It's Time to End 'Too Big to Fail'

Of the 8,195 banks in this nation, just four, JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , Wells Fargo (NYSE: WFC  ) , and Bank of America (NYSE: BAC  ) control nearly 40% of the deposits. Those four, plus Goldman Sachs (NYSE: GS  ) , hold 97% of the industry's notional derivative exposure.

These statistics would be hilarious if they weren't true, and if the banks behind them didn't have the power to manipulate vast portions of the economy. We spent the latter half of 2008 feeling the wrath of "too big to fail." Today, banks are bigger than ever. We need to end that. Now.

Here's why
We all know the downside of "too big to fail." They screw up; we pay the price. Yet many people (mostly bankers) still defend the practice. So rather than firing off reasons why "too big to fail" is such a menace -- you already know those -- we'll refute the arguments defending it.

Start with the first argument -- that post-Lehman, the problem has evaporated. JPMorgan Chase CEO Jamie Dimon, for example, recently argued that his bank wasn't too big to fail. Wrong. JPMorgan Chase is not very likely to fail at the moment, but let's not pretend that the eruption of its balance sheet, with more than $79 trillion in notional derivative exposure (we're not making that number up) wouldn't annihilate everything in sight.

Plus, we'll remind you that AIG, Bear Stearns, Lehman Brothers, Citigroup, Washington Mutual, Fannie Mae, and Freddie Mac all once gave off the impression of being "not very likely to fail," too. Overcoming the notion that last fall's financial crisis was a random, one-off event is perhaps the most crucial aspect of stabilizing the financial industry. Last fall was no fluke. It will happen again.  

Moving on to the grittier arguments, Dimon has also been quoted as saying: "Large businesses are large for a reason. You can't do an $8 billion loan if you are a small bank."

No, but can't eight smaller banks lend $1 billion each? And that way, wouldn't competition flourish, since those smaller banks would all bid against each other on loan terms? Increasing the number of competitive banks doesn't reduce the total amount of capital in the financial system. 

There were huge, prosperous, industrial companies far before there were banks with multitrillion-dollar balance sheets. We think it's plainly clear that the overall economy fared far better when three or four banks didn't hold the economy in a headlock. In fact, this seems utterly obvious to everyone except the big banks.

Like Dimon, other advocates of too-big-to-fail banks like to cite vague, specious evidence. Here are the reasons we hear most often:

"Big banks are more efficient"
This would be a good point -- if it were true. But the evidence suggests otherwise. From a Federal Reserve survey of thirty-nine studies on merger performance from 1980 to 1993: "The findings point strongly to a lack of improvement in efficiency or profitability as a result of bank mergers, and these findings are robust both within and across studies and over time." Ouch.

More recent studies -- even the one selectively quoted by a prominent too-big-to-fail advocate -- reveal similar findings: "Efficiency does not significantly increase with bank size as one might expect if economies of scale are an important determinant of success."

If size were a significant advantage, you would expect large banks to be doing really well. But over the past two years we've seen just the opposite, as every single major convoluted bank not only failed, but failed so spectacularly that they had to be bailed out by the government. Most smaller, regional banks that didn't run massive blind, drunk trading desks fared far better.

"Our broken-up banks will have a competitive disadvantage to sprawling foreign banks"
This point assumes that there are advantages to scale, which, as we've seen, is probably false. Moreover, it's become irrelevant since Europe, which recognizes the risks big banks pose, has the courage to break up theirs -- the list so far includes Lloyds, Royal Bank of Scotland, Northern Rock, and ING.

"Large, sprawling multinationals need large, sprawling banks"
It's curious that the financial-services industry would be the only one whose customers want their suppliers to be powerful and consolidated. In reality, there's a reason why large companies don't do all of their business with a single bank -- you have more risk and less bargaining power when you rely on fewer suppliers. Peter Boone and Simon Johnson note that General Electric's (NYSE: GE  ) 2008 stock offering used seven lead managers, while Microsoft's (Nasdaq: MSFT  ) May bond offering used seven lead and joint lead managers. Smaller companies also like to spread their business around.

That's why you don't see any companies, other than the major banks, up in arms about the possibility of banks being broken up. They would benefit from greater competition and financial stability.

Remember, advocates of the current system have to show that the size and complexity of too-big-to-fail banks provide benefits that are worth more than seven million jobs and trillions of taxpayer dollars, plus whatever economic devastation future crises cause. But they still have not given us any good reason to keep these giant Bankensteins around, much less one that justifies these tremendous costs.

So if efficiency isn't the question, why would the CEOs of banks be so gung-ho about becoming large and in charge? Sometimes a pair of simple tables tells a powerful story:

JPMorgan Chase ($2 trillion in total assets)

Year

Return on Assets

CEO Compensation

2005

0.7%

$22.3 million

2006

1.1%

$39.1 million

2007

1.1%

$34.3 million

2008

0.2%

$19.7 million

Source: Capital IQ, a division of Standard & Poor's.

Bank of the Ozarks ($2.9 billion in total assets)

Year

Return on Assets

CEO Compensation

2005

1.6%

$464,997

2006

1.4%

$774,064

2007

1.2%

$825,588

2008

1.2%

$912,336

Source: Capital IQ, a division of Standard & Poor's.

If you're a CEO, you don't build dynastic wealth for yourself by being small and nimble. You do it by being an enormous, sledgehammer-wielding giant.

Those who don't have a vested interest in the matter often agree. Paul Volcker, Alan Greenspan, and Mervyn King, Governor of the Bank of England, have all argued we need to break up the banks and/or stop them from running proprietary trading desks.

Heck, even John Reed, the former chairman of Citigroup who got the bank-regulating Glass-Steagall act repealed, wants it back

I'm sorry …. We learn from our mistakes …. I would compartmentalize the industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn't spread and sink the whole vessel.

Help us out here
We simply want to see one, logical, clear explanation for why we shouldn't break the banks apart -- or bring back Glass-Steagall, separating investment banking and trading activities from commercial banking. Just one.

So far, the popular explanation is, "Well, it wouldn't solve all of our problems." Neither does outlawing theft, but that doesn't mean we should pooh-pooh its importance. In our opinion, no one has rationally shown why the economy is better off when three or four banks dominate the land, as opposed to breaking them apart, ending "too big to fail," and letting competition run free. In fact, the evidence seems to thoroughly disprove it.

We're fairly certain there's one real reason why we haven't found the courage to take these necessary steps. Everyone in Washington must know that any such effort will invite a flotilla of banking lobbyists to come sailing in, cannons blazing, threatening to undermine campaigns and derail re-elections. Heck, we'd be scared of them, too. We just want someone to name that fear as the reason why a handful of banks continue to hold the economy hostage. And if that isn't the reason, please tell us what is. We're dying to hear.

To help Congress along, we'll make sure each and every one of its 535 members gets a copy of this article in their email inbox, so they'll have a chance to speak up and defend our current financial system. We've also sent this article to the major banks and their trade associations. Members can respond to either of the email addresses we've provided below.

We're waiting.

In the meantime, we can all call our Senators and tell them to support the SAFE Banking Act, which would put a hard cap size on too-big-to-fail Wall Street banks.

Click here for your Senator's phone number. There is also a major petition going around in support of the SAFE Banking Act, which you can sign here.

Ilan Moscovitz and Morgan Housel have no financial interest in any company mentioned in this article. Microsoft is an Inside Value recommendation. Motley Fool Options recommended a diagonal call on Microsoft. The Motley Fool is investors writing for investors.


Read/Post Comments (95) | Recommend This Article (290)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 13, 2009, at 4:43 PM, meland24 wrote:

    Your opinion reflects a title more like 'It's Time to End Too Big.' But we don't need legislation to break up the banks. More regulation is the last thing the financial services industry needs. Let THE MARKET take care of this. If you want to end 'too big to FAIL', then eliminate the FDIC and don't bailout any company with other people's money.

  • Report this Comment On November 13, 2009, at 4:50 PM, davideconnollyjr wrote:

    This was a really fine article, and the vast majority of Americans do not approve of any more bail outs. Repealing Glass-Steagall was payback for political donations, and the consequences to the taxpayer are now evident. Many of the architects of the recession are still in operation, totally unchastened by their experiences, and still controlling the levers of power in industry, and government. It should be obvious to anyone without blinders that the last administration, and the present administration are behaving in a similar fashioned, when it comes to breaking up AIG, Fannie Mae, Freddie Mack, and all the other golden cows. The federal housing authority and HUD are rife with corruption, and have been for decades, and that will be the next bailout. Beyond that, there are at least 10 states that are teetering on insolvency, in addition to the specter of bankrupt social security, and Medicare systems. The two political parties in this country have played people against each other, to remain in power, but both parties have led us to financial Armageddon.

  • Report this Comment On November 13, 2009, at 5:02 PM, cforstersmith wrote:

    Right on guys! I think you hit the nail on the head with the analysis and also the fact that the lack of real financial service overhaul being tied to the ubiquitousness of money in politics. I'll send another copy to my senators.

  • Report this Comment On November 13, 2009, at 5:08 PM, TMFEditorsDesk wrote:

    Excellent article, guys...I agree 100%.

    -Anand (TMFBomb)

  • Report this Comment On November 13, 2009, at 5:24 PM, savyliberal wrote:

    I have to admit I am a bit shocked at this piece, but couldn't agree more. Last year's melt-down, and the huge public debt is has saddled us all with, should be all the evidence we need that MORE bank regulation and the return of Glass-Steagall is precisely what we need. The kind of half-measures so far proposed by the Obama administration will not cut it. Banks should not be ever again be allowed to become too big to fail. We must remember that great size also results in decreased tranparency, another factor in the meltdown. If investment banks want to invest in and peddle risky derivatives, let them (still with some oversight), but keep that action away from the place where we keep our checking accounts and mortgages.

  • Report this Comment On November 13, 2009, at 5:42 PM, DenimAdept wrote:

    Why not do both: repeal Glass-Steagall *and* break up banks. I used to really like certain banks, but they got bought up. And their buyers got bought up. Those buyers got bought up, and now we're *stuck* with BoA and others. Bring back BayBank!!

  • Report this Comment On November 13, 2009, at 5:47 PM, TMFRoyal wrote:

    "Our broken-up banks will have a competitive disadvantage to sprawling foreign banks"

    Terrible reasoning. The big banks' argument amounts to saying that we should do stupid things (allow big banks) because other people do stupid things (allow big banks). This is much the same scare tactic that the financial industry has used for years.

    Excellent article, Ilan and Morgan!

    Jim (TMFRoyal)

  • Report this Comment On November 13, 2009, at 5:49 PM, DDHv wrote:

    In the last elections, we voted Constitutional party wherever both parties fielded low quality candidates. Far too often! :-(( Doubt it made any practical difference, but it relieved our feelings. If enough people do this, it might actually produce a return to using the constitution instead of detouring around it.

    Too big to fail might lead to proving the country isn't too big to fail.

  • Report this Comment On November 13, 2009, at 5:54 PM, OneLegged wrote:

    Bravo!

    My only concern is that your 535 emails will fall on 1070 (a presumed tally) deaf ears..er blind eyes. Congress hasn't been exactly receptive to anyone other than these banking scoundrels since this fiasco began.

  • Report this Comment On November 13, 2009, at 5:56 PM, bretco wrote:

    One of the very best Fool articles to date.

    The shame of politics and political contributions continues to corrupt capitalism and the things that made this country great.

    Who would have ever thought that so many capitalists would be calling for MORE government regulations and oversight?

    Maybe Kruschef was right, they will eventually bury us.

    We really aren't too big to fail anymore than once Great Britan was, nor Rome or the Greeks or even Egypt for that matter. Sad !

  • Report this Comment On November 13, 2009, at 5:56 PM, TMFDiogenes wrote:

    OneLegged,

    That's okay if that's what happens. That would tell us something too...

  • Report this Comment On November 13, 2009, at 5:57 PM, yachtboy9 wrote:

    It might be useful that in line with breaking banks into smaller units, it would follow that their consumer credit card units could be broken into smaller, more manageable divisions.

    The plea that the credit card divisions need to charge fees for almost everything to be profitable demonstrates that they are mismanaged. Not much difference between them and a loan shark. Breaking up the consumer credit divisions would make them more competitive and see a turnaround of fees and excess charges to retain customers.

    Imagine a relationship where customers use cards within the terms of a balanced contract. Fees are charged for egregious misuse of an account, like non payment after 10 days, not 1 minute after midnight as it is now.

    Consumer credit may temporarily shrink, but given the competitiveness of the market, it will be back.

    and quickly.

    Another area that need to be exposed to the light of day is the 3 major so called consumer credit rating compnies. They've turned what should be a simple matter into a complex and for them a revenue generating industry. For all their complex analysis of consumers and trends, the've done nothing but increase the cost of credit to consumers.

    I recently reviewed my BoA checking and savings account; I maintained the account because of the number of branches and free ATM's around the country. I discontinued to account and switched to a local credit union. Why?

    *BoA charged me 25.00 per month for the account

    which was far in excess of what I would pay monthly in ATM fees when I needed cash.

    *The Credit Union is free and the services offered are pretty much the same as I got from BoA, only less. This Included international banking services. when needed. The Credit union is part of a nationwide free ATM system that larger than BoA or any other national bank for that matter. A small application on my blackberry tells me where the nearest ones are within a 25 mi radius free.

    People, take your money and go to your local bank. In the long run, you will help break up the tyranny of the large national banks. Its clear that our congress and government don't have the courage to do it.

  • Report this Comment On November 13, 2009, at 6:06 PM, sleepymonkey wrote:

    Great article! Repeal Gramm-Leach-Bliley. Reinstate Glass-Steagall. Too big to fail = too big to exist.

  • Report this Comment On November 13, 2009, at 6:07 PM, rajackson43 wrote:

    Great article this one should be e mailed or sitting

    right on the President's (of USA) desk!! Very good point.This will likely stimulate the economy by putting small banks in competition and making them

    more leanient on credit restrictions.Also being most

    small business loans are lent from small banks stimulating the economy this way might get thing growing from the "grass roots" of business.

  • Report this Comment On November 13, 2009, at 6:20 PM, kurtg10536 wrote:

    I never did comprehend the expression "too big to fail." To me it just means that all the investors in the outfit will lose all their money. Like people who owned shares in GM.

    Banks should never be stock brokers or traders. They should have never been permitted to engage in those activities.

    The idea of bundling mortgages into bonds where really no one cares about the quality of the underlying mortgage and the resulting bonds are sold as investments to the trusting public is absolutely reprehensible.

    An excellent article!

  • Report this Comment On November 13, 2009, at 6:35 PM, ron153 wrote:

    OK, let's set a $100 billion cap on assets, and break up the top four banks into 50 smaller ones. Now that wouldn't cause any chaos, of course not. And let's punish Wells and JP Morgan for doing such a good job and acting, by and large, very responsibly, because a few unfettered morons screweed up. If Wells and JP Morgan weren't so big, and so well managed, they couldn't have rescued Washington Mutual and Wachovia, ever think of that?

    This article is moronic, as is all the bleating in Congress. If this sortr of idiotic thinking prevails, it will be extremely problematic for the banking industry.

  • Report this Comment On November 13, 2009, at 6:37 PM, marketsailor1945 wrote:

    Or we could leave the banks in tact and give the people a greater potential to accumulate a vast wealth at the cost of the other tax payers...

  • Report this Comment On November 13, 2009, at 6:57 PM, TMFDiogenes wrote:

    Hi ron153,

    The outcome that JPM and WFC survived after the entire system was bailed out doesn't imply that they wouldn't have failed had we not poured cash into their balance sheets and bailed out AIG. WFC in particular had a very low tangible book value ratio, and JPM had CDS exposure that they bet AIG would be able to honor. And neither would have survived widespread bank runs that could have easily ensued had we let the chips fall where they may.

    Also, whether or not they successfully navigated one financial crisis just isn't the point. To refer you to the beginning of the article:

    "JPMorgan Chase CEO Jamie Dimon, for example, recently argued that his bank wasn't too big to fail. Wrong. JPMorgan Chase is not very likely to fail at the moment, but let's not pretend that the eruption of its balance sheet, with more than $79 trillion in notional derivative exposure (we're not making that number up) wouldn't annihilate everything in sight.

    Plus, we'll remind you that AIG, Bear Stearns, Lehman Brothers, Citigroup, Washington Mutual, Fannie Mae, and Freddie Mac all once gave off the impression of being "not very likely to fail," too."

    That's really dangerous. I don't want the fate of our economy and our country to rest on the judgment and altruism of whoever happens to be in charge of several large banks to do the right thing and turn down vast amounts of wealth that accompanies massive risk-taking.

    Thanks everyone for the great comments, keep 'em coming,

    Ilan

  • Report this Comment On November 13, 2009, at 7:03 PM, xetn wrote:

    I guess you don't believe in free enterprise, and the neither does the federal government.

    "Too big to fail" is an invention of the federal government designed to reward their "friends" for their failures. Since the Fed was designed with a provision of being the "lender of last resort", the Fed could have acted to bail out those large banks by creating reserves out of thin air. For a list of Fed functions:

    "Google a Fed publication entitled "The Federal Reserve System: Purposes and Functions." In addition to recklessly manipulating the money supply and causing boom-and-bust cycles for more than ninety years (including the Great Depression and the current one), the Fed "has supervisory and regulatory authority over a wide range of financial institutions and activities." That’s an understatement if ever there was one. Among the Fed’s "functions" are the regulation of:

    Bank holding companies

    State-chartered banks

    Foreign branches of member banks

    Edge and agreement corporations

    U.S. state-licensed branches, agencies, and representative offices of foreign banks

    Nonbanking activities of foreign banks

    National banks

    Savings banks

    Nonbank subsidiaries of bank holding companies

    Thrift holding companies

    Financial reporting procedures

    Accounting policies of banks

    Business "continuity" in case of economic emergencies

    Consumer protection laws

    Securities dealings of banks

    Information technology used by banks

    Foreign investment by banks

    Foreign lending by banks

    Branch banking

    Bank mergers and acquisitions

    Who may own a bank

    Capital "adequacy standards"

    Extensions of credit for the purchase of securities

    Equal opportunity lending

    Mortgage disclosure information

    Reserve requirements

    Electronic funds transfers

    Interbank liabilities

    Community Reinvestment Act sub-prime lending demands

    All international banking operations

    Consumer leasing

    Privacy of consumer financial information

    Payments on demand deposits

    "Fair Credit" reporting

    Transactions between member banks and their affiliates

    Truth in lending

    Truth in savings

    All of this financial market regulation and regimentation was in full force during the Greenspan era. None of it could conceivably be considered to be "libertarian" or "free market" in any way. The Fed is a government central planning agency, period.

    Source: Thomas DiLorenzo: professor of economics at Loyola College in Maryland.

    The foregoing is the reason we don't need to give the Fed any more power of regulation.

    Instead of more regulation and more government interventions, we need LESS; actually we need none.

    Without the government's wanting to specifically aid their "friends" such as Hank Paulson's ex employer: GS, "too big to fail" would not seen the light of day and the taxpayers would not be on the hook for the billions that were transferred from us to them.

    What you specify as small banks joining is backing large loans has been done for a very long time, to reduce risk and as a matter of fact very large banks do so as well. There is nothing wrong with large banks but they would not be as large with out the government's interference. Without the Fed and FDIC, bad banks would simply go out of business. With out those two entities, bankers would not have a safety net and would therefore not take unnecessary risks. There would be no more moral hazard created by the safety nets of government. Lets face facts; the Fed was created by some of the largest banks with the aid of the federal government.

    Perhaps the following will provide the evidence of removing government from the equation:

    http://blog.mises.org/archives/011033.asp

    At the end of the day, the best regulation is not government, but the self interests of consumers. At the root of most, if not all government regulations and intervention is a company or sector wishing to reduce competition.

  • Report this Comment On November 13, 2009, at 7:09 PM, CD101C4 wrote:

    I agree, it is time to break up "too big to fail" institutions, not just the banks. To assure healthy commerce, we should eliminate the "moral Hazard" caused by federal bailout- and break up "too big to fail" institutions -- that includes insurance companies, banks, loan guarantee companies/orgs, automotive companies (and their unions).

    This campaign needs to spread--- help us take it to your neighborhood- Capitol Hill....

  • Report this Comment On November 13, 2009, at 7:47 PM, ObillO wrote:

    There was a financial crisis in the mid-70s, the early 80s, the early 90s, and the late 2000s. Mostly caused by poor regulatory practices and even dumber bank managment. Too Big To Fail should go the way of dinosaurs. The 2008 Bailout of $1trillion or so cost every household $10,000 in debt burden, and someone in the future will pay. Breaking big banks up will CREATE jobs. More preseidents, VP, treasurers, etc. See a book call "Stupidomics" for some additional ideas on ways to reduce the chances of future banking crises.

  • Report this Comment On November 13, 2009, at 7:56 PM, edallan wrote:

    A very solid article -- all the more valuable in that it does not come from people whom the enablers of the stripmining of the Treasury perpetually label "liberals" or "commies" or "socialists."

    Realistically, with the advances in technology, beyond a point there really are few economies of scale, and one thing that has been the case as Bank of America has gotten to its present "too big to fail" size is that merger after takeover after buy-out has NOT resulted in more benefits for the depositor, little benefit for the shareholder, noticeable job losses, but massive skimming off the top at every level by the top bank executives -- and of course by their investment advisors.

    I'm afraid that we have seen that, contrary to Republican theology, the "free market" cannot be trusted to regulate itself, not even for its own selfish benefit, let alone for the public good.

    We need a return to the equivalent of Glass-Steagall -- don't let the bankers gamble with the money of innocent depositors. We need an end to naked short-selling and to credit swaps with "heads I win, tails you lose" strategies -- and enforcement. We need greater transparency, not less. And we need more criminal prosecutions of people who play fast and loose with other people's money.

  • Report this Comment On November 13, 2009, at 8:05 PM, pernfam wrote:

    I totally agree with the view expressed in this article. These " to big to fail banks" should be either broken up or significantly regulated. It all gets back to lobby money controlling Congress. No one wants to be a one term Congressman. It is Lobby money that destroys and distorts our values.

  • Report this Comment On November 13, 2009, at 8:31 PM, SuperPicks wrote:

    Excellent article, but this can be done

    NOW

    simply move your deposits out of the big banks & put them into community banks & credit unions

    MOVE YOUR DEPOSITS!

  • Report this Comment On November 13, 2009, at 8:43 PM, Luis50 wrote:

    Huge banks can:

    1.- Pay huge salaries.

    2.- Disconnect themselves from the needs of their local customers.

    3.- Have piles of money to speculate on proprietary trading.

    The breaking up of banks into much smaller units would automatically get rid of those problems, apart from all the ones mentioned in your excellent article.

  • Report this Comment On November 13, 2009, at 8:43 PM, modeltim wrote:

    This article is spot on and based on common sense.

    I might add that once we get done breaking up these bloated financial behemoths that vigorous antitrust action be taken to break up other megafirms in industries such as Big Pharma and insurance. Competition is what's needed to revitalize our economy. Enough of this "free market" nonsense.

  • Report this Comment On November 13, 2009, at 9:36 PM, dikrew wrote:

    "You can't do an $8 billion loan if you are a small bank."

    No, but can't 8 smaller banks lend $1 billion each?"

    In most cases (if not all), such a decision is within the control of the borrower. I don't want to defend the banks (they can do that for themselves), but the customer/borrower has to accept a large part of the blame for allowing itself to be "captured" by a large bank. The MSFT and GE examples cited are good examples of the customer/borrower exercising good fiscal responsibility.

  • Report this Comment On November 13, 2009, at 9:37 PM, offthepools wrote:

    Totally agree with the sentiments in this article. Now the question is how do we get it done?

    Perhaps we setup a website devoted to gathering signatures for a petition to the politicians. Or maybe we use the site to request donation to start our own grassroots advertising campaign...

  • Report this Comment On November 13, 2009, at 9:57 PM, devoish wrote:

    Maybe you all could jump on board with Senator Bernie Sanders and sign his petition.

    http://sanders.senate.gov/petition/?uid=c53f1aca-5881-403e-9...

    Here is a link to the proposed legislation that would break up the banks. It is only two pages long.

    http://sanders.senate.gov/files/AYO09C99.pdf

  • Report this Comment On November 13, 2009, at 10:05 PM, ejeckert wrote:

    We all know that derivatives caused the problem in the banking system. Then get rid of the problem. We know that derivatives are not going to go away so separate them from the investment banking so that the investment customers are not at risk. If investment banks want to gamble in risky derivatives, let them form a separate subsidiary, such that if it fails the primary investment bank survives.

  • Report this Comment On November 13, 2009, at 10:07 PM, starbucks4ever wrote:

    It is so sad that no one would even mention the only right thing to do: shut down ALL of them, big and small, so that they can no longer provide credit.

  • Report this Comment On November 13, 2009, at 10:50 PM, damaw6 wrote:

    I couldn't agree more. What didn't come through clearly is that these large financial institutions (some are now, conveniently for themselves, became banks so as to gain access to taxpayer capital) were the very entities that created the "shadow banking system", flooding the economy with capital and creating most of the problems that caused the bubble that popped and resulted in jobs and trillions of dollars of wealth lost. Let's not kid anybody; these bankers just played musical chairs and they are still running the "surviver" banks. These guys didn't become farmers in Nebraska, folks! Why reward them now? They've already telegraphed to the market that they will collectively pay each other record levels of compensation in 2010.

    Before Obama was inaugurated in November of last year, he very correctly observed that they should be allowed to fail and "bear the consequences". However the powerful political forces brought to bear by these banks and their lobbies and friends on the "Hill" have quite efficiently silenced that sentiment (if he still believes it).

    It seems to me that the telecom industry has flourished for decades following the government mandated break up of AT& T. Guess what, the guys that need to borrow $8 billion won't be too strapped if we take away one-stop shopping for them.

    We can do this; what are we waiting for? Don't screw around with creating more toothless bureaucratic regulation; break up their frat party and do it now! Have the courage of your own words, Obama!

  • Report this Comment On November 13, 2009, at 10:50 PM, jomueller1 wrote:

    Thanks for the well written article. I like your train of thought and I like to add another facet. Big companies which sell off units and hedge funds which break up companies do that because the smaller units are more mobile and eventually more profitable. So they use just the opposite reasoning of the big banks. Makes me wonder. I believe the CEOs of the big banks just want the power like the kings of times gone by.

    I further believe the whole economy is rigged by power hungry and greedy people. The money little people earn is just the grease for the big money machine. It's like unavoidable but unliked expenses. It all started with the puritans who believed (or said they believed) they were doing "God's work" and being filthy rich was proof of their loyalty to god.

    In my view it is proof that they do not follow the bible or the teachings of Jesus despite this constant wish "God bless America" or having "In God We Trust" on the money. All religions teach the virtue of sharing and they do not promote amassing insane riches.

    But even if someone does not follow religious rules but humanistic principles (we are not animals - or are we?) or even enlightened capitalistic ideas it makes sense to share in order to have a steady stream of activity and income without fighting.

    The Fed is a private enterprise controlled by Goldman Sachs in the disguise of a government agency. Their role is to create bubbles because that makes it easier for the insiders to rake in huge profits. The credit card operators never had better excuses to raise interest rates and fees despite the fact they get their money for free. Instead of buying into this scam people should boycott credit cards and banks as much as possible. Why did Mastercard have a profit of 30% on revenue? That is legalised robbery. And the government stands by and debates until the people with the short attention span forgot what it was all about.

    This system of boom and bust is also used against countries. Remember Mr. Soros and the UK pound? When the dollar is high US companies can outsource cheaply and suppress their own people, they can buy foreign assets cheaply and charge foreigners an arm and a leg. Then a bust is created and and selling foreign assets is a nice windfall without having produced a thing. The foreign profits will be repatriated and result in more dollars. Nice windfall again.

    Do you see how sinister the business leaders and the politicians in their pockets are? As they say, a fish starts stinking from the head.

  • Report this Comment On November 13, 2009, at 10:51 PM, mrcumming wrote:

    When will goldman sacks be prosecuted also the goverment officials who allow them to operate the way they do?

  • Report this Comment On November 13, 2009, at 10:53 PM, mrcumming wrote:

    When will Goldman Sacks be prosecuted and the goverment official who have allowed them to operate the way they have?

  • Report this Comment On November 13, 2009, at 11:23 PM, jm7700229 wrote:

    It seems that some of our fellow Fools do not understand what "too big to fail" means. It means that the cost of their failure is unimaginable harm to the economy. I don't like the fact that the architects of the meltdown get off scot-free anymore that anyone else does, but I'm not prepared to see my net worth drop to near zero in order to punish them.

    In my opinion, we have two rational choices: break up ANY organization that is deemed "too big to fail," or regulate the bejeezus out of them to prevent them from taking chances. I prefer the former and don't mind if it ends up decreasing efficiency -- an outcome I consider unlikely in any event or the biggies wouldn't be spending their money to buy out the "inefficient" little guys.

    Im a free marketeer -- right up to the point where I'm expected to sacrifice for the sake of the overall economy. Then I become a trust-buster.

  • Report this Comment On November 14, 2009, at 3:39 AM, jaketen2001 wrote:

    Amen.

    Or as some of the comments indicate, just let them fail as they will inevitably do, again.

  • Report this Comment On November 14, 2009, at 9:04 AM, ewent0 wrote:

    Banking institutions are no less a gamble at present than the stock market. Holdings by the biggest players gambling on limitless profits is the reason. Of course, these bankers aren't going to roll over and play dead just for the sake of national financial security when THEIR financial security is the priority and every decision they make is in that dimension.

    It's the "who", not the "what" that's TBTF. The "who" forget the one reality regarding money: It ALWAYS runs out. History proves this. And, history also proves that as a result of chief decision makers believing in their supremacy are the reason civilizations vanish.

    These bankers are Towers of Babel. One earthquake and they're rubble.

  • Report this Comment On November 14, 2009, at 10:16 AM, jesse2159 wrote:

    First, you presume that 535 representatives would do somethin to run afoul of lobbyists. Won't happen. Banks will do as they damn well please, and no weisel congress person will ever threaten their own existance with crossing the real deciders, lobbyists.

  • Report this Comment On November 14, 2009, at 10:31 AM, Gorm wrote:

    Amen! Amen!

    Excellent article! Sure hope Congress heeds your well articulated thoughts.

    Truth is, growing via acquisition is nothing more than a huge ego trip for CEOs!!

    Why would a nation tolerate such risk when there is NO justifiable benefit for the country as a whole?

  • Report this Comment On November 14, 2009, at 12:44 PM, thisislabor wrote:

    I think, I recall saying it somewhere a few hundred times or so to apply the anti-trust laws and break these banks up, or enforce glass steagal. so yeah I would have to say I agree with the author of this article.

  • Report this Comment On November 14, 2009, at 12:50 PM, TMFDiogenes wrote:

    "[TBTF] means that the cost of their failure is unimaginable harm to the economy....I'm a free marketeer -- right up to the point where I'm expected to sacrifice for the sake of the overall economy. Then I become a trust-buster."

    Right on, jm7700229.

    - Ilan

  • Report this Comment On November 14, 2009, at 1:03 PM, PressClub wrote:

    Great article. I have some tangential thoughts on this.

    I agree that "too big to fail" is not a valid argument to force the citizens of the US to bail out any company. During the worst of late 2008, my small company could not find second round money and folded operations. A lot of other small companies shared the same fate. What I learned from the experience is that the founders of Hewlett-Packard (Bill Hewlett and Dave Packard) were probably right in taking a pay as you grow approach to managing their business rather than to depend on the kindness of strangers (investors or bankers). It certainly would never have occurred to me as being reasonable or appropriate to go back to America and ask for public largesse to save my small business. After all, when stuff happens, one should discover why the stuff happened, (if applicable) punish the bad guys who made stuff happen, dust off, move on and start again (which is very hard when you put everything into your company, but you have to do this, as what other options does one have?).

    However, all that said, "too important to fail" might be a valid argument. If the issue is one of American national defense, then perhaps we might want to be more concerned and deliberate in our decisions to let such a company go.

    I'm not really thinking about banks here, unless the bank happens to support a defense infrastructure company. Even then, perhaps there could be an "out of band" separately managed bank expressly for those types of company directly involved in national defense. Such a bank could be held to the highest standards and regulation. After all, one of the real Constitutional duties which the federal government is actually charted with (unlike say most of the stuff it seems to have gotten its fingers into in the last century) is to provide for the common defense. After all, if the federal government cannot get that constitutionally mandated duty right, everything else will not matter.

    As to concerns over going to huge international banks for mega loans, I agree with your point and, per your example, logically an American corporation would want to support 8 American banks loaning 1 billion rather than one huge international bank loaning 8 billion, because it seems the right thing to do, all other things being equal (e.g., rates and terms being similar). However, if a corporation goes to an international bank and it fails, at least the burden of such a failure does not fall squarely on American citizens.

  • Report this Comment On November 14, 2009, at 1:10 PM, MrsCathyGF wrote:

    I agree. Big deposit percentages of the overall banking market causes political power grabbing.

    If banks are broken up, Glass-Stegall reinstated, then

    gov't can't come in and meddle. We're making it easier for them.

  • Report this Comment On November 14, 2009, at 1:13 PM, thisislabor wrote:

    there are 8,195 banks for defense contracting companies to go to, let them shop around.

  • Report this Comment On November 14, 2009, at 1:13 PM, thisislabor wrote:

    either Glass-Stegall, or break them up. one of the two.

  • Report this Comment On November 14, 2009, at 1:16 PM, halbiz wrote:

    Amen.

    I love the comparison to ship construction.

    I would also like to add the fact that Boards of Directors also receive higher compensation for meetings and other benefits when they join megabanks and they are supposedly responsible for setting reasonable CEO salaries. We can only imagine what other perks are available.

    Power corrupts. Absolute power corrupts absolutely.

  • Report this Comment On November 14, 2009, at 2:13 PM, madhat007 wrote:

    GREAT ARTICLE!

    Too big to Fail? We know the problem HELLO! wHAT IS THE PROBLEM?

    THE MODERN FEDERAL RESERVE!

    When did we decide that the fed was going to get the dual mandate? Control inflation and control growth?

    Excuse me...Now we are being asked to give them more power? this to a group that already doesn't get out enough! My idea....Form or join americans for responsible government at your state...cut back federal reserve power...remember all politics is local..

    Guess what,,,The brainiacs at the fed screwed up big time! When individuals screw up there are consequences! Greenspan you messed up..Too many days believing all your fans...The fed screwed up and now has blamed everyone else...the borrowers, the regulators...whoever...you are the biggest regulator all ready! Cut back the power! after you do that, then go to the other culprit..Wall Street!

    Time for clawbacks! Oh yea I know it's a fantasy because the TBTF banking system will put a gun to everyone's head...Oh well Mr Buffett likes it cause let me see where is his money? Oh I remember wellls fargo usbank goldman sachs american express ok you get the idea...

  • Report this Comment On November 14, 2009, at 2:17 PM, PressClub wrote:

    @thisislabor - I believe in free markets, so I don't really disagree with you, however, there must be something in place to assure their (defense contractors) protection (especially in single source contract situations) employing an appropriate trust but verify model.

    Without them and those in the US armed forces whom they support and supply, there is no free market. Thus, "too important to fail".

    @halbiz "Power corrupts. Absolute power corrupts absolutely." should be engraved in the halls of congress to remind them why the people should never allow them to have absolute power. They seem to forget that they are there to represent and protect the interests of the nation and not to rule it.

  • Report this Comment On November 14, 2009, at 3:16 PM, lewellen180 wrote:

    Re banks for critical industries ... the same argument that small banks could in aggregate provide large loans, applies to banking in general for whatever company.

    If a defense contractor does all of its business with one bank, regardless of that bank's size, if the bank goes down the contractor will suffer.

    If the contractor uses, let's say, 10 banks and one of them goes down, it's more than a nuisance but hopefully less than fatal.

    Heck, I'm a private citizen with a fairly mediocre net worth, but I still have four different banks: one "general use" for monthly expenses, one backup for general use, and two "stashes" for emergency funds. It's just not that hard to do with today's access and tracking tools. I should also note that NONE of these are "big banks" as they don't provide the service or products I need at a price I want to pay.

  • Report this Comment On November 14, 2009, at 4:09 PM, rd80 wrote:

    Just because it's fun to take the other side of an argument -

    JPM assets would break into 690 Bank of Ozarks sized institutions. If each CEO of those 690 banks were paid $912k, the total would be $630 million to replace Dimon's $19.7 million.

    Plus, the market would have to find 689 additional qualified bank CEOs. Based on recent history, I don't think there are anywhere near that many kicking around looking for work.

  • Report this Comment On November 14, 2009, at 4:35 PM, PressClub wrote:

    @lewellen180 - Excellent point. Taking responsibility for assets and spreading risk by placing assets over several institutions is a good thing. Kind of like dollar cost averaging, only different. After all, spreading risk is what insurance companies are built upon. Doh!

    @rd80 - in the spirit of taking on the other side... but just think of all the extra tax revenue the government will realize from $630 millon vs Dimon's $19.7 million! Heck, Dimon may not even make the social party A lists if that plan gets implemented. ;-)

  • Report this Comment On November 14, 2009, at 5:59 PM, velodad wrote:

    Growing pains of - The New World Oder? Laughed at by many, but rather sobering if you seriously look into the compendium of evidence.. without prejudice.

  • Report this Comment On November 14, 2009, at 6:28 PM, karenbe111 wrote:

    Bravo Fool for telling the truth about big banks and what they are doing, holding America hostage to economic terrorism. First, they lobby OUR representatives to enact laws enabling them to fleece us, and then they lobby OUR representatives to bail them out with OUR taxpayer dollars because they have gambled away their ill-gotten gains. Enough

  • Report this Comment On November 15, 2009, at 12:42 AM, secjd wrote:

    EXCELLENT ARTICLE!

    Let the ideologues say what they will - Glass-Steagall worked for decades until, by some arrogance, the "rocket scientists" at Goldman, J.P. Morgan, Lehman, etc. convinced everyone that they'd "got it all figured out" and there was 'no more risk.' And, as if the repeal of Glass - Steagall were not enough, the Justice Department basically stopped enforcing antitrust laws years ago during the so-called "Reagan Revolution;" the trend towards consolidation has been allowed to go on throughout our economy for far too long, and we all see the results.

    Glass-Steagall should be reinstated because banks should never be allowed to recklessly gamble with Federally-insured deposits; those who've posted comments arguing for allowing them to have failed are being naive; the taxpayers would have paid for the failures in order for the FDIC to be able to meet its commitments with respect to insured deposits. And, were those deposits not insured, millions of ordinary people would have been completely wiped out - I'd like to see what these people would have to say if their bank failed and all their personal savings disappeared!

    I'd also like to point out that it is all too often those very same ideologues who find "big government" so offensive; apparently, they prefer to entrust the welfare of our society to a small cartel of modern-day "robber-barons" whose only motive is profit. Washington can't find the courage to break up the banks because Washington is OWNED by the Banks. TR saw the dangerous folly of allowing big business to become powerful enough to control our government; that's why we have antitrust laws.

    p.s: As for the company needing an $8 billion loan, it would not even be necessary to go to eight banks for eight $1 billion loans - a lead, 'managing lender' would be engaged and the $8 billion loan syndicated out among a network of other, smaller lenders, as has been standard practice in the industry for decades.

  • Report this Comment On November 15, 2009, at 3:41 AM, Nu2this1 wrote:

    I am not very schooled in economic matters, but it seems to me that speculative investments should not be done with money that is borrowed for the purpose. A simple rule might be not to gamble any more than one can afford to lose. Is that idea just "Pollyanna-like" or does it make sense?

    Thanks for the excellent article.

  • Report this Comment On November 15, 2009, at 6:29 AM, jaderdavila wrote:

    too big MUST fail

    the raw fact is that dinossaurs become incontrolable

    the ceo looses sight of the whole operation

    the behemoth starts leaking money by a thousand holes

    it waits the client to change for it

    the small team is lean and mean

    it can change with the client

    it's better than 'just in time'

    it can move to INSIDE the client

  • Report this Comment On November 15, 2009, at 2:00 PM, wuff3t wrote:

    "OK, let's set a $100 billion cap on assets, and break up the top four banks into 50 smaller ones. Now that wouldn't cause any chaos, of course not. And let's punish Wells and JP Morgan for doing such a good job and acting, by and large, very responsibly, because a few unfettered morons screweed up. If Wells and JP Morgan weren't so big, and so well managed, they couldn't have rescued Washington Mutual and Wachovia, ever think of that?..."

    Yeh, but your defence of Wells and JPM rests on the assumption that they will always, always have responsible, prudent CEOs. Can we afford to take the risk of assuming that?

  • Report this Comment On November 15, 2009, at 2:57 PM, otd365 wrote:

    great artricle ! and for the most part great reader comments.

    I am fascinated by the laissez faire comments. My mind wanders off into a fantasy football game with no referees or corrupted ones, no rules and no history to decide the out come. WHAT A MESS, the human species is far to imaginative to ever be control by rules. We all know this, but we must set limits of what is fair disclosure on any intercourse where only one of the parties is in full control of the facts i.e. Banking. A business's objective is to identify market need and then try to fulfill that need. To suggect that to redress the imbalance between supplier and consumer we eliminate any rules of disclosure would increase the risk and drive up the cost to all parties to the agreement. This is not an agreeable outcome to either party. The need for an independant referee be default goes to regulators(government).What is needed is to insure the regulators are neutral and stay that way.

    The repeal of Glass-Steagall sent the referees home and left the crowd to referee the game and if your the visiting team your continued survival could be in doubt.

  • Report this Comment On November 15, 2009, at 3:14 PM, SwampBull wrote:

    Three cheers for the authors!

    Listen up, Congress!

    REINSTATE GLASS STEAGALL NOW

    If you don't, I will vote you out - and I'll advise everyone I know to follow suit.

    Stop whispering back and forth with those who invented these schemes, and do the right thing for your country!

  • Report this Comment On November 15, 2009, at 5:49 PM, tkell31 wrote:

    Well, you cant legislate morals and people at the top generally got there by looking out for number 1. Given human nature and greed I think the only check is downsizing or perhaps a sports like salary cap. The image of pigs at the trough come to mind.

  • Report this Comment On November 15, 2009, at 10:30 PM, secjd wrote:

    To Both Ron153 and Wuff3t:

    JP Morgan and Wells didn't "rescue" WashMu or Wachovia; they bought them out with taxpayer-funded "bailout" money and, quite frankly, that is part of the problem; every time over the past 20 years there has been a banking crisis, our government has responded by further de-regulating and providing the "survivors" (which has been a tenuous description at best of those financial institutions remaining) with taxpayer-paid-for bailout funds to enable them to buy out the assets of those that failed - thereby only accelerating the trend toward over-concentration and playing a major hand in creating financial institutions which we are then told are "too big to [allow to] fail."

    And, for Pete's sake, will some moderator PLEASE REMOVE the inappropriate, parasitic posts by mdooline and yutian1998? There was actually a really lively, intelligent discussion going here and it has now been desecrated by ads for counterfeit goods.

  • Report this Comment On November 16, 2009, at 1:27 PM, dwscho wrote:

    I worked in the banking industry my entire career. I worked on the asset mangement side of the bank handling money for wealthy individuals. However, I was aware of what was going on throughout the bank. I thought the repeal of Glass- Steagall was good for the industry when it was repealed providing new income opportunities and also allowing customers to obtain more of their financial services from the same institution. However, it became readily apparent when the lenders starting making riskier loans and not asking for appropriate documentation that the industry was on a course of self-destruction. It was even more obvious when the government backed the risky lending activities that a catastrophe was imminent.

    Unfortunately for the industry, they allowed greed and stupidity to spoil a good thing. They weren't satisfied with being able to serve customers better. They ventured into more risky activities where they lacked the knowledge to effectively manage those new business activities. Also, the incentive compensation offered management and some employees encouraged excessive risk taking and was not tied to performance.

    I believe the industry was given a chance to spread into new business areas and improve customer service and their potential earnings stream. In my opinion, the industry blew the opportunity and doesn't deserve a second chance. I believe it's time to re-institute Glass Stegall. I also believe it's time to force the largest banks to divest themselves of business activities and markets until they return to a size which does indeed allow them to fail as a result of irresponsible business practices without becoming a burden for taxpayers and the financial markets.

    Congress needs to deal with this mess now.

  • Report this Comment On November 16, 2009, at 1:43 PM, wuff3t wrote:

    secjd,

    Yeh, I know - I was quoting Ron153's remarks back at him and pointing out why I disagreed...

  • Report this Comment On November 16, 2009, at 5:25 PM, tmorella wrote:

    While this article provides an admirable idea, to me, the best advice is what SuperPicks wrote earlier. Once the first stimulus (aka TARP) occurred, my wife and I decided that, if an entity is deemed "too big to fail," we would take it upon ourselves to help it to not be "too big." I call it one of my Patriotic Duties. We immediately pulled out of our Chase and Bank of America accounts, and opened an account with a local bank who had not accepted TARP. In the end, we actually found a bank account that reimburses us for our withdrawals at non-bank associated ATMs (since one of the main reasons for using Chase/BoA was to have little or no ATM fees, this was a perfect result).

    As an aside, the discussions with the bank managers, especially at Chase, were primarily of incredulity, almost to the point of arrogance, repeatedly expressing astonishment of our reasons for closing the account (we merely mentioned that we were reducing our TARP exposure and closing all accounts with any such institution).

    Further, once we heard that GM and Chrysler were supposedly too big to fail, we decided that any future car we buy will not be manufactured by these entities.

    We have since closed all credit card accounts with TARP entities, and, as of this coming Friday, will leave Wells Fargo as the mortgagee for our house. We will be, in the paraphrased words of Dave Ramsey, "TARP Free."

    In addition to recommending that all Fools dispose of business with such entities (you can find a list of Federal fund receiving companies at propublica.com), I would also like to see the Fool cease the use of Bank of America as its credit card provider.

    While legislation to prevent TBTF institutions may work, lets not forget that the financial industry, just prior to the start of the present recession (and in contradiction to the false political speak coming out of Washington) was actually one of the most regulated industries out there. Thus, perhaps the best way is a combination of legislation and citizen action.

  • Report this Comment On November 16, 2009, at 5:29 PM, JustWhoIAm wrote:

    Is it "Too big to fail" or "Big enough to reward failure"? I think that 2008 proved it was the latter.

    Keith

  • Report this Comment On November 16, 2009, at 5:30 PM, JustWhoIAm wrote:

    Is it "Too big to fail" or "Big enough to reward failure"? I think that 2008 proved it was the latter.

    Keith

  • Report this Comment On November 17, 2009, at 3:59 AM, secjd wrote:

    tmorella,

    While your actions certainly are commendable and smart (with the exception of my checking account, which was opened under my then employer's private banking arrangements, I myself have always followed a simliar strategy), unfortunately, I'm not sure how realistic this is on a mass scale; the problem (as I'm sure we've all experienced multiple times by now) is, you open an account with one financial institution and the next thing you know your account has been bought out by another - and another - and then another, until you find yourself at the mercy of some behemoth you never intended to do business with. This has happened to all of my credit card accounts (except for Discover), all of my brokerage accounts, bank accounts and even my 401K accounts - except for the checking account with the behemoth that still exits - and actually started divesting itself of most of its extraneous subsidiaries several years ago after realizing what a complete disaster its "diversification" plan was proving to be.

    So, while you make a noble - and logical - case for the ability of unfettered "free markets" to correct themselves, the problem, unfortunately, is that, thanks to the perpetual ingenuity and resourcefullness of aspiring monopolists and oligarchs, "free markets" don't always work that way...

  • Report this Comment On November 17, 2009, at 9:56 AM, tmorella wrote:

    secjd:

    I agree that your prognosis does pose a problem to my free market banking theory. Further, this has happened to me - in industries other than financial (telephone service immediately comes to mind). We (my wife and I) actually thought about this possibility as well, and the bank that we chose has been around Chicago for more than a hundred years; is privately-owned, and, so far, has rebuffed all offers (we asked them specifically of this issue). Obviously, past performance is no guarantee of future performance, so we are taking our chances.

    My thoughts are that, if this did happen to my local bank, we would just go elsewhere. And keep going elsewhere. Logistically, yes, this would incur extra work and eat up time. However, to us, we feel it to be the right thing to do. Plus, with the Internet (and electronic transfers and the like), the number of "local" banks at our disposal has increased dramatically (note that my initial post advocated only for the divestment of business with TARP-funded entities, and not to solely "go local" - I'm not too concerned with knowing my banker on a face-to-face basis). In actuality, my credit card is now handled out of a bank in Nebraska, and I have secondary investment-type account in Massachusetts that has a debit card based out of a Missouri bank.

    Who knows, we may get to a situation where the possibility you forecast does not allow us to change banks. It is a distinct possibility, I agree. However, given as disgusted we are over the past 8.5 years of complete fiscal irresponsibility coming from Washington (including an utter disregard for the economics of the free market), my wife and I are willing to keep doing this as long as we can.

    Also, keep in mind, my original post did not mention this "citizen action" as the only solution. I fervently believe that the fall of Glass-Steagall has helped to lead us into the recession we currently are enjoying. And, while I am definitely a free market thinker, some regulation of the financial industry is necessary. Further, I also think there should be some sort of "separation of bank and state" theory that should be followed - no federal funding for any financial institution in the future. In our capitalist society, failure is, in fact, an option. While some may experience pain if a Chase or BoA goes under, I seriously doubt whether it would bring down the entirety of the country. Enron didn't. Standard Oil didn't. And I'm sure I'm missing a large conglomerate here.

  • Report this Comment On November 17, 2009, at 4:36 PM, shawkii43551 wrote:

    What we need to do is get all of the pacs, lobbiest and special interests out of Washington and get the polititians listening to the voters again.

    Our political process is too large and takes to much for granted. The Federal Government has taken on more control than it was designed to do. Why does the city I live in need to get a Federal Grant to hire police? Because so much of our tax dollars are going to Washington that we are voting down local taxes, so that we can aford to live.

    Look what happened to Ma Bell. Broken up and split in pieces that made each of us pay higher phone bills because they were subsidizing a large portion of their business with fees from the comercial portion. Now the phone business is getting back to larger and larger companies. So, how much good is it to break the big companies up if they just keep getting bigger, just in a different form?

  • Report this Comment On November 17, 2009, at 8:05 PM, DoctorDum1 wrote:

    Excellent Article!! and TMTC great commentaries. As I wrote responding to a previous article: '...if it is Too Big to Fail, then it is TOO BIG TO EXIST.' and '...there ought to be a law!', etc.

    yachtboy9's comments about Big Bank Credit Cards also should be sent to members of Congress.

  • Report this Comment On November 17, 2009, at 10:58 PM, MikesMoneyTalk wrote:

    Michael Jon Byers Lubbock Texas I agree Excellent article.

  • Report this Comment On November 19, 2009, at 12:47 PM, sid2286 wrote:

    Great article. Keep up the good work.

  • Report this Comment On November 20, 2009, at 8:26 AM, steveballmer wrote:

    Microsoft is too big to fail!

    http://fakesteveballmer.blogspot.com

  • Report this Comment On November 20, 2009, at 10:18 AM, spendamony wrote:

    Large banks are more efficient but they have to be regulated. Who feels comfortable with their money in the bank these days? Think small banks can't fail? If we have to be responsible for their mistakes lets make them do business in a manner that reduces the risk to us. Legislate a minimum liquid asset level above all possible liabilities. Legislate a strong balance sheet requirement where ordinary people do not have to worry about putting their money in the bank.

  • Report this Comment On November 20, 2009, at 10:44 AM, mnjones wrote:

    It's time to end soft-money political contributions, and the rest will take care of itself!

  • Report this Comment On November 20, 2009, at 11:00 AM, JCoeur wrote:

    You do the big bankers too much honor by refuting their 'arguments'. They have no arguments. As highly interested parties (and how) with no scruples (scruples are for little people), they simply have 'big lies'. The argument for breaking up these monopolies was made and won a century ago. There is no need to re-invent the wheel, or pretend that there are two sides to the story, thereby allowing the oligarchs time to regroup and exert their veto power over the interests of $350 million people.

  • Report this Comment On November 20, 2009, at 11:27 AM, aljohnlll wrote:

    Bullseye!! This was an excellent article that every politican should read and act on but that's like saying the cat wouldn't swallow the mouse.

  • Report this Comment On November 20, 2009, at 11:54 AM, iverbro wrote:

    Separation of regular banking and investment banking and all of its ramifications would be an easy first step, but how do divide up a bank with 8,000 branches? Without changing one of my credit cards, there have four name changes in around ten years. Do we reconstitute the old banks? The article presents the problem in a clear fashion, but Humpty-Dumpty couldn'y be divided into a half dozen smaller eggs, perhaps an omelet?

  • Report this Comment On November 20, 2009, at 1:21 PM, efmagowan wrote:

    Well, nothing else has worked. I say it's time for the torches, pitchforks and vengeful mobs.

  • Report this Comment On November 20, 2009, at 1:35 PM, Putttn wrote:

    Great article and about time. We do need a good old 60's revolt against the crooks that have invaded our government and banking/wall street institutions. There are many books, blogs etc etc but no action yet to force their hands. I have written my Congressmen and everyone I can think of who might be able bring this criminal situation to light. Even Oprah!! Until we all organize in a big push it all amounts to a bunch "bitching". Ellen Brown's Web of Debt blog as well as "End the Fed" efforts are getting some attention but we need more people to understand what's happening to them. I sure applaud you for getting this to our Cpngress.

  • Report this Comment On November 20, 2009, at 1:58 PM, slpmn wrote:

    The most amazing thing about this debate is that there really isn't one! Everyone from hemorrhaging liberals to Ayn Rand thumping reactionaries agree - too big to fail is too big to exist! This isn't a free market issue at all! If the market can't punish bad decisions, the market is broken, and that's what we have here. As many have noted, the only real barrier to action are the lawmakers in thrall to the banking lobbyists and an administration staffed at all levels with people from the industry. Those are tough to get around, but in the end, I have to believe major change is going to happen and the only question is when and what form will it take. Its a huge issue and great job to the fool staff for keeping up with it.

  • Report this Comment On November 20, 2009, at 2:35 PM, cawbs wrote:

    As a small business consultant and bookkeeper I have witnessed too often the arrogance of the banking industry when dealing with my client's business banking needs. Additionally the way in which these large banks pile on the overdraft fees and additional penalties while still allowing their customers to use their debit cards is unconscionable. Trying to talk to a local branch of one of these megabanks is impossible. They simply smile sheepishly and hand you a business card with an 800 number. Enough is enough. Just on these small issues alone, the lack of regulation of the banking industry has got to end. Bring back Glass-Steagall at a bare minimum.

  • Report this Comment On November 20, 2009, at 6:17 PM, elCoz wrote:

    Morgan still has the WaMu shareholder lawsuit pending and going forward.

    It's the political-economy, stupid. We all knew it was a bad idea to let banks, brokerages, insurance companies and sears all merge back in 1980 but Dems sold out. ye reap what ye sow.

  • Report this Comment On November 20, 2009, at 10:41 PM, spiralclimb wrote:

    I simply will not vote for any candidate that opposes breaking up these monsters.

  • Report this Comment On November 20, 2009, at 11:57 PM, cooperbry wrote:

    I agree. Break them up! No reason for their existence. They're not too big to fail anymore. We should be calling them "too big to exist"!

  • Report this Comment On November 21, 2009, at 10:51 AM, tlippert362 wrote:

    Anybody with two braincells to rub together knows that deregulating is a bad idea in cases like the bank industry and a significant portion of what led to this disaster.

    Xetn, your argument doesn't hold any water. The fact that the fed has been given too much power is hardly an argument for deregulation. It's an argument for splitting the powers up into institutions which are reasonably equipped to handle them. And to ensure that the institutions have adequate oversight to ensure that they're using the powers wisely.

    The list you posted is largely mooted by the fact that the Feds, particularly over the last decade or so, were slow to use the powers they had. Result very similar to what we would've gotten without any regulations.

    Smaller banks are easier for the FDIC to seize and spin off when they get into trouble. They're easier to monitor for trouble and should one go down completely smaller banks take down fewer people's money. As well as smaller banks being better for the free market to function with.

    I tend to find the fool opinions to be way too far right, but in this case they're absolutely right, there just isn't a valid argument to be had for the status quo.

  • Report this Comment On November 21, 2009, at 12:49 PM, elsiejay wrote:

    Spot on... we also need to find a way to regulate the regulators.... (?)

  • Report this Comment On November 21, 2009, at 7:13 PM, kmc45 wrote:

    In a capitalist system failure is an important element, but the failure of one company should not do significant damage to the rest. Another problem is that those who make the most money (individually) from these institutions are not the ones (Joe Shareholder) who suffer the most when problems occur. Now that these companies are no longer run by their owners, anyone in upper management should have clawback provisions in their contract.

    You might think of bringing back Glass-Steagall and adding other regulations to prevent stupid conglomerations as a type of insurance. It may lower your potential return, but it protects you when times are bad.

    For those who say that the "market" should be the sole regulator, I ask: Would you play a football or basketball game with no rules and no referees, where the players decided amongst themselves what is right or wrong? Can you guess who would make the decisions? Capitalism is a great system, but can only function well when there are sensible rules and competent referees.

    I would advise care when using numbers. A quick calculation (using your numbers) shows that the JPM CEO's compensation in 2005 was 0.16% of earnings, while the CEO of BoO received 1.00%. What is truly disappointing is that in 2008, when earnings were way down, those percentages rose to 0.49% and 2.62%, respectively.

  • Report this Comment On November 22, 2009, at 10:18 PM, indigodenim wrote:

    It seems so easy to unwittingly become a gambler when all you want to do is invest. Why is it legal to call insurance something other than just what it is? Why is it legal to buy these when the buyer is not part of the transaction being insured? My house burns and causes a $300K event, but because of CDS "insurance" the market sees a $1 billion event.

    Why is it legal to layers bad apples on the bottom and put the good ones on top, and then get a ratings agency to declare the barrel is A OK (just sell it fast as you can). Why is it legal to accept a level of risk that you cannot possibly pay if bad things happen? How does holding these policies make anyone feel better knowing the transaction can never happen.

    And, what do we do when every major bank is playing in the poker game and one hand wipes most of them out? And who will pay the side bets of all the spectators when they realize they don't have the ability to pay each other all the bets they made?

    Why can't we just declare all the side bets null and void? And why can't we require the parties to be responsible if there is a claim.

    Why after all that has happened does the general public still not understand what Wall Street has done and why it was so wrong? And why are they not sitting in jail somewhere?

    I guess we do need to regulate things that fly in the face of common sense.

    indigodenim

  • Report this Comment On November 23, 2009, at 6:32 PM, gesheddc wrote:

    "Too big to fail": Break them up!!! Can we have a

    petition sponsored by Motley Fool which we can all sign?

  • Report this Comment On November 24, 2009, at 2:39 AM, Randin wrote:

    There is no logical answer of course. That said, the groups that had all of the protections put in from the last depression are still around and the last thing they want is them back in place. I imagine Goldman Sachs would rather not be regulated let alone broken up....

  • Report this Comment On March 25, 2010, at 6:50 PM, sparker2005 wrote:

    So, Godlman Sachs plus Citigroup and three other banks "hold 97% of the industry's notional derivative exposure."

    Before the Federal government unloads its shares of Citigroup, will anyone disclose Citigroup's derivative exposure?

    Will another part of the crisis be wasted?

  • Report this Comment On April 16, 2010, at 11:46 AM, thefreakingenius wrote:

    Well I'm not Ayn Rand, but I have a nearly rabid belief in the power of the individual and in the necessity of a government and a financial system that enables, even facilitates the individual effort to succeed. That seems to be the essential difference between democracy and communism (not that ANY of the totalitarian dictatorships on the face of the planet have even passing familiarity with the tenets of communism). The problem is that the system has been hijacked by a group of self-serving sycophants who claim to be free wheeling innovators and therefore entitled to grotesquely enormous compensation. They are not inventive, nor are they particularly intelligent (other than in a sly and cunning way). They all head up PUBLIC COMPANIES that are bound by rules that were formed hundreds of years ago and which did not forsee companies where ownership is so fragmented that a big shareholder owns .5%. The inmates are therefore running the asylum!!! These are paid employees!!! They are hired guns!!! They work for wages!!!! They do not create wealth - they only consume it. They DON'T own the companies - the SHAREHOLDERS own the company!!! So let's get real. Public companies need to be subjected to the rule of 10 - the highest paid employee cannot be paid more than 10 times the lowest paid - in total compensation on a yearly basis - including arrangements for pension income. Then retained earnings should be designated accordingly - 50% for debt reduction and/or growth, 25% for employee incentives and 25% for dividends. Now just before the truly rabid rightwingers start to froth at the mouth they should remember - if the are TRUE TO THEIR IDEOLOGY they should be supporting the shareholders NOT THE EMPLOYEES. And, this rule would NOT apply to private corporations - owned and created by inventors, innovators and visionaries.

  • Report this Comment On June 17, 2010, at 11:43 AM, davidrj54 wrote:

    Sometimes I feel the American Nincompoop Capitalism works like this: The People are the the Parents. The People have Children. The People do not want to mind their own children. So they pass them to the baby-sitter. The baby sitter is the Government who knows everything about the the children - strengths, weaknesses, opportunities and threats. So to be able to keep his/her baby-sitting job he/she partners with the Cook, who is the Fed Chairman, so that the children can be kept stupid, lazy and fat while they can empty everything in the house except the kitchen sink. When the parents return home due to a recession, they find the house in topsy turvy, the children stupid, lazy and fat and everything stolen. Now who is to be blamed, the children, baby-sitter, cook or the parents?

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1043042, ~/Articles/ArticleHandler.aspx, 10/25/2014 2:40:14 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement