makes for less satisfying blogging–after all, who doesn’t like using bricks to smash things instead of build things? But…give it a try, huh?

  39. So you believe that he could not have:

    1) Revoked the CMFA and replaced it with something else that was functional and /non Phil-Gramm sponsored ?
    2) Do SOMETHING about the credit agencies?
    3) Reduce leverage from 40 to back to 12 to 1?
    4) Treat insolvent banks like insolvent car companies?
    5) Re-establish Glass Steagall?
    6) Limit giant bank mergers ?

    For more, see this:
    Obama Reform Plan Fails to Fix Whats Broken

  40. call me ahab says:

    franklin-

    as much as it pains me to respond to your insipid nonsense- I must correct your interpretation of things- Obama could have chosen different people and different solutions that would have been politically popular and could have won the day had he attempted to do so- instead-

    he chose people that were more of the same and with the same policy prescriptions as W- you are a naive apologist that can see no wrong with this administration and instead blame it on congress because in your mind- if there were truly 60 real democrats- real work could get done- also-

    it saddens me that you will one day be involved with the education of young minds in this country.

  41. franklin411 says:

    He *should* do those things–especially Glass Steagall. But he cannot achieve them. Not without 60 reliable Democrats in the Senate. This isn’t 9/11, and this President does not have the ability to dictate to Congress under the pretense of national security.

    Look, the political reality you’re missing is that, while the particular makeup of the political parties has shifted, the general political demographics have changed very little. This country is still divided 50/50. The only thing that began to change in 2006 was that the extreme right wing of the Republican party kicked out anyone who wasn’t locked in step with their ideology. Voters stopped voting Republican in many places, but they still wanted to vote conservative. They just voted conservative Democrat.

    That’s how you end up with owned Senators like Ben Nelson.

    I don’t disagree with you on the basic idea that the table needs to be leveled (it’s still tilted in favor of the rich and powerful). However, I don’t think you appreciate how hard it is to get anything productive through a 40/40/20 Senate. 40 liberal Dems, 40 conservative Republicans, 20 Democratic Republicans.

    The President is doing all that he can, as fast as he can, to fix the system. We didn’t devise this house of cards overnight–it took 30 years. It’s going to take at least that long to set us on the right course again.

    I am in DC at the moment traveling, but here’s a link to a great article I read in the Politico (print edition…you can only get it in DC!) that illustrates my point on the limits of what can be done immediately. The President wanted the CFTC and the SEC to merge, but his final proposal didn’t include that. Because the President decided he didn’t want it? No. Because some no-name corn state Senator wanted to keep the CFTC alive so lobbying dollars would keep flowing to the Ag committee (the CFTC is part of the Department of Ag!):

    http://www.startribune.com/politics/national/congress/48535072.html?elr=KArks:DCiUHc3E7_V_nDaycUiacyKUUr

  42. 1001 says:

    @ Franklin @

    Dear Leader will pass anything he wants ……

    haven’t you been told === he’s the new Messiah !!!!

  43. JoWriter says:

    f411 gets it half right and half wrong. Conservative voters were fed up with the REPUBLICAN president and Democrat Congress voting bailouts for everybody and their brothers, so they refused to vote. Deluded MOTR voters believed in [unspecificed] change, hence B.W. Obama. It is the conservative Rs who been kicked out of the GOP – temporarily, I hope.

    Here’s my real comment though: why aren’t we paying more attention to the FDIC? Is it because we just have too many balls already spinning above our heads? Not one of the three banks closed this weekend was in Calif or Fla or AZ, where loan defaults have skyrocketed. What does that mean?

    These small bank closures, mainly in the South, are contributing to the TBTF conditions most people deplore. Small banks closing, getting gobbled up by bigger banks.

    Walter Adams, my late, revered econ professor at Michigan State Univ., argued in our classes in the 1970s that GM was too big. He called it a dinosaur and said it could and should be broken up into 5-6 viable companies.

    In my experience, all attempts to fix problems with govt solutions make things worse, if only b/c we take our eyes off the ball in the mistaken belief that the problems have been fixed. Unintended consequences also play a big part in the fiascos. Think FDA, for example. I’m sure you can think of more.

    Let’s not forget moral hazard as we attempt to think up fixes for these TBTF situations. As for folks who wish to escape harm as a big institution fails – forget it. However, the harm will be small as a function of how far away you are from the situation. Think credit unions – I’m with Donna there.

  44. Pat G. says:

    “that their collapse would be catastrophic. Hence, all those multibillion-dollar, taxpayer-financed bailouts.”

    What’s going to be catastrophic is the cost to us.

    “their vast wealth buys influence and power and corrupts the political system.”

    Enter the PPT.

  45. DonRobbie says:

    Here’s my stupid question.
    If we do break up the Megabanks do we still have the risk of correlated failure that cannot be allowed to happen. The S&L crisis involved a bunch of “failable” institutions but the crisis was still too big to be solved without special programs. Would a correlated collapse of a large number of small enough to fail Market makers or Primary broker dealers be something that the Feds would allow to happen? Would the story have played that much differently if we had 6 small investment banks instead of one big one collapsing and leading to global bank run in September 08? I think Treasury and the Fed would still feel the need to react to the systemic risk.

  46. Winston Munn says:

    I think President Bushmaster should have made Donald Rumsfeld Secretary of the Treasury. “There’s the too, too big and the known to be too big, but we must concern ourselves with the too unknown and too big to be unknown for long.”

  47. drollere says:

    the concept TBTF is misleading and, to venndata’s point, it is also difficult to quantify without a totally transparent market.

    the issue is really TITF — too *interconnected* (or *influential*) to fail — which is a network problem of centrality or power. it is possible, for example, to imagine a bank that holds all the cash deposits on the planet but has no debt: how exactly can it fail? once we allow an institution to become interconnected, through debts, derivatives or loans — then we can also imagine an institution that is in book value relatively small (say, the small derivatives trading arm of a huge insurance company), but that is so interconnected, and also so extensively the creator of third party interconnections, that if it fails it takes down the whole network.

    the problem here, as i understand it, is more like share of market. institutions should not be capped on any asset or value dimension, but they should be capped in terms of the portion of a market they facilitate or make, or in terms of the portion of a market they *exclusively* make. alternately, they should be capped in terms of their or their products’ *centrality* (influence or connectedness) within a market network.

    it’s remarkable that we have a restriction on say, a car manufacturer share of market or a media company share of DMIs or audience, but we have no similar restriction on, say, the issuing of mortgage backed securities or the creation of derivative contracts.

  48. Groty says:

    It seems naive to think that the same policymakers and regulators who allowed BAC to acquire MER and Coutrywide, JPM to acquire Bear Stearns and WaMu, and WFC to acquire Wachovia in the past year would suddenly be concerned about TBTF.

    Does anybody really think Geithner would advise Congress to pass legislation to bust them up into smaller peices less than a year after he helped facilitate the deals?

  49. bruerr says:

    Groty nice comments.

    Here is the law (current law) that backs up your position:

    U.S. Code Title 12, Chapter 16, § 1831 o. Prompt Corrective Action (i)(1) and (i)(2)(A)(B)(C)(D)(F)1 …Restricting activities of critically undercapitalized institutions: To carry out the purpose of this section, the Corporation shall*, by regulation or order— restrict the activities of any critically undercapitalized insured depository institution; and at a minimum (emphasis added), prohibit any such institution from doing any of the following:

    (A) Engaging in expansion or acquisition of competing firms
    (B) Extending credit for any highly leveraged transaction
    (C) Amending the institution’s charter or bylaws.
    (D) Making any material change in accounting methods.
    (F) Paying excessive compensation or bonuses.

    *The term ’shall’ above is used to denote a mandate. Legal mandates denote required action and if not performed result in an attempt to defeat the laws.

    (A) in full: …”Entering into any material transaction other than in the usual course of business, including any investment, expansion, acquisition, sale of assets, or other similar action with respect to which the depository institution is required to provide notice to the appropriate Federal banking agency. ”

    You are exactly right, people who allowed and/or approved this violation of standing law, should have no business rewriting the law.

    The approving federal banking agency, did not give Bear, Washington Mutual, Lehman or Wachovia the same chance to recapitalize as they gave the other large banks. [(At favoritism and acquiring competing firms, or assuring competition was eliminated and taking their deposit base and cash flow (which JPMorgan needed desperately, due to its derivatives market exposure.)]

    Mr. Paulson had interest in eliminating competing firms. (See onlookers post above http://www.ritholtz.com/blog/2009/06/too-big-to-fail-special-nyt-edition/#comment-185387)

  50. bruerr says:

    The truth may be that exotic investment ideas built around “swap” instruments, are something of a wicked creation, similar to the Minotaur.

    Instead of admit what happened, the King of Crete, Minos and all his servants felt compelled to lie, and thus began a convoluted effort to build a contraption most the public could not see: A maze, under the palace, for which to put the wildly-conceived creature. There was a mistaken belief they could not harm the Minotaur. That it would somehow cause a curse on them, if they let it die. The death of the Minotaur was believed to be “too big” to deal with. So they set themselves on a course of the absurd. Eventually, felt compelled to build an elaborate contraption for it to live in and determined to lie about what they were doing to feed the Minotaur. The maze constructed, was a result of many craftsman and tinkering personalities, who wittingly or unwittingly participated in the deception.]

    This story in Greek mythology, serves to explain the absurd behavior of top officials and their understudies.

    The same holds true, in a way, for “Too Big to Fail.” In a peculiar way, “Too Big to Fail” mirrors the Greek mythological tale about the Minotaur.

    Instead of admit what a failure CDOs and other exotics have been, our leaders, mainly diluted by Hank Paulson’s early dishonesty, have acted to adopt the phrase. This results in fooling people, into believing a myth.

  51. bruerr says:

    New law is about transferring ownership from big banks to the common. Big banks that self regulated and created that market out of thin air, are now seeking a way to transfer that problematic market, onto the American people, without acknowledging how faulty their creation is. The goal of re-writing law and putting federal board of governors, is about about failing to segregate properly the problems, (let the banks fail that need to fail) “capturing” Americans and leading them unsuspectingly, to a maze.

  52. DeDude says:

    Off course it is possible to shrink them – use the right incentives. A tax of 90% on anything above a certain size and/or a demand that anything above a certain size cannot leverage more than 1 to 2, would do the job.

  53. [...] what Barry Ritholtz over at the Big Picture is calling our President: Barack W. Obama. Ritholtz sees little to no difference between Obama’s financial sector polices and those of [...]

  54. nick K says:

    I like it. Its all too big, too leveraged, too much. The fed govt is too big too. As Billy Madison said to the French teacher: SLOWW DOWWN>..