NYTimes: ‘Too Big to Fail’ Remains Very Real http://nyti.ms/Tw3CY3
The market perception that some financial institutions are “too big to fail” is alive and well. If you want to remove that perception, you need to break up our biggest banks.
creditors still believe that the government stands behind very large bank holding companies and other big financial companies.
In effect, the government is providing a form of insurance that encourages financial institutions to become even bigger — and thus even more likely to be protected by some combination of the Federal Reserve, the Treasury and other agencies. This is an unfair, nontransparent government subsidy that encourages excessive risk-taking and creates a very large potential downside for the nonfinancial side of our economy.
When the choice is between global calamity on the one hand and unpalatable, unpopular and perhaps even illegal support for big banks on the other hand, these officials expect to go with the bailout.
Prominent figures on Wall Street fought fiercely against the broad contours of financial reform legislation in 2009-10 and fight now on every line of every detailed regulation; their estimated 3,000 to 5,000 lawyers and lobbyists work very hard and earn a great deal of money for a reason.
We need to have a credible commitment to let any financial institution fail — in the sense that it will go out of business, wiping out shareholders and imposing losses on creditors.
But any promise for global megabanks that we would “just let them fail” is completely hollow. Standard or even modified bankruptcy procedures are not a credible threat because of the damage this would cause to other financial institutions and to confidence around the world.
Make banks and other financial institutions small enough and simple enough to fail — this is the point stressed by Messrs. Fisher and Rosenblum.
As Mr. Haldane documents, when measured properly, there are no economies of scale for banks over $100 billion in total assets. As a society, we are not losing anything by imposing a size cap on our largest banks, which currently have assets in excess of $2 trillion. Of course, there are private benefits that are being lost — meaning lower subsidies for large financial firms and the powerful people who run them.