What "Too Big to Fail" Means

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Last Friday, my colleague Ilan Moscovitz and I laid out why we think there's no excuse not to break big banks apart, ending "too big to fail." We specifically jabbed at JPMorgan Chase (NYSE: JPM  ) CEO Jamie Dimon, refuting what we thought were unfounded defenses of the megabank culture.

That same day, by pure coincidence, Dimon penned an op-ed in the Washington Post, again defensively writing:

J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail ... a failed bank's shareholders should lose their value; unsecured creditors should be at risk and, if necessary, wiped out.

No kidding, kind sir. No one -- even the most hardcore defenders -- has ever suggested that shareholders shouldn't be punished. I couldn't care less about the shareholders of these companies. What I care about is collateral damage to the rest of the economy. That's what "too big to fail" is all about.

Everyone wants banks that screw up to fail. That's capitalism. But we don't want the resulting punishment of those who didn't screw up. That's just insanity.

When a normal bank fails, its shareholders and some creditors are out of luck. Those who willingly took the risk pay the price -- as they should. But when a megabank fails, you, me, and everyone else feels the pain, as the entire global economy spirals into freefall -- just like it did after Lehman Brothers failed. Those who were a million miles detached from the bank still paid a price.

A commenter to our article suggested that suppressing the scope of banks runs contrary to the free market. "I guess you don't believe in free enterprise, and ... neither does the federal government," the poster wrote. This couldn't be further from the truth.

Economic freedom relies on individual risk-taking. In our current financial system, the stupidity of a few reckless bankers and traders creates unintended collective risk-taking. It's as far from freedom as you can get. We want a system where bank failures wreak havoc on stakeholders of just that bank, and nothing else. You can still screw up; just leave me out of it. That's freedom, and we're big fans of it.

Charlie Munger, who has mastered the English language in amazing ways, said it best:

People really thought that giving a predatory class of people the ability to do whatever they wanted was free market enterprise. It wasn't. It was legalized armed robbery. And it was incredibly stupid.

Dimon, in his op-ed, suggests creating a regulatory structure able to handle the failure of megabanks, the same way the FDIC seizes and sells failed commercial banks. This sounds good in theory, but it's seriously flawed. A pillar of the FDIC system is the ability of larger, stronger, banks to purchase and absorb failed ones. When Washington Mutual failed last year, JPMorgan was right there to scoop it up. The transition was nearly flawless and pain-free. But this was only because JPMorgan was so large that it could digest WaMu's $307 billion in assets with relative ease.

What happens when JPMorgan, Bank of America (NYSE: BAC  ) , or Citigroup (NYSE: C  ) -- each with about $2 trillion in assets, and gazillions of dollars in notional derivate exposure -- fails? There isn't a single private institution in this country that could absorb a balance sheet that large -- except the federal government, which is why we experienced last year's bailouts.

Having a system where huge banks can safely fail relies on the presence of huger banks to absorb them. But this scenario quickly spins out of control: For each megabank, there has to be a bigger megabank around to save it, and an even bigger one that can save that one. Ultimately, the solution to the problem becomes the problem.

Off the top of your head, you can think of at least a half-dozen "too big to fail" institutions. JPMorgan, Citigroup, B of A, Wells Fargo (NYSE: WFC  ) , Goldman Sachs (NYSE: GS  ) , Morgan Stanley (NYSE: MS  ) , AIG (NYSE: AIG  ) ... maybe a few more. The failure of any one of these institutions would come down to two choices: Either put the entire economy on the brink of collapse, or be bailed out by the government. Either choice is both anti-free market and maddeningly unreasonable. That's what "too big to fail" means, and why it needs to end.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (46) | Recommend This Article (80)

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  • Report this Comment On November 17, 2009, at 12:57 PM, capitalist12 wrote:

    I believe Jamie Dimon is right although everyone wants to think about the good old days as a rationale for stability in stead of looking to see why things failed even then.

    The rationale I have are examples of this is done in non-financial companies - an example is companies like Adobe, CISCO, Oracle for example bought companies that compliment their business to become bigger than that are just plain buyouts of competition.

    Banks are the same, they need to add more businesses to their portfolio as they become bigger (that's what gets a company to become big). How come Pepsi recently bought the bottling and nobody said it is getting even bigger. The reasoning for cutting banks to be small is plain non-capitalististic view and we might as well let the government run all the companies now.

  • Report this Comment On November 17, 2009, at 1:16 PM, madmilker wrote:


  • Report this Comment On November 17, 2009, at 1:44 PM, megabuc wrote:

    CITIBANK HAS BEEN NATIONALIZED...ALL SHARE HOLDERS WILL BE CLEANED OFF THE CHARTS...Citibank is involved in accepting KICKBACKS on investments and has been BID RIGGING in the manipulated sales of MUNICIPAL DERIVATIVES. Citibank is all FRAUD AND LIES. WHERE ARE THE REGULATORS? IN CITIBANK'S POCKET..........PUT ALL THESE CLOWNS IN THE CAN WITH MADOFF AND THE SNAKE. Wall street must be cleaned up of all these millionaire crooks.

  • Report this Comment On November 17, 2009, at 2:21 PM, ed1007 wrote:

    >>Those who were a million miles detached from the bank still paid a price.<<

    So.... Boo Hoo. Stuff happens, sometimes through no fault of your own. Be prepared. Life is a lot easier that way.

  • Report this Comment On November 17, 2009, at 3:53 PM, akutach wrote:

    Capitalist12 it would seem you're not listening or care, but the problem is not comparable to Pepsi because when Pepsi fails we either get sad or go get a Coke.

    If the banks are able to interlace investments with assumptions of limited demand for liquidity in their valuation so that assets cannot be orderly resolved in a mega failure, and the very act of default on their obligations sends a cascade of further default and illiquidity to counterparties that could not have known the risk, then a crisis occurs because everybody questions their faith in a monetary system that is founded on faith alone.

    Perhaps the issue is not one of banks' capitalist right to profit and grow from that profit, but that they are the chosen executors of our monetary policy, much to their profit.

    Morgan, how much of the problem is too-BIG-to-fail versus too-OPAQUE-to-fail? In other words, how much of the Lehman fallout had to do with its size compared to the impact of panic due to the uncertainty that arose (who would be next, imploding derivatives market, etc)? Could part of the solution be to demand more transparency? If we could demand large-scale, but comprehensible risk taking then when one bank fails, people/government would be less surprised and more quickly and accurately assess the condition of other banks and to what degree they will be impacted. Isn't this the proposed role of a systemic risk regulator? I question the government's ability to implement such a regulatory body over the long haul and that regulator's autonomy, but that to me seems a more viable alternative to simply capping bank size which seems like a crude and potentially ineffective tool for defraying risk.

  • Report this Comment On November 17, 2009, at 4:03 PM, McCrikey wrote:

    It means the economic stability of big business is the governing principle of our country.It means national socialism.

  • Report this Comment On November 17, 2009, at 4:18 PM, dcrednek wrote:

    I think that Jamie Dimon is, for the most part, a good banker and an exceptional business leader. However, his op-ed in the Post is just plain irrelevant, as was pointed out in this article. It's about collateral damage, about healthy businesses being broken in the fallout of a larger business collapse. To that end, it is the regulator's responsibility to review the size of an entity relative to the systemic risk it poses in the scenario of complete collapse. Not all businesses need to be subjected to this test, but a few should be: banks, insurance providers, rail, and utilities to name the easy ones. Take a look at what the UK government did in recent weeks to assuage their TBTF problems. We here in the US should have the courage to follow suit. We'll all be better off over the long-term.

  • Report this Comment On November 17, 2009, at 4:20 PM, MADACASTO wrote:

    Nah, it just means SSDD - same *stuff*, different decade. Live long and prosper 'merica!

  • Report this Comment On November 17, 2009, at 4:23 PM, dm2000dm wrote:

    Just wish CEO's at FNMA, FHLMC, Merrill Lynch, Bear Stearns, Wamu and the list goes on got to keep their huge pay over the last 5 years prior to going bust.

    That is the real injustice here.

  • Report this Comment On November 17, 2009, at 4:54 PM, clydejazz wrote:

    I hope this article gets mailed to all our congresspeople, too.

  • Report this Comment On November 17, 2009, at 5:23 PM, 0819fool wrote:

    I thought someone was going to write something like "Too Big to Fail means that if the banks fail, the governments fail".

  • Report this Comment On November 17, 2009, at 5:42 PM, AJ30 wrote:

    There are two easy fixes for this problem. 1.Separate "Investment Banking from deposit banking by pasing an updated Glass-Steagall Act, and; 2. If a bank exceeds a given size remove the FDIC coverage from all deposit accounts. Dimon bought WaMu for its depositor list.

  • Report this Comment On November 17, 2009, at 5:45 PM, Dannysea wrote:

    All of this makes me think of the article in USA front page several weeks back about the new (world?) money that was being decided upon by the White House. It could be argued this new global currency could be the super banks to scoop up the big boys.`

    Things are as they are; too little, too late; coulda, woulda, shoulda? Looking at all the foreclosures that have not been tapped yet, the cash flow crisis of the banking industry is plummeting through, the national debt and free-spending continuing, there has got to be opportunities out there.

    Think the idea too far fetched? What is Obama talking to China, in China this week, about really?

    I think this and the previous pres are both keepers of secrets from the American people. Yes, there should be untold things, but I think History is not going to look favorable on this generations American Presidents; even if they get their way and have and will force their view on the world.

    Are we in danger? Then give it to us in terms that Reagan did with simple graphs and slices of the pie, etc. Or methods of the day people can understand, even if they have to oversimplify.

    America is made up of mostly the refuse of the world's population. We are a gritty, hunker-down, carry-your-brother-on-your-back, we-will-work-through-it people.

  • Report this Comment On November 17, 2009, at 5:48 PM, LessGovernment wrote:

    To big to fail is the Frankenstein of banking. It was brought to life in large part by the repeal of Glass Steagall, and by the Commodity futures Modernization Act, both of which were the products of a very self interested and greedy for campaign funds Congress.

    Saving Too Big to Fail by definition means a delayed economic recovery for small businesses and jobs, because saving these monsters requires time (measured in years) to allow them to "earn" their way out of oblivion by borrowing from the Fed at 0% and buying Treasuries that pay interest. In large volumes, over time, they will earn enough to once again write down the bad assets on their books, currently hidden from view due to the repeal of Mark to Market - again, an act by a greedy and self interested Congress.

    In the mean time, we wait through 2007, 2008, 2009, and most likely all of 2010 for jobs to be created while businesses starve for capital, while banks raise credit card and other consumer credit rates, and while, due to the lowered demand, a housing debacle turns into a commercial real estate debacle, and unemployment, and deficits go through the roof.

    Tinkering with oversight is simply the action of the greedy little bastards in Congress again trying to look like they are doing something while not offending the institutions that provide so much campaign funding for them to keep their greedy little piggy snouts in the trough that is Congress inside the beltway.

    Folks, it is time to roast some pig. Fire them all. Never Vote for an Incumbent.

    As to Too Big To Fail, simply tax it out of existence. Give these Institutions two choices. Abide by the spirit of Glass Steagall (bring it back) and there is no limitation on size, or not abide by Glass Steagall if you want to, but once that election is made, it is made for keeps, and income taxes slide on an increasing scale with Asset size up to 100% of earnings, and the Boards of Directors and top management are held liable to the extent of their personal assets for their decisions that put risk on to the taxpayer, and stock holders and all lenders are at risk for their entire investments without question, without government intervention. Doing this will put sanity back in the board rooms and create the atmosphere where capital will be hard to obtain for risky banking activities. Unless you want to go through worse than what we are experiencing today in 10 to 15 years, drastic steps have to be taken and what I am suggesting here is but two of many that are needed.

    Currently Japan is in debt in excess of 200% of GDP and rising. Japan is the largest buyer of Treasury Notes from the US. The large banks in the US are the largest buyers of Japan's debt. If Japan defaults, no make that when Japan defaults, it all comes crashing down unless proper and unambiguous steps have been taken in time to avoid the default of Japan from causing a total global economic collapse.

    Too Big to Fail is right now holding too much Japan debt. You can not tell them to not buy it, they will not listen. You can not make them act in a way that is responsible, they have already proven that. They will act in self interest to make money for themselves regardless of the damage to the economy and the taxpayer.

    So you have to Kill Too Big to Fail, and do so now. Japan's debt is projected to reach 300% of GDP within 15 years, and at that time, interest on their debt will exceed all tax revenues collected, which is basically the point of default, although actual default could be postponed for a little while longer. Japan is not alone. All around the globe are these Too Big to Fail banks buying and holding debt backed by nothing. And Bernake can't see any bubbles. What a fool (not a Motley fool either).

  • Report this Comment On November 17, 2009, at 5:58 PM, dcstrade wrote:

    I would take a closer look at Lehman Brothers' failure "causing the subsequent freefall" before accepting it as fact and writing about it. That really wasn't the case. I think fearmongering by political leaders, and the intervention itself were more damaging than Lehman Brothers' collapse.

    The unknown depression of the early 20's involved no intervention at all, and it was so short-lived, that it was virtually unheard of. Compare that to Hoover and FDR's socialist policies and the Great Depression that we all know and love, and you have reason to go back and check the facts. Read "Great Myths of the Great Depression" from the Mackinac Center think tank for public policy in Michigan. "Hoover did nothing" is the top myth being propagated today. Where it comes from I have no idea... probably politicians.

    Too big to fail is an easy problem to solve... let them fail. It's that very notion of failure that makes capitalism what it is. Without it, you have crossed a line towards socialism which will inevitably breed communism. Interesting article in the UK's telegraph today.... sales of Adam Smith's "Wealth of Nations" are at record levels in China, while Marx's "Communist Manifesto" is booming here in the West.

  • Report this Comment On November 17, 2009, at 6:00 PM, dcstrade wrote:

    I would take a closer look at Lehman Brothers' failure "causing the subsequent freefall" before accepting it as fact and writing about it. That really wasn't the case. I think fearmongering by political leaders, and the intervention itself were more damaging than Lehman Brothers' collapse.

    The unknown depression of the early 20's involved no intervention at all, and it was so short-lived, that it was virtually unheard of. Compare that to Hoover and FDR's socialist policies and the Great Depression that we all know and love, and you have reason to go back and check the facts. Read "Great Myths of the Great Depression" from the Mackinac Center think tank for public policy in Michigan. "Hoover did nothing" is the top myth being propagated today. Where it comes from I have no idea... probably politicians.

    Too big to fail is an easy problem to solve... let them fail. It's that very notion of failure that makes capitalism what it is. Without it, you have crossed a line towards socialism which will inevitably breed communism. Interesting article in the UK's telegraph today.... sales of Adam Smith's "Wealth of Nations" are at record levels in China, while Marx's "Communist Manifesto" is booming here in the West.

  • Report this Comment On November 17, 2009, at 6:10 PM, regulatethem wrote:

    I agree. Stop the big banks from being too big to fail. We need antitrust rules to limit the total risk or exposure, limiting use of derivatives or re-pooled mortgages. Real assets should be tied to real value, regardless of market bubbles. Market evaluations must stay on top of assets held and their associated values.

  • Report this Comment On November 17, 2009, at 6:27 PM, Howard1ii wrote:

    Instead of "too big to fail", this discussion should be about "too big to manage," In a lot of cases i.e. WaMu, they grew too big too fast, to have the appropriate level of internal controls. On the other hand, a local bank makes a loan, the president of the bank sees it, and understands the local economy enough to understand the risks.

  • Report this Comment On November 17, 2009, at 6:34 PM, xetn wrote:

    We do not need to limit the size of banks or any other enterprise. We do not need government intervention or regulation that does nothing except add unnecessary expense to operations for compliance and helps drive companies and jobs off shore. I do not understand the thought processes of people on this site, who presumably are interested in making a fortune in trading stocks; weeding out the bad companies, and then offering up the nonsense of supporting "too-big-to-fail".

    The article states that we would all suffer needlessly if we allowed these huge banks to fail. The reason given is there is no one "big" enough to pick up the remainders. The fallacy of that is we don't need one bank, but multiple banks to be entrusted with what remains after bankruptcy. Just like many banks participate in large loans and have been doing so for next to forever.

    As for hurting everyone, what do you suppose bailouts do to the taxpayers? Do you think it helps them, or don't you even think about them? And I though fascism was dead at the end of WWII, but it is alive and well with the current administration and it seems the support of the "Fool".

    The best protection for consumers is not government regulators or interventionism, but the careful analysis of the individual seeking the best places for making purchases. Government's interference, such as SEC, FDIC, the Fed, etc. creates moral hazard and nobody feels the need to take responsibility for their own actions. This includes the bankers, knowing that the government will always bail them out for their incurring unnecessary risk-taking.

  • Report this Comment On November 17, 2009, at 6:39 PM, ironyworks wrote:

    If an institution becomes " too big to fail"

    Then it is a national security risk!

    We need to break those companies down to spread the risk and re-induce competition where it was all bought out.

    The same thing that holds for banks, clearly applies to insurance companies ( health insurance included).

    Otherwise it would be prudent to simply nationalize them and clean them up...( grin)..


  • Report this Comment On November 17, 2009, at 6:51 PM, foolishdoog wrote:

    your acting as if the failure of Lehman Brothers was NOT a prerequisite to the greatest buying opportunity in a lifetime. deflation is liberty .

  • Report this Comment On November 17, 2009, at 6:52 PM, foolishdoog wrote:

    deflation is liberty.

  • Report this Comment On November 17, 2009, at 7:04 PM, JaneBond wrote:

    For once, I couldn't agree more. Too bad Obama is one of their stooges just like the rest of our elected officials.

  • Report this Comment On November 17, 2009, at 7:52 PM, FleaBagger wrote:

    Mr. Housel is assuming that in capitalism, bad things only happen to bad people or rampant speculators (perhaps the same thing in his mind). Or he is at least assuming that we can make it that way without losing the best parts of capitalism. Actually, consumers are the people who win in capitalism. Businesses fail so that consumers can succeed. The capitalists start over with their diminished capital, the employees find other jobs or retire to live on their savings; but the consumers (the 98-99.9% of people outside of that business and its fellow "buggy whip makers") win, as they always win until government starts intervening against them for the sake of jobs or at the behest of bankers who selflessly see the need for themselves to be regulated.

    In unregulated capitalism,

    Prices always go towards zero;

    Quality always goes towards maximum satisfaction of the customer's needs or desires;

    Customer service always pleases the customer, regardless of the convenience of the employee;

    Prices go up only when there's a quantum leap forward in quality (as when the car replaced the horse-drawn wagon), and the trend resumes its plunge towards zero;

    to note an exception to these trends in capitalism is to note an example of government interference, i.e. not true capitalism.

    So bad things happen to good people, and there's nothing you can do to prevent it without destroying capitalism. And you'll find you haven't prevented as much bad as you've caused. Just let companies fail, let people get laid off, let mid-sized companies (small-cap public companies) that were overleveraged go bankrupt for want of affordable refinancing. Let hundreds of thousands of people lose their jobs, because ten years from now, we'll be living with the consequences of what we do today, and we'll be better off if we don't sacrifice capitalism to promises of comfort and status quo.

    Seeking to avoid responsibility and the consequences of our actions, and making excuses like "I didn't know what they were doing with my money!" is what got us into the mess of being at the mercy of banks too big to fail and a government at their beck and call.

  • Report this Comment On November 17, 2009, at 8:06 PM, 7footmoose wrote:

    I have two comments for which I have no answers:

    How big is too big and who makes the determination? The government has not shown it can govern this type of issue effectively so who do we turn to?

    Why dose Canada not have this problem? There are only six financial institutions of size in Canada and they are not having this debate.

  • Report this Comment On November 17, 2009, at 8:29 PM, rookie2009 wrote:

    ditto...retired gm uaw worker,i knew gm was a joke 4 months into my 'career' in 77. buy some megabanks,cringe,hold,and make some loot,and,repeat,MR.HOUSEL! THAT'S FREE WILL.i have no regrets although i could use some new free eyeglasses....

  • Report this Comment On November 17, 2009, at 8:47 PM, bpan500 wrote:

    FINALLY, someone has written a very succinct argument for what I have been thinking and saying for months. Thank You.

    What was good enough for Ma Bell should be good enough for Chase, et al Chase Midwest, Chase New England, Chase Southeast....sounds just right to me.

  • Report this Comment On November 17, 2009, at 8:54 PM, dc46and2 wrote:

    If we continue to perpetuate a system where failures are likely, then it makes sense to limit the size and scope of banks. But that would not necessarily guarantee our safety. If a large number of small banks failed, the consequences could equal or surpass the problems caused by a single mega-bank failure.

    "Breaking them up" is just preemptive damage control. We need to fundamentally alter our banking system so that "failures," in the present context, would be nigh impossible under legal operation. I want innovation and risk-taking in productive industry not in banking.

    Banks, like the money they handle, are simply a means to an end, not an end of themselves. They produce nothing of value, but they make production possible by organizing the flow of capital from those who have it to those who can use it. There is no reason why banks must have these systematic risks in order to perform their necessary function.

  • Report this Comment On November 17, 2009, at 9:56 PM, KayZeeDee wrote:

    Agreeing with bpan500 on this as far as a solution to this problem goes. I can see both sides of this argument, but to me the real issue isn't who is right, but HOW will we make sure we don't get into this same situation again? Free market capitalists have their view points (to which I mostly agree), and socialists think the government should come in and save the day (to which I mostly disagree).

    However... bpan500... I remember when the gov't stepped in and made Ma Bell split up. Things have been fine since that time, perhaps even better. The gov't stepped in, and then got out of the way (mostly - they still can't keep their mitts out of the business).

    I think the solution is to split these giants up into smaller parts. this will require gov't intervention. then uncle sam should leave it alone.

  • Report this Comment On November 17, 2009, at 10:48 PM, DownEscalator wrote:

    I have yet to have anyone convince me that we either need to regulate the size of institutions or prevent the "too big to fail" ones from doing so. Either path, in my opinion, thwarts the purpose of government and obstructs the proper workings of capitalism.

    One key role of democratic government is to regulate relations among its citizens. Capitalism, to work properly, requires an even playing field at the most basic level, independent of what the present leaders might find best for society. For example, it may be more efficient in the short-term to shift patent laws to afford broad protections to large companies and minimal protections to small-time inventors who lack the resources to instantly develop their products. But for long-term capitalism to delivery the greatest possible results, we protect intellectual property rights.

    Why do we change when it comes to bankruptcy? We have well-established bankruptcy laws in this country that are essential for our capitalist system. They drive all sorts of creditor activity and prevent unnecessary risks from being taken. Why on Earth have we chosen a class of institutions to protect from bankruptcy? Why are their creditors immune to the creditor process in bankruptcy? (i.e., why did Goldman receive 100% of its debts from AIG back instead of the pennies-on-the-dollar settlements most creditors take in bankruptcy proceedings?). How can this system possibly aid capitalism's functioning in the US?

    It doesn't. This fear of systematic collapse is ridiculously overblown. Would C's failure make my life worse? No, in the long term it would make it better.

    "Too big to fail" is nothing more than sucker's rhetoric to promote unsustainable businesses. As long as we keep pumping money into the C's and BoA's, we're like a doctor putting a band-aid on a leg that desperately needs to be amputated.

  • Report this Comment On November 17, 2009, at 10:50 PM, LessGovernment wrote:

    Dear KayZeeDee,

    I agree completely. That is why I suggested using the tax code and base the effective rate of tax on size. When the size hits an effective rate level that is too punitive, the firms will voluntarily split themselves to be able to operate once again at a lower the rate. An additional advantage is this will also increase, not decrease, competition in the marketplace.

  • Report this Comment On November 18, 2009, at 12:46 AM, bc0203 wrote:

    The big problem is, by the time it becomes apparent to regulators that entities have become "too big to fail" the system is already out of control - and in this case, due to the rapid pace of global financial markets, it is rapidly getting worse. Banks who bought bad residential and commercial real estate are incentivized to "shore up" their balance sheets with the debt of governments that are technically insolvent, and encouraged via legislation to make more bad loans. When the whole house of cards comes crashing down, its not going to be pretty, no matter how many pieces you break it into. The best you can do is invest accordingly.

  • Report this Comment On November 18, 2009, at 2:30 AM, secjd wrote:

    "Too Big to Fail" means allowing the reckless over-leveraging of financial institutions that issued (or underwrote) and sold trillions of dollars in face value of Under-Collateralized Debt Obligations not only to individual investors but also to banks, credit unions, pension funds, etc. around the world; they default, and banks with insured deposits go under, people's pensions get wiped out and ultimately both small businesses and consumers suffer. I have clients with responsibly financed, profitable small businesses that have been forced into insolvency due to short-term cash-flow problems that resulted from the "credit crunch;" their only alternative at present is to seek "vulture" financing from lenders of last resort because there are no "lenders of first resort" that are acutally lending.

    If Pepsi were on the verge of bankruptcy, they'd likely do what every other company that produces stuff typically does; they'd sell off operating subsidiaries and assets to multiple buyers to stay afloat or reorganize in bankruptcy (or, in extreme cases, liquidate). With financial institutions, it's not quite so simple because the vast bulk of their "assets" consists of cash and, in the current environment, promises to pay by third parties. Cash obivously will never fetch more than its face value in cash and therefore cannot really be "sold" in the usual sense of the word, and severe over-leveraging renders promises to pay practically worthless - both at the level of the debt obligation itself and at the level of the in-turn over-leveraged institution that holds it . And, the opacity of the large finanical institutions can mask a complex interdependency that makes spinning off various operating subsidiaries to sell in the open marketplace exceedingly difficult.

    As for claims that complete lack of intervention and total reliance on the "free market" will ultimately benefit the consumer, while that may hold generally true under normal conditions, when you have a marketplace which comes to be dominated by a small number of beheamoths, that is poppycock. The consumer will just be held hostage by anticompetetive monopolies that will use whatever means necessary to snuff out competition. The mega-financial institutions that have been enabled through deregulation won't be allowed to fail because their very size means they have enough wealth and power at their disposal to stack the deck or change the rules to their favor as needed for them to survive and profit.

  • Report this Comment On November 18, 2009, at 10:05 AM, carso295 wrote:

    I gave a public speech at the university of Missouri St Louis about why the banks were being bailed out, and explained to my class that if the government did not the economy would collapse and the teacher completely disagreed with me and the rest of the class thought that my speech was foolish for preaching such rot. I got a C-.

    I HATE my school.

  • Report this Comment On November 18, 2009, at 3:34 PM, j457 wrote:

    It continues to baffle me that customer deposits have grown over 30% in the too big to fail banks since the start of the financial crisis last year. These large banks pose a much greater risk to the country today compared to last year. And yet the govt allows their size to grow and grow. BAC has upwards of 1 trillion in customer deposits. Let me ask you, how would the FDIC ever try to manage such a failure. I don't think they could without a major run on banks, forcing the FDIC to shut down the financial system until all the TBTF banks were nationalized and dismantled. Unfortunatley, the TBTF's will continue posing systemic risks until we the people start depositing our checks elsewhere. Close your account today, pull your funds, and bank locally or with a credit union. The next year of our actions will determine the success of the USA for decades.

  • Report this Comment On November 19, 2009, at 2:37 AM, halbiz wrote:

    The repeal of Glass Steagall and the passing of the Commodity futures Modernization Act were a huge mistake. We need to revisit these mistakes immediately.

    Banks should not be holding companies. Insurance companies should stick to insurance.

    Trading companies must not be banks. Banks making most of their profits from trading is the new nightmare.

    The profiting from insider information within these mega"banks" with paper-thin Chinese Walls has made the idea of a "free-market" a joke.

    How did we let this happen as a citizenry? Corporations were given the rights of citizens and they have since become Super Citizens.

    Our sense of fairplay and belief in a "level-playing field" is lost when large banks with well connected CEOs and Boards convince our politicians, with the help of highly paid lobbyists, that they know more than the average citizen or small businessman and should be favored as special advisors.

    There may be some talented CEO's like Dimon, but that does not mean these MegaFirms have a right to exist. They should be broken up or be forced to pay higher fees to allow for the higher risk they pose for our capitalistic system. Count the billions that are now held in derivatives without real assets behind them and divide that by the number of mega firms that deal in them. The fees should be levied accordingly. After that, some level of % of GDP should limit the size of such firms.

  • Report this Comment On November 19, 2009, at 7:45 AM, tomd728 wrote:

    And none of the bums mentioned above as Banks or individual leaders of Banks lending one red cent to deserving small business.

    Currently the sole purpose of the "too big to fail" gang

    is to serve themselves through M & A activity,continuing to trade in Markets that may be deemed too dangerous and provide liquidity for each other.

    These guys are the arch criminals of this or any age and now using our money !

    Who is watching them and defining their true efforts ?

    A bunch of self-righteous dolts such as Barney Frank who never had a chance to understand what is really going on right under his nose !!!!!!!!

  • Report this Comment On November 19, 2009, at 12:39 PM, rse0506 wrote:

    One idea which I have not seen mentioned in this thread is fairly simple: have higher capital ratio requirements for very large banks. This idea may not play into various ideological notions of either no regulation at all, or regulation to the extent of effective nationalization (effectively government control), but it has the pragmatic virtue of being doable TODAY, within the existing regulatory structure.

    It would immediately discourage "largeness" in banks by hitting them directly in the aspect that they use to milk out profits during asset bubbles (exaggerating the bubble all the while): their leveragability.

    The beauty of a sliding leverage-allowance scale (depending on size) is that it punishes large-scale risk-taking BEFORE the consequences hit, rather than during or after. Some risk-taking is good, and a necessary aspect of a free-market economy. The sliding-scale capital requirement allows us to put the brakes on the biggest, most systemically-important risk-takers before they go off the deep end. That in turn would tend to discourage bigness, and when contemplating a merger, the parties would have to make a trade-off between cost-efficiencies realized and the loss of leverage room.


  • Report this Comment On November 19, 2009, at 7:53 PM, pib2 wrote:

    TBTF gives the banks the 'de facto' right to print money. In a regulated market when entities fail the collateral that was put up in good faith is used to pay creditors. The entity fails and then goes away. No tears. Regulate the banks. Make them post collateral that is commiserate with the risk if the bank fails---- take the collateral to pay creditors then make them go away. Regulate or expect failure. It is actually quite simple. Commodities exchanges have played this way for more than 100 years. While many firms have failed, their debts have always been paid and then they went away. No tears. Banks should have to put up the money to cover their risk. Pigs get fed, hogs get slaughtered. All banks are swine. Break up the banks then regulate them. Reinstate Glass - Steagal. Make them put up the money like the rest of us. As a capitalist I am sickened what has gone on the last couple of years. Break up the swine banks or we will all suffer.

  • Report this Comment On November 20, 2009, at 12:30 PM, mcrose wrote:

    I find it dis-ingenuous when I hear people say, "no one could have predicted this"


    It was predictable and predicted - but preventing it would have required the decision-makers make decisions based on the health of the bank, as opposed to the size of their own compensation packages.

    As long as compensation for decision-makers is based on the transaction, they will maufacture transactions.

    If we could somehow tie the compensation of the decision makers to THE RESULTS of the transaction, then they would make decisions that protected the companies - as opposed to looting the companies.

  • Report this Comment On November 21, 2009, at 12:44 AM, angryvoter wrote:

    This is all pretty simple stuff.

    - Wealthy, well-connected financiers make truck loads of cash when the economy is doing well.

    - They buy influence through lobbying and campaign contributions.

    - Their greed and lack of integrity causes them to engage in risky and unsustainable business practices.

    - When the financial house of cards collapses their influence insures that their political lackeys will class their businesses as "too big to fail".

    - The politicians bail them out with taxpayer money, under the pretext that the alternative is much worse.

    - The financiers have no personal responsibility for their actions, and make truck loads of money even though the economy is tanking.

    Ultimately, we, as voters, have the government we deserve. We need to take action.

  • Report this Comment On November 21, 2009, at 8:52 AM, jaderdavila wrote:

    the notion 'too big to fail' was invented by politicians

    they think that if they save the dinossaur

    plenty of good votes will come their way

    it really does

    the trouble to the rest of us

    is that this dinossaur will suck up taxpayers money

    each time it remembers to whine

  • Report this Comment On November 21, 2009, at 11:56 AM, fourthreethree wrote:

    It's my opinion that the too-big-to-fail club is manned by traitorous opportunists who would rather see themselves profit at the expense of our nation's integrity. If we are in a time of war, aren't treasonous acts punishable by the traitors' executions? Many of us down here below the curbs of Wall Street would love to see some inflated heads roll. "Let's Roll!"

  • Report this Comment On November 22, 2009, at 12:16 AM, clarkmel wrote:

    The big banks should be broken up. Ma Bell was split into AT&T and the Baby Bells with far less justification than exists with the “Too Big to Fail" banks.

    The government's role is to regulate interstate commerce in such a way that life, liberty, and the pursuit of happiness are maximized. Ignoring the threat posed by a big bank failure is unacceptable.

    However, the heavy hand of "close supervision" from new and more powerful federal regulators is exactly the wrong response.

    Anti-trust laws exist to protect the free market from excessive control by a monopolistic private entity – exactly the current situation and exactly the right prescription.

  • Report this Comment On November 22, 2009, at 11:14 AM, FarmGranny wrote:

    Bravo Clarkmel, the work of the government is also to pay attention to the laws that are on the books even from the 1890. If they had been more astute, more of what the Sherman Act is really about "may" have slowed or relieved us from some of the effects of this overly large downfall we have experienced.

    The predators find a way only when "we" are not paying proper attention. There are plenty of laws; they just need enforcing and understanding. Take the time to Read History, Understand History, and then maybe it won't have to smack you to make you pay attention and rattle the cages of your congressperson and senator.. Democracy works when it has participants.

  • Report this Comment On December 09, 2009, at 2:04 PM, themacbug wrote:

    Banking has become so complex that not only the lawmakers are confused but so are the bankers. This is the reason that they need to be broken up. Banks should have a very narrow range of services and work on small modests profit margins. Investments should be done by investment companies where everyone knows that there is risk and rewards. Banks should not take ANY risks. I remember when this was true and the whole economy was more stable and reliable.

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