Should banks be allowed to become "too big to fail"?

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

“It is at the top of the list of things that need to be fixed,” said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. “It fed the crisis, and it has gotten worse because of the crisis.”

“There’s been a significant consolidation among the big banks, and it’s kind of hollowing out the banking system,” said Mark Zandi, chief economist of Moody’s “You’ll be left with very large institutions and small ones that fill in the cracks. But it’ll be difficult for the mid-tier institutions to thrive.”

“The oligopoly has tightened,” he added.

In the last quarter, the top four banks raised fees related to deposits by an average of 8 percent, according to research from the Federal Reserve Bank of Dallas. Striving to stay competitive, smaller banks lowered their fees by an average of 12 percent.

“None of us are saying dismember these institutions. But you do want to create a system that allows for others to grow, where no one has an oligopolistic power at the expense of others who might be able to provide financial services to consumers,” said Richard Fisher, president of the Federal Reserve Bank of Dallas.

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

If the government continues to back big firms over small, regulators worry that reckless behavior could return to Wall Street.

Should the largest banks be “busted”, broken up into many smaller institutions?

Is “too big to fail” even a problem?

Breaking up huge banks isn’t the solution. Extensive and tight regulation to keep them from gambling too hard with other people’s money is the solution.

This. The other requires defining what ‘too big’ means and trying to force banks to shrink sounds like nationalization.

Oh come on. Seriously? What happened to this country’s balls? Breaking up institutions is not nationalization. Taking banks into receivership is not nationalization. I can’t believe you’ve come out of this crisis thinking there’s no such thing as too big to fail, just bad regulatory overseers.

You do realize that size itself is an impediment to oversight? You do realize that the extent of the damage of this crisis is due to allowing these institution to increase in size and combining investment/commercial/insurance financial institutions? You do realize size actually gives them more influence (which lead to them getting special privileges in extended leverage and such a large bailout) in government and threatens the democratic process?

God, what’s it going to take to excise the conservative demons of the last 25 years?

You don’t have to define what too big means in a systematic way with an automated break up process. We can look at breakups on an individual by individual basis, like, you know, we always did.

Ok Mordrak, you do it, and I’ll watch. What size do you want them to be? A Missus size 12 sound about right? So what happens when they outgrow their britches? They are then hammered down to the proper size again? What a nightmare for the government to be in. No thanks.

We don’t have to define a size. We can say, these are two big now because our monetary system would have likely collapsed had just one of them failed (Lehman Brothers showed) and that was when they were smaller before subsequent mergers. We had to print vast sums of money and give it to the very people that failed to save our system . That’s evidence enough that the current size is too big.

Split each company up into two-three companies along service lines (like they were before glass-steagall was repealed) or equal parts. Did we have to define a size in order to split up Standard Oil? We have the tools but obviously we’re a bunch of pussies without the will. We’re too scared of our own shadow.

Right, and this requires defining what ‘gambling too hard’ means. Not sure why you believe one is easier than the other.

Someone explained it best this way. The public thinks there should be smaller financial institutions with more oversight based on some pretty reasonable real world experience of late. However, the public is also preoccupied with staying employed, keeping up with family obligations or spacing out with sports/entertainment (mea culpa). Meanwhile the banks and financial institutions think the opposite and employ an army of lobbyists, many of whom are former legislators or regulators, to keep the pressure on congress 24/7 to leave things as they are. That and campaign contributions. It effects Democrats and Republicans but, obviously, moreso the latter because that fits their ideology to a t.

I’m rapidly coming to the conclusion we’re pretty much fucked. Obama on a host of issues talks a good game but doesn’t deliver. I think much of that is because he genuinely is a well meaning consensus builder. But he lives, now, in a world where assigning decent motives to everyone around the table is sheer foolishness.

Sometimes you have to come out swinging, state what you believe, sell it and then let Rahm off the chain to kick ass.

Nah, James, it’s just time to change our name. The United Corporations of America has pretty nice ring to it, no? I for one don’t welcome our not so new corporate overlords.

I don’t know, it sure sounds like “the public” didn’t follow what actually happened during the crisis if this thread is any indication.

Does anyone think that with this much money involved that breaking them up or regulating the hell out of them is going to make any difference whatsoever? Either way the wizards of finance have made it perfectly clear that they will do things we could neither imagine nor anticipate to end-run whatever is impeding them from making off with as much loot as possible.

No matter what is ultimately done it will go about as swimmingly as has the War On Drugs.

It did after the Great Depression. We had 50 years of a relatively stable financial market until we started peeling away regulatory measures in the 80s (in which we had the junk bond scandal). You’re acting like people weren’t aware CDSes were potentially dangerous, but they were. We actually had hearings on them before the Commodities Futures Modernization Act passed. That bill specifically exempted them from any oversight and existing bucket shop laws. Congress decided to buy Wallstreet’s arguments in the form of campaign contributions instead of the warnings from regulators.

It’s our very lack of faith in and expectations from our government that helped put us in this mess. Yes, government doesn’t always work, but it’s our only real check against corporatism. It’s about time we started demanding they do their jobs instead of just throwing up our hands and handing over our government to a corporate oligarchy.

I don’t think is any major problem really. A strong regulatory authority can and has done this in the past. My understanding is that we did a great job of this for decades before the fad for federal deregulation finally caught up with the financial sector.

Small banks aren’t a magical solution. A wave of failures of little banks is just as bad as a failure of one big bank.

Actually, this entire year we have been going through a wave of failures of little banks. The FDIC has handled it remarkably well and have honed their methods to a T.

There was a great This American Life podcast on that topic several months ago. It explains how groups of FDIC agents walk into a bank on Friday evening, take over, and get the bank ready to reopen that following Monday. It is all a pretty dramatic affair really.

You’re acting like politics, technology, the finance industry, and American culture haven’t changed at all since the Depression. Everything is set up now to make it practically impossible to undo all of the changes that indirectly led to the mess we’re in, and you’ll never be able to get rid of the two factors that led directly to it: greed and voter apathy.

Throughout American history there has always been at least one industry with practically unlimited license to rape and pillage. Right now it’s the finance industry, and the people masterminding it have done of terrific job of making sure it’s going to stay in that position for the foreseeable future.

It’s not just failures that is the problem Kraaze, but also influence. Part of the problem was the ability to pass the risk buck in the form of securitization and CDSs. Smaller banks generally have actually done much better in the crisis and almost all of the TARP money has gone to larger banks. This isn’t an accident.

My issue with the size is about compartmentalizing the damage, which was let loose as part of that deregulation that you were talking about (Glass-Steagall). I’m not saying these institutions should suddenly become mom and pop banks, but they should probably be broken up into more than 3 competing national banks and preferably bank into specifically commercial/investment/insurance institutions rather than combinations of the three. That alone will reduce their size without turning them into local or regional institutions.

I was referring to something more comparable to the failure of a big bank. The sort of dire event that was such a horrible prospect that the bailouts were hastily enacted. Imagine all the bank failures this year to date happening in a few week period, that’s the scale of thing that could be just as bad as a huge bank failing.

Many of the systemic changes you’re talking about have happened just in the last decade.

Throughout American history there has always been at least one industry with practically unlimited license to rape and pillage. Right now it’s the finance industry, and the people masterminding it have done of terrific job of making sure it’s going to stay in that position for the foreseeable future.

And I’m saying it shouldn’t and as long as people keep buying bullshit arguments about government it will definitely stay that way. Your opinion is we’ve lost for all time. My opinion is people should wake the fuck up. I prefer my opinion.

I understand that, but compartmentalization is a defense strategy against isolated and exceptional unexpected flaws. It doesn’t help a bit if the faults are systemic.

You’re ignoring structurally what caused the failure which is directly related to the intermingling of the businesses and their size and instead treating it like an act of god, as if the big guy decided he’s going to smite X dollars of assets.