From ‘too big to fail’ to even bigger in just four years

Some cheery news from Bloomberg to start your week: The banks that were “too big to fail” just four years ago are now even bigger than before:

Five banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.

Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did in 2007 with the Fed-assisted rescue of Bear Stearns Cos. by JPMorgan and in 2008 with Citigroup and Bank of America after the Lehman Brothers bankruptcy, the largest in U.S. history.

“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.

But, but, but — Dodd-Frank!

Yeah, about that: President Obama and congressional Democrats — led by two of the central characters in Washington’s part of the financial crisis, Sen. Christopher Dodd and Rep. Barney Frank — decided the way to avoid TBTF in the future was to pass a voluminous law full of new regulations to say, “No bailouts. We mean it this time!”

A “living will” for large banks and new capital and liquidity requirements are not bad things. But they are insufficient to ensure that, in the event of another crisis in financial markets, the feds won’t feel compelled to bail out big banks — putting taxpayers on the hook.

In fact, the Bloomberg story suggests banks and industry observers think nothing has changed as far as the government’s implicit promise to prop up TBTF institutions:

Even with policy makers’ claims that the next crisis will be handled differently, investors still regard the largest banks as protected by an implicit government guarantee. One sign of that attitude is that investors continue to demand from the biggest banks lower interest payments in return for deposits.

That gives larger banks a funding advantage over their smaller rivals. In 2011, funding costs for banks with more than $10 billion in assets were about one-third less than for the smallest banks, according to the FDIC. That gap was only slightly narrower than the 37 percent advantage the largest banks enjoyed when Dodd-Frank was signed.

For 28 global banks in 2009, that benefit translated into a cumulative $250 billion, according to Andrew Haldane, the Bank of England’s executive director for financial stability.

“Markets have come to believe that what the government did in 2008 and 2009 isn’t a one-time deal, that the government will somehow come to the rescue of these big financial firms,” Kevin Warsh, a former member of the Fed’s Board of Governors, said on the March 28 “Charlie Rose” TV show.

Credit-rating companies Standard & Poor’s and Moody’s say they anticipate the U.S. government would rescue large banks in a future crisis. Both cut the major banks’ debt ratings by one level late last year, while retaining them as investment grade credits.

To paraphrase U.S. Chief Justice John Roberts, the way to stop too big to fail is to stop too big to fail. If a bank is so big as to pose a systemic risk to the financial system, no amount of regulatory ingenuity — however well-intentioned and clever — will be sufficient. And regulators, like some generals, tend to fight the last war. That means the demands they’re placing on banks might help prevent an exact rerun of the 2007-08 financial crisis, but may well create new blind spots or incentives for risk-taking that aren’t apparent until it’s once again too late.

I used to write about antitrust cases in Europe and generally think most antitrust actions are misguided, short-sighted, politically motivated, futile, or some combination thereof. But if the U.S. government is going to use the force of law in an effort to prevent taxpayer bailouts of banks, I tend to favor using the power of antitrust to keep banks below a certain market share. Yes, that means forgoing some efficiencies and capabilities that mega-banks have — and no, I don’t have a particular threshold in mind. But it would be preferable to institutionalizing TBTF, as Dodd-Frank appears to have done.

(Forgotten in haste and now added: H/t to Ed Morrissey at Hot Air)

– By Kyle Wingfield

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109 comments Add your comment

jconservative

April 16th, 2012
11:46 am

I always believed that TARP was one of the few things George W Bush got correct.

ragnar danneskjold

April 16th, 2012
11:48 am

Fully agree, excellent analysis. And over the intellectual pay grade of leftists.

Jefferson

April 16th, 2012
11:49 am

The people who cause the problems are not the people who get hurt by the problems.

Arnold

April 16th, 2012
11:49 am

They need to be broken up. All the large institutions need to be broken up.

Tiberius - Your lightning rod of hate!

April 16th, 2012
11:50 am

The way to stop too big to fail is to let the offenders fail.

There are no consequences for bad actors when you bail them out.

Kyle Wingfield

April 16th, 2012
11:50 am

jconservative: The merits of TARP aside, I’d hope we would all agree it would be best to avoid getting in that situation ever again, to the furthest extent possible.

Kyle Wingfield

April 16th, 2012
11:52 am

Tiberius: I would agree, except that letting such large institutions fail has an enormous effect on people who didn’t make the bad decisions. Once the institutions are small enough to limit that kind of collateral damage, then I say, let any and all the bad actors fail.

ByteMe

April 16th, 2012
11:53 am

The law before Dodd-Frank was this:

Banks could not leverage above 12:1.

That was supposed to keep the debt risk to a managable level. The law had been in place since the 1930’s.

The SEC under Bush waived the law for the largest banks, thinking they would just “police themselves”. Bear-Stearns got to 60:1 before failing. Lehman was in similar dire straits and it failed. The others were north of 15:1 but Bush’s team decided to just throw money at them (using TARP which was not designed this way) and hoped they would stay afloat (which worked, but no one likes the outcome except for the banks themselves).

DF is certainly not an optimal solution, but what would pass a Congress bought and owned by corporations?

ByteMe

April 16th, 2012
11:59 am

except that letting such large institutions fail has an enormous effect on people who didn’t make the bad decisions

To further clarify this excellent argument: does anyone have a clear idea what letting the largest bank in terms of deposits — Citigroup — would have cost taxpayers to just let fail? Remember that all depositors are FDIC insured up to $250K, which is backstopped by taxpayers. All pension funds holding Citigroup stocks and bonds are insured by PBGC, which is also backstopped by taxpayers. And Citigroup was essentially a zombie bank (Dead Man Walkin’!) in 2008 without government assistance (no one else was going to take the risk on them, because no one had a clear idea of what the risk really was).

I think the penalty for having to take TARP should have been more severe and required breaking the whole into much smaller parts. But letting it die? Nope. That would have been much more expensive to taxpayers and depositors.

Tiberius - Your lightning rod of hate!

April 16th, 2012
12:00 pm

Kyle, I have little sympathy for people who throw their money at investing firms with little or no regard as to whether that firm is responsible, rather than just looking for the best return no matter what.

Both the bad actors and the the people who abdicate their responsibility to police their own finances need a wake up call.

Rafe Hollister

April 16th, 2012
12:01 pm

I goes against my libertarian bent, but why not once again only license banks to operate in one state and turn regulation back to the states. Consumers would still be free to bank wherever they got the best deals, with new technology, you can live in Georgia and bank in Colorado. It worked in the past.

I would obviously have to be phased in over a long period allowing the big guys to divest themselves of their operations out of state, but might work. Sure, would cause some shock and awe for the big guys.

Dusty

April 16th, 2012
12:11 pm

I’m not sure I got all this straight.

Big banks got so big and varied that they had to be bailed out by the government. (Bigger government debt!)

Dodd and Franks got a bill passed saying the government would no longer bail out big banks. Yes!

But..if big banks get in bad shape again the government WOULD bail them out. (More gov debt again!)

Huh?

We only need smaller banks? NO!

Smaller banks would fail without help from government and people using small banks would lose their money.

Looks like to me we best deposit our money in a coffee can and bury it under the apple tree.

(Can anyone promise me a rose garden?)

Tiberius - Your lightning rod of hate!

April 16th, 2012
12:13 pm

And you wonder why we keep getting the government that makes those laws, Dusty?

Tiberius - Your lightning rod of hate!

April 16th, 2012
12:20 pm

I find it interesting that government is willing to bail out banks for heading into rocky waters due to bad government regulations and interference, yet have no such plan to bail out homeowners who are in rocky waters due to bad government interference in that market.

ByteMe

April 16th, 2012
12:36 pm

But..if big banks get in bad shape again the government WOULD bail them out. (More gov debt again!)

No, that’s not what Kyle wrote.

What he wrote is that investors think that’s what’s going to happen. In reality, only the Fed and Treasury Secretary will know for sure what they’ll do when the time comes. Similar to last time, if you think about it.

Cutty

April 16th, 2012
12:42 pm

‘But if the U.S. government is going to use the force of law in an effort to prevent taxpayer bailouts of banks, I tend to favor using the power of antitrust to keep banks below a certain market share.’

Isn’t that what the administration tried to do over the howls of socialism from the right? Also, didn’t the republicans want to further eliminate regulations for the banks by claiming that that would be bad for business? Seems the stock market is doing just fine.

Kyle Wingfield

April 16th, 2012
12:55 pm

Cutty: I don’t recall the administration trying that. I do know there’s a pretty healthy debate on the right about whether to do as I’ve suggested.

Lil' Barry Bailout (Revised Downward)

April 16th, 2012
1:01 pm

Isn’t that what the administration tried to do over the howls of socialism from the right?
——-

No.

And in any case, “howls from the right” can’t stop 60 Democrat senators from passing whatever bill they want.

Rafe Hollister

April 16th, 2012
1:06 pm

I’m sure, when all is said and done, we will do what we always do.

Put off making a decision and hope for the best. When everything blows up, we will create another government agency or three and spend a bunch of money we borrowed from the Chinese. That unfortunately is the American way.

Finn McCool (Class Warfare === Stopping Rich People from TAKING MORE of OUR MONEY)

April 16th, 2012
1:08 pm

ooops
If Romney wants to pull this off, his campaign might want to make sure he really is behind closed doors the next time he talks to a roomful of donors.

http://www.salon.com/2012/04/16/what_mitt_won%e2%80%99t_say_in_public/

Lil' Barry Bailout (Revised Downward)

April 16th, 2012
1:09 pm

That was the Greek way, too.

Lil' Barry Bailout (Revised Downward)

April 16th, 2012
1:13 pm

Shocking stuff, Finn. (rolls eyes)

Yawn.

Scooter

April 16th, 2012
1:21 pm

The Sarbanes Oxley Act should’ve never replaced Glass Steagal… that’s what allowed them to get so big in the first place. Alan Greenspan, Robert Rubin, Bill Clinton and a republican congress all had their hands in it.

Dusty

April 16th, 2012
1:24 pm

You guys are no help. I already know how to go into bankruptcy. Too many people have shown me how its done.

Well, the government has heard me and has already sent me a love note with an itty biitty refund check. Yes, sir, they have a simple, safe and convenient savings option for me!!! Just sign up a http://www.treasurydirect.gov.

OOooo wheee! The government knows how to save money?????? Since when??

All I want the govenment to do is get smaller and spend less money.

Jack

April 16th, 2012
1:25 pm

Save your Confederate money…

carlosgvv

April 16th, 2012
1:36 pm

Kyle, if you really believe Big Business banks should not receive any more bailouts, I know you will support the Buffett bill currently before Congress.

Don

April 16th, 2012
1:47 pm

As long as banks are TBTF, then the implicit bail out exists regardless of rhetoric or how thick a regulatory bill you can pass.

Bust’em up!

Tiberius - Your lightning rod of hate!

April 16th, 2012
2:06 pm

Wow, Finn! That “reporter” sure nailed Romney! :roll:

Why do you have to make stuff up? Can’t you just accept that Romney’s proposals are actually MODERATE? We know you can’t run on the “extreeeeeme” card in 2012 now that he’s the presumptive nominee, but couldn’t you provide something of, you know, actual substance with which to complain about the next President of the United States?

Tiberius - Your lightning rod of hate!

April 16th, 2012
2:07 pm

“Kyle, if you really believe Big Business banks should not receive any more bailouts, I know you will support the Buffett bill currently before Congress.”

Except, of course, that one as nothing to do with the other. :roll:

JF McNamara

April 16th, 2012
2:10 pm

Kyle has selective memory. Were Republicans for ANY finance reform? No.

They strongly opposed the bill and had no alternatives. They simply wanted to keep going like we were. Their opposition is the reason the bill is weak today. Don’t try to make it out as an Obama failure. It’s a Republican failure. The Republicans were refusing to do their job, and we are worse off because of it.

At the time, I said that we would be in the same place as have a similar crash because the Republicans wouldn’t allow any meaningful reform such as the re institution of Glass Steagall. Democrats tried to stop too big to fail, and Republicans were in lock step against it.

Here’s Eric Cantor discussing the issue at the time. What was the Republican plan again?
http://youtu.be/3Y3770GZQOk

carlosgvv

April 16th, 2012
2:12 pm

Tiberius – 2:07

The Buffett bill says the rich should pay at least as much percentage wise in taxes as the middle-class. Kyle says Big Banks should not get any bailout help from the Govt. and should succeed or fail same as middle-class businesses.

You complete lack of understanding on so many issues tells me you need to finish high school and get at least some college before posting here again.

Kyle Wingfield

April 16th, 2012
2:17 pm

carlosgvv: The only connection between the two policies is that both involve money.

Jefferson

April 16th, 2012
2:25 pm

Break them up is the answer.

Kyle Wingfield

April 16th, 2012
2:27 pm

JF: I think you may have selective memory: The Dems only needed a single Republican senator’s vote to pass — and that was only because the Dems decided health insurance reform was a bigger priority than preventing a repeat of the biggest financial calamity in decades; if they’d done it the other way around, they might’ve finished the law while they still had 60 votes in the Senate.

As with the stimulus, Obamacare, cap and trade, and everything else attempted during Obama’s first two years, the Dems did not need GOP votes, and thus made no effort to get GOP votes. The debate on all these issues was between the center-left (remember the Blue Dogs?) and the further-left.

But then, we’ve already had an election to sort out whether the Dems were being overly aggressive in trying to pass their agenda or the GOP was being overly aggressive in trying to stop it. It was in November 2010. As you may recall, the Dems lost.

Tiberius - Your lightning rod of hate!

April 16th, 2012
2:29 pm

So Jf McNamara, a Democrat-sponsored, passed and signed bill is a Republican failure?

I’m sorry, but when did up officially become down? :roll:

Tiberius - Your lightning rod of hate!

April 16th, 2012
2:32 pm

Carlos, connect the dots for me please.

Dodd-Frank is a financial regulatory bill for specific businesses, and the Buffett Rule is a tax bill against millionaires.

And they are related – how?

Pizzaman

April 16th, 2012
2:48 pm

Excuse me. To big to fail was Bush/Cheney. Too far along when The President ‘inherited” it to change it.

East Lake Ira

April 16th, 2012
2:51 pm

Don't Tread

April 16th, 2012
3:04 pm

Have any of the “too big to fails” paid back their bailout money, or did they just get a government loan to pay off the other government loan like GM did (and then call it “paid off”)?

Chrysler should just be sold for scrap.

Tax the evil rich !! (so we can spend even more on stupid stuff)

Skip

April 16th, 2012
3:07 pm

I put 60% down on my house in 02, who bails me out? I’ve only lost half of that .And because I have more invested than BofA why don’t we share the loss?

Contrarian

April 16th, 2012
3:09 pm

Once again, the shows us all just how incredibly liberal the AJC is.

Just saying..

April 16th, 2012
3:11 pm

Tiberius – Your lightning rod of hate!
April 16th, 2012
12:20 pm
I find it interesting that government is willing to bail out banks for heading into rocky waters due to bad government regulations and interference, yet have no such plan to bail out homeowners who are in rocky waters due to bad government interference in that market.

Which group contributes more to election campaigns?

Tiberius - Your lightning rod of hate!

April 16th, 2012
3:13 pm

Doesn’t matter, Just saying. I’m all into the “fairness” doctrine liberals say they want but really don’t.

hryder

April 16th, 2012
3:14 pm

Too big to fail is B.S., M.S., and Ph.D.. Any and all businesses that are in danger of failure should never be bailed out by our federal government and if unable to recover as a viable business permitted to go down the drain. This is how a free market economy is to function but never permitted, because we have elected office holders buying votes to remain in political power. Only if reasonable business operating laws are violated should the Feds be involved and then only to inforce the penalties established by law which should include significant incarceration for all officers. Never should the Feds select businesses to receive Fed funding, not one. VOTE OUT ALL ELECTED INCUMBENT OFFICE HOLDERS IN THE NOVEMBER ELECTIONS.

JF McNamara

April 16th, 2012
3:26 pm

My memory isn’t selective at all. I remember the complete way in which both Healthcare and Financial Reform played out. Republicans wanted Obama to fail at all costs, and they would not do anything to help.

Rush was uttering the words, “I hope he fails.” Any negotiation or cooperation got a Republican demonized in the press and ostracized in the party as a RINO. There was a complete wall of resistance against the Democrats, and there was payback on any cooperating Republican in the primaries.

Now its being played that the Democrats excluded the Republicans. That’s complete and utter nonsense and you know it. If Democrats excluded Republicans then there would be serious proposals put forth by Republicans at the time that were dismissed by Democrats for both Healthcare and Financial Regulation.

Where are they? [That's not rhetorical]

Republicans failed to try to govern, and I’m still irritated by it. They put politics before the country. My memory is crystal clear in remembering that.

Just saying..

April 16th, 2012
3:27 pm

Tiberius – Your lightning rod of hate!
April 16th, 2012
3:13 pm: “Doesn’t matter, Just saying. I’m all into the “fairness” doctrine liberals say they want but really don’t.”

And that relates to buying off politicians by…?

Hillbilly D

April 16th, 2012
3:38 pm

Scooter @ 1:21

Good point. For somebody who was supposed to be a genius, Greenspan sure was naive, or else he never told the truth. Either way, everybody else paid the price. Never saw it coming or so he said.

If they’re “too big to fail”, bust them up, then they won’t be too big to fail. That’s not going to happen, though. Timothy Geithner, Ben Bernanke, Hank Paulson and on and on, are all products of the big Wall Street firms. That’s where their mindset is, that’s where their loyalties lie and that’s who they are going to look after.

GT

April 16th, 2012
3:47 pm

The more we adopt ways to save freak events in the economy, like bank bailouts, the more we risk the mother ship, the US Treasury. The Tea Party about tested the theory last year in refusing to pay our bills, showing that the country could indeed survive a credit free economy. I am not sure that most poor and lower middle class have not learned the way of cash and carry better than the rich. Almost like the drug business, cash is king, and the demise of the banks would effect the rich and upper middle class more who live off charge and check and carry. In other words the standard of living for the upper middle and the rich would be far more effected.

Just saying..

April 16th, 2012
3:48 pm

“If they’re “too big to fail”, bust them up, then they won’t be too big to fail. That’s not going to happen, though. Timothy Geithner, Ben Bernanke, Hank Paulson and on and on, are all products of the big Wall Street firms. That’s where their mindset is, that’s where their loyalties lie and that’s who they are going to look after.”

And so it goes…

Kyle Wingfield

April 16th, 2012
3:48 pm

JF: Again, selective memory.

Politifact reported in September 2009 that there were already 35 health-reform bills proposed by Republicans. Democrats discounted those because none represented a “single Republican bill” — although Tom Price of Georgia had a comprehensive bill with 44 co-sponsors (I wrote about the updated version recently).

They did, however, unite behind one proposal for financial reform.

Again, they were ignored because the Dems could afford to ignore them — and were too arrogant to believe their numbers could change substantially in a matter of months. That’s not revisionism. It’s the “I won” record of fact that began on Day 4 of the Obama presidency. What incentive did Republicans have to play along when they were told four days into the Obama presidency essentially to shut up because they’d lost, and when their votes didn’t mean anything to the final outcome of the legislation anyway — and when Democrats governed with that fact in mind?