The Good And Bad Of Banks Too Big To Fail Getting Bigger...

from the not-all-bad,-but... dept

Ever since the whole financial crisis began, and the concept of "too big to fail" became a common phrase, I've been wondering why the US gov't didn't set up a simple provision in any bailout procedure: if you are too big to fail, and because of that need a gov't bailout, then a part of that bailout means you need to become small enough to fail. I think it's a perfectly reasonable suggestion that has been pretty much totally ignored.

So, when news came out that the biggest banks, the ones deemed "too big to fail," are now getting even bigger, you might think that I'd view that as a bad sign. And... partly, I do. But not for the reasons you might expect. The issue of "too big to fail" isn't the bottom line size of the bank, it was about how interconnected it was in the rest of the economy, and how any ripple effects of a failure would damage (significantly) other parts of the economy. But, since the government has done pretty much next to nothing to actually deal with that sort of systematic risk (and, no, putting in place a "systematic risk" manager, as we keep hearing, isn't going to fix the problem), it should come as no surprise that these banks still have such risks.

But, the fact that, by themselves, these banks are growing isn't a bad sign. Given what the government has done, it's actually a good sign. You should be a lot more upset if, after the government gave these banks so much money, they went out and lost it all. Instead, many of them have at least put it to good use (and some have returned money to the government at decent interest rates -- though, the amount returned still is a blip compared to the amount at risk).

The real issue isn't the size of the banks, but how interconnected they are. But little to nothing has been done to take on that problem -- which is a bad thing. However, given that, it's at least a decent sign that these banks we've given so much money to are actually doing better these days.
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Filed Under: banks, radical transparency, risk, systematic risk, too big to fail, transparency


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  1. identicon
    Anonymous Coward, 31 Aug 2009 @ 9:58pm

    It's amazing how these banks are "too big to fail" yet they don't want the government regulating how much money their executives and such can get paid. There is an implicit contract between these banks and the public/government that if these banks fail the government will bail them out yet they don't want the government to regulate them whatsoever. So what incentive do they have not to fail if they know the government will simply bail them out if they do fail? They only want capitalism and free markets to the extent that it helps their paychecks, otherwise they just want government protectionism at public expense.

    link to this | view in thread ]

  2. identicon
    Anonymous Coward, 31 Aug 2009 @ 10:20pm

    Agree with #1

    link to this | view in thread ]

  3. icon
    Mike Masnick (profile), 31 Aug 2009 @ 10:27pm

    Re: Agree with #1

    Apparently, the Fed itself netted $14B in profit thru the mess that they created.

    Isn't that a good thing? The "fed" is taxpayers. But, I'm sure the overall losses will drop that number significantly before this is all done...

    link to this | view in thread ]

  4. identicon
    fallenacorn, 31 Aug 2009 @ 10:29pm

    Bank Holiday, FDIC Report, and the Federal Reserve Secrets

    link to this | view in thread ]

  5. identicon
    Doug, 31 Aug 2009 @ 10:36pm

    Disagreeing

    Interesting position, but you've missed one of the central insights of "Too big to fail" -- it also means "Too big to regulate".

    That the bailout simply seemed to feed into usual practices of consolidation, etc., and didn't bring on any interesting regulatory changes seems to me to confirm it.

    In other words, the horse has left the barn on this one. It'll be fascinating to see the circumstances the next time this rolls around. I'll put my money on "The veep is also VP at BoA"

    link to this | view in thread ]

  6. icon
    Steve Robertson (profile), 31 Aug 2009 @ 10:42pm

    This is HORRIBLE for Taxpayer and Consumer

    Lack of real competition will be a problem. This market grab facilitated and funded by the US Taxpayer is yet another example of the little man taking yet another one up the rear. Look at the record number of mid and small-size bank failures this year that we (US Taxpayers) are on the hook for as these institutions gain massive control over our financial future. The WP article http://bit.ly/sPF75 from Aug 28 does a great job of spelling out the real issue to consumers as result of this grab. Any upside is completely eclipsed by the down. I'm actually surprised at your lack of outrage.

    link to this | view in thread ]

  7. identicon
    Anonymous Coward, 31 Aug 2009 @ 10:48pm

    Re: Re: Agree with #1

    How much of that do you think will go back to taxpayers vs how much will make its way to the pockets of politicians and lobbyists?

    link to this | view in thread ]

  8. icon
    Steve Robertson (profile), 31 Aug 2009 @ 10:50pm

    Re: Disagreeing

    I agree with Doug that there is no real reform and worse yet the giant private equity funds that are buying up the failing institutions are threatening to stop if the US raises the asset requirements and insurance fees as the FDIC is smartly suggesting. They are lobbying the administration and it is likely that a Larry Summers controlled economic policy team will do nothing to stop them from getting their way. Once again the little guy gets left holding the bag on debt and inflation.

    link to this | view in thread ]

  9. identicon
    Anonymous Coward, 31 Aug 2009 @ 10:56pm

    Re:

    The thing that I'm trying to get across is if there is going to be an implicit contract between these banks and the government/public that if the banks fail the government will bail them out then the government should regulate things like executive paychecks and such. If they want free market capitalism then they should be allowed to fail. But these banks want it both ways and they shouldn't have it both ways.

    link to this | view in thread ]

  10. icon
    Brooks (profile), 31 Aug 2009 @ 11:21pm

    Hey, wait a minute

    Michael, you've missed the point. The problem was not that "too big to fail" meant that banks were too interconnected with the economy.

    The problem was the asymmetry created when huge banks knew that they could take significant risk, and if it turned out well they'd see huge profits (and, not incidentally, management bonuses), but that they were essentially insured on the downside by the government.

    The only reason the free market works is that people play with their own money. The too-big-to-fail phenomenon is like sending me to Vegas with the deal that if I win, I split the money with you, and if I lose, you cover my loses. From my point of view, I'd be crazy not to maximize risk in that scenario.

    So yes, it's good that the banks are recovering. It is not good that the fundamental TBTF problem has not been addressed. Any bank (or other company) that's going to be failed out of trouble should also be regulated to limit the risks it takes. Otherwise the asymmetry will continue.

    link to this | view in thread ]

  11. identicon
    Sheinen, 1 Sep 2009 @ 3:12am

    Not to look like I'm trying to recruit a private army or anything but has anyone seen Zeitgeist?

    It's shocking how accurate some of the accusations about large corporations rallying for world dominance really are.

    Think about it - the big have gotten bigger and the small have been eliminated from the race. I'm not a fan of any market where that amount of control is in the hands of those who probably intentionally stuffed it up in the first place.

    link to this | view in thread ]

  12. identicon
    Enrico Suarve, 1 Sep 2009 @ 3:44am

    Re: Re: Agree with #1

    "Isn't that a good thing? The "fed" is taxpayers"

    Yes and no – from my understanding it's sort of a weird barely accountable mixture of public and private; as far as I'm aware it supposedly has public accountability at an overall level, but at a functional level consists of a select group of privately owned banks

    The federal reserve is only slightly more federal than Fed-Ex

    So no - the fed making more money does not have to amount to the public seeing any of it; they will undoubtedly see some, but since this supposedly publicly accountable bank doesn't appear to have effective auditing already in place (there has to be a lobbyist backed, brown envelope reason for why such an obvious step has not been taken decades ago), I’d guess that the percentage of the profits not eaten by internal 'costs' may be a lot less than you might think

    link to this | view in thread ]

  13. identicon
    Anonymous Coward, 1 Sep 2009 @ 4:02am

    The question in my mind is: would they have grown (or be replaced by more honest entities) without the bailout? I live in a country that's far more unstable than the US, and my experience is that crisis have a tendency to end and institutions have a tendency to grow. The crisis itself is sometimes scary, but it generally just means postponing your big plans (at the individual level, I've yet to see a big company postpone its plans) for a year or so.

    link to this | view in thread ]

  14. icon
    Dark Helmet (profile), 1 Sep 2009 @ 4:50am

    Re: Re: Agree with #1

    "Isn't that a good thing? The "fed" is taxpayers. But, I'm sure the overall losses will drop that number significantly before this is all done..."

    ....what? Care to explain this? The FED is a tight group of private banks that have been given the power over monetary policy in this country. How is the FED taxpayers (other than the private citizens that own the private banks making it up)?

    link to this | view in thread ]

  15. icon
    SteveD (profile), 1 Sep 2009 @ 5:16am

    Re: Hey, wait a minute

    I think your reasoning is flawed in the same way the capitalist thinking that got us into this mess is flawed; you believe that people will behave rationally.

    In light of the bailouts it makes perfect sense that bankers will start to take huge risks with the assumption of a Government safety-net, but in reality the precise opposite of this is true.

    In the current climate people are worried that a recovery will be delayed due to the risk-adverse culture that has been created in the business world as a result of the meltdown.

    But back to the central issue...the immediate problem is one of restoring growth and stability to the economies of the world. For that I don't think too many Governments are going to regulate very heavily in the short-term, but rather focus on what can be done in the long term.

    The danger is that a lot of people in the financial industries are desperate to return to how things were, and will fight desperately to resist the needed reforms that might increase regulation to prevent systematic problems.

    link to this | view in thread ]

  16. identicon
    Ryan, 1 Sep 2009 @ 7:49am

    Re: Re: Hey, wait a minute

    Huh? In the long run, people will behave rationally in a capitalist system. Do you know why? Because they actually have the incentive do so. Actually, the players that "failed" acted rationally -- they knew they would get bailed out and rewarded if they ignored risk, and that's exactly what happened. The other thing that happens in a capitalist system is that the people who do not or are unable to act intelligently and rationally so as to succeed...will merely fail. Their capital will be reallocated to more successful ventures, and the system will ultimately become more stable, streamlined, and efficient. The notion that there is such a thing as "too big to fail" is precisely what props up failed businesses and keeps the system in a state of flux. There is no such damn thing as "too big to fail". If you are adversely affected by the failure of a bunch of banks, then don't invest in them next time.

    For that I don't think too many Governments are going to regulate very heavily in the short-term, but rather focus on what can be done in the long term.

    Are you fricking joking? Government is the most short-sighted, self-serving, vulnerable-to-gaming entity there is. More regulation just leads to more inefficiency, more inability to change and adapt, and regulatory capture that skews the rules in favor of incumbents over the innovators and entrepreneurs that represent the next wave of progress.

    link to this | view in thread ]

  17. icon
    PrometheeFeu (profile), 1 Sep 2009 @ 8:13am

    Well, another option, is to dramatically raise reserve requirements for large banks and drop them for smaller banks... Basically, if you are too big to fail, you are not allowed to risk failing... If you are small enough to fail, go nuts!
    And people are not rational. If you study economics beyond econ 101, you will realize that. Behavioral econ has shown it time and time again...

    link to this | view in thread ]

  18. identicon
    Anonymous Coward, 1 Sep 2009 @ 9:10am

    Re: Hey, wait a minute

    "Michael, you've missed the point."

    I don't think he missed the point I think he was trying to make his own point regarding too big to fail and how that pertains to antitrust laws.

    link to this | view in thread ]

  19. identicon
    tdr, 1 Sep 2009 @ 9:38am

    Corporations should not be allowed to grow beyond a certain size. If they do, they should be automatically and irrevocably broken down into a number of separate smaller companies.

    link to this | view in thread ]

  20. icon
    Dark Helmet (profile), 1 Sep 2009 @ 9:43am

    Re:

    "Corporations should not be allowed to grow beyond a certain size. If they do, they should be automatically and irrevocably broken down into a number of separate smaller companies."

    Not good enough, because the ownership of the large corporations, which would continue to own the smaller portions, is ultimately international banks in the form of direct partial ownership, debt owed, board member positions, etc.

    If you don't regulate bank involvement in business, you'll get nothing changed.

    link to this | view in thread ]

  21. identicon
    TDR, 1 Sep 2009 @ 9:55am

    Then remove international banks from all business involvement completely.

    link to this | view in thread ]

  22. icon
    Dark Helmet (profile), 1 Sep 2009 @ 10:51am

    Re:

    "Then remove international banks from all business involvement completely."

    Equally problamatic, since they currently have massive amounts of influence and power because of the sheer amounts of capital in their coffers, not to mention the money that is owed them. Taking action against them, in the cases of many nations, would be seen as being similar to King Philip IV outlawing the Knights Templar when they wouldn't forgive him his debts.

    Incidentally, that analogy makes a great deal of sense for a variety of reasons. The Templars pretty much invented the modern banking system, with regard to loans and interest. Some people also believe that Templar treasures, possibly including the legendary Treasure of Solomon, were recovered by one WWII beligerent party or another, making it's way back to the European Rothschilds and their American agents, the Morgans and Rockefellers, and was used to finance the banking explosion and expansion that has ocurred since.

    Either way, what we need is a kind of French Revolution on a global scale, meaning the simultaneous rejection of current banking policies and practices throughout the world. There hasn't been leadership in the States that hasn't been in the banking industry's back pocket since maybe Eisenhower, who in his farewell address to the nation stated:

    "In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals so that security and liberty may prosper together."

    Alert and knowledgeable people today are referred to as alarmists or conspiracy theorists, even when discussing items in the public record like The Echelon Network, NSA wiretapping, or MKULTRA and COINTELPRO.

    My opinion? In America, they've won the first round, and it's going to get better before it gets worse.

    link to this | view in thread ]

  23. icon
    Auditrix (profile), 1 Sep 2009 @ 11:55am

    Re: Re: Hey, wait a minute

    This is certainly not my area of expertise, and I am not sure if Michael Masnick had antitrust laws in mind when he blogged, but I do think that an intent of US antitrust law was to prevent entities from becoming so big that they would drag down the larger economy with their failure

    I think these original laws need to be reinforced and/or enforced to prevent future crises

    The increased consolidation that has resulted from bailouts and other government meddling may have strengthened the economy in the short term, but it puts the economy at greater risk in the long term. I think Robert Reich said it best when he said something like "If an entity is 'too big to fail,' it's just too big!" (Hope I am not misquoting.)

    link to this | view in thread ]

  24. identicon
    TDR, 1 Sep 2009 @ 12:51pm

    Just thought I'd add this tidbit about the banks. Apparently they're threatening another collapse if any action - including the Audit the Fed bill - is carried out against them:

    http://www.zerohedge.com/article/racketeering-101-bailed-out-banks-threaten-systemic-collap se-if-fed-discloses-information

    link to this | view in thread ]

  25. icon
    Dark Helmet (profile), 1 Sep 2009 @ 1:49pm

    Re:

    Auditing the FED will NEVER happen.

    link to this | view in thread ]

  26. identicon
    Anonymous Coward, 1 Sep 2009 @ 3:39pm

    I still think that if you have a mortgage and you out-last the bank holding said mortgage... You win. ;)

    link to this | view in thread ]


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