Debunking the "Too Big To Fail" Myth → Washingtons Blog
Debunking the "Too Big To Fail" Myth - Washingtons Blog

Tuesday, October 13, 2009

Debunking the "Too Big To Fail" Myth



(2) The White House needs to "regulate and oversee them", even though it is clear that the government has no real plans to regulate or oversee the banking behemoths

(3) Giant banks are good for the economy

In response to the latest claims by the government, let me recap the real reason the government doesn't want to break up the too big to fails.

We Need Them To Help the Economy Recover?






In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer - who was Ben Bernanke’s thesis adviser at MIT - say that - at the very least - the size of the financial giants should be limited.




If We Break 'Em Up, No One Will Lend?






BusinessWeek noted in January:




And Fed Governor Daniel K. Tarullo said in June:














The Giant Banks Have Recovered, And Are No Longer Insolvent?






Indeed, Nobel prize winning economist Joseph Stiglitz said recently:



Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to "creative accounting", such as Goldman "skipping" December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

Some very smart people say that the big banks - even after many billions in bailouts and other government help - have still not repaired their balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can't prove they are solvent, they should be broken up.

The Government Lacks the Power to Break Them Up?

Does the government lack the power to break up the TBTFs?


One of the world's leading economic historians - Niall Ferguson - argues in a current article in Newsweek:

[Geithner is proposing that] there should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as "too big to fail" banks.


Whether or not the banks' holding companies can be broken up using the PCA, the banks themselves could be. See this.



Geithner and Bernanke have been using one loophole and "creative" legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).


So don't give me any of this "our hands are tied" malarkey. The Obama administration could break the "too bigs" up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.

Is Temporarily Nationalizing the Giant Banks Socialism?



In contrast, the Bush and Obama administrations' actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is - truly - socialism.


The Real Reason the Giant Banks Aren't Being Broken Up

So what is the real reason that the TBTFs aren't being broken up?

Certainly, there is regulatory capture, cowardice and corruption:

  • Economic historian Niall Ferguson asks:
  • Manhattan Institute senior fellow Nicole Gelinas agrees:
  • Investment analyst and financial writer Yves Smith says:


  • William K. Black says:





  • Harvard professor of government Jeffry A. Frieden says:

But there is an even more interesting reason . . .

The number one reason the TBTF's aren't being broken up is [drumroll] . . . the 'ole 80's playbook is being used.

As the New York Times wrote in February:



Indeed, Richard C. Koo - former economist at the Federal Reserve Bank of New York and doctoral fellow with the Fed's Board of Governors, and now chief economist for Nomura - confirmed this fact last year in a speech to the Center for Strategic & International Studies. Specifically, Koo said that -after the Latin American crisis hit in 1982 - the New York Fed concluded that 7 out of 8 money center banks were actually "underwater" and "bankrupt", but that the Fed hid that fact from the American people.

So the government's failure to break up the insolvent giants - even though virtually all independent experts say that is the only way to save the economy, and even though there is no good reason not to break them up - is nothing new.

William K. Black's statement that the government's entire strategy now - as in the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts") makes a lot more sense.


  1. Good assemblage of information. The lesson appears to be that the previous lesson went unlearned. If the banks can't meet their obligations, they'll have to turn to the Federal Reserve--again. Just how much more can they lend? Endless borrowing would make attracting foreign capital harder, at some point rising rates and contracting the economy further.
    The Fed's lent out some $2 trillion in excess of TARP. These handouts to big banks have been entered as part of the deficit, but are they owed by the public? I've heard that there's actually a legal precedent which allows governments to escape its obligations when the money isn't spent to benefit the public, the Sack Doctrine. See Mike RIvero's take on it here:

  2. The banks could have been broken up when they were obviously insolvent and the government had to step to save them. However, that was not done, and the Paulson Plan was designed specifically to avoid this and Congress went along with it. It's too late this round.

    The banking oligopolies have bought too much influence to be broken up. The only way this will be possible is for them to be blamed for the next crash, which the government will no longer be able to bail them out of without threatening the stability of the dollar (which is already getting shaky in the eyes of US creditors).

    It may take Great Depression II for it to become possible to muster the public outrage necessary to scare politicians into doing the obvious. Without fear of electoral defeat in spite of campaign coffers being full, I don't see meaningful reform as a practical possibility. The oligarchs control the system both through buying influence and holding the levers of finance, which can make or break the economy in short order.

    Nothing is written in stone, however. As the voices of reason and evidence pile up, the possibility that a contraction short of Great Depression II could tip the scales, and it is almost guaranteed, given the lack of reform and accountability. So, pile it on, by all means.

  3. G! You've been on fire lately! Thank you for your consistent outstanding contributions.

  4. Great article but you left out Paul Volcker who is being shuffled into the pantry like a crazy Uncle at Family Reunion. Obama used his credentials during the election but once it was clear he was diametrically opposed to Summer et al, he has been marginalized.

  5. Long Term Capital Management and the Swiss bank it took down goes some way towards pointing out

    Too Big To Succeed

  6. Wonderful post, got here from Zero Hedge, and have added you to my blog roll.

  7. FANTASTIC! This is far and away the best summary of the TBTF nonsense I've seen yet. I'm going to personally make sure everyone I know (in the blogosphere and real life) sees this.

    Thanks for doing the legwork on this one.


  8. is regulatory capture a nice term for corruption?

  9. What about Michael Hudson? Add him to the list.






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