Too Big to Fail vs. Capitalism

• Report this Comment On June 29, 2011, at 2:48 PM, Branchville wrote:

  Only the strong survive, the weak become the meal. Just check out mother nature in action.

• Report this Comment On June 29, 2011, at 3:10 PM, whereaminow wrote:

  "But as Hoenig points out, the size of these companies goes against capitalism to begin with"

  Hoenig is so deceitful. He knows how these banks got big to begin with. His fellows at the Federal Reserve helped make them big.

  If he were to be honest, he would say, "We are a cartel, and the Fed is the head enforcer of the cartel. We reward the banks that take the biggest risks, and therefore, we are responsible for their size. Nothing about this is capitalism."

  When Hoenig admits that he's a crook, I'll start listening.

  David in Qatar

• Report this Comment On June 29, 2011, at 3:22 PM, Gary1030 wrote:

  I have some thoughts to deliver to whomever wants to hear it about the "too big to fail" theory. Schooled in insurance and finance, and taught economics by Dick Armey, Glass-Steagal was holy grail to protecting taxpayers from failure of co-mingled investments/deposits. When it was taken down in late 90's I asked my father what he thought, considering he was a real banker for 60 years and had just retired. He was shorter with words than me and commented, "They did it for greed, not wisdom", followed by a comment I did not totally understand, "They think they are too big to fail..and they will prove that to be right". I asked him if we could ever have another Great Depression to which he replied, "Now more than ever". He still traded his own bonds until his death in 2005, but he predicted the fall of GM and avoided those bonds, and began to see the municipal bond threat due to pension obligations and excess spending. But in January 2006 after his death I intercepted a call and asked info pretending I was going to tell my father when he woke up from a nap. The seller was trying to pawn mortgage backed securities, trying to explain the 1000 mortgages made the eggs less risky. When I asked what happen when the housing market turns sour countrywide, he hung up. I turned and told my secretary who had cried in the past thinking she would never afford a house, and having seen others buying $300K houses who were fresh graduated elementary teacher married to a welder, and I said, "hold your powder dry and be ready to buy, because this last call showed me the market was going to plunge in housing. All across America people knew what was going on was a bubble, and no one with power had the conviction to be Paul Revere and ring the bell. Angry is about all I can say is how I feel. And all of my 60 years I know that when I am angry over something Washington has done, I know millions of others are feeling the same way. I want that anger to steamroll Washington and statehouses all across America until we get it back. I would like to get an idea going, which are Senators and House running in 2012 to pledge to support a "Sunset Law" that sets a schedule for all Federal Departments, Agencies, and Authorities to be sunsetted on a schedule where within 3 years every one will have to turn their attention into their organization to justify the existence of their agency, etc. Every one would have to appear in front of Congressional hearing and show where they can cut 20%. If they can't, then they sunset automatically. Priorities will be set. Something greatly lacking now.

• Report this Comment On June 29, 2011, at 3:23 PM, LeonardChallenge wrote:

  What would be the issue with letting banks get as big as they want, and if/when they fail letting them do so. Everyone is acting like if a large institution fails there wont be capital/competitors/entrepenuers willing and able to fill the void in the marketplace that they provide. As far as a shock to the system, is that not what capitalism is about. If an individual/institution uses thier resources in a way that exposes it to massive losses to a point where bankruptcy is forced upon it should that not be allowed so that they actually and painfully learn from mistakes and never make them again.

• Report this Comment On June 29, 2011, at 6:15 PM, Gary1030 wrote:

  Ref to what Leonardchallenge says, the problem with letting one bank get so large that when it fails it takes down all of the conglomeraged companies owned by that bank, or worse yet, spreads to all the other banks due to counter-party risks on their books, is exactly what you would not want. When that happens it is capitalism at it's purest form, and when you are in a soup-line like the depression, you wouldn't like it's pure form so much. Banks that operated separately did so at their own risk since the Depression fix, knowing full well if they did not keep capital requirements high enough they would be closed and depositors paid off by FDIC. But when a bank is allowed to become too large there is actually no regulator than could sort out the risk on that banks books, and certainly that regulator is not going to shut it down. The result is when multiple banks are allowed to grow too large, the end result is the government must bail them out because one, or all going down would kill the country's economy, not just kill the bank. In my opinion these larger banks should have very large capital requirements simply to overcome the inability to properly regulate what they have on their books. Smaller banks that have a history of full disclosure should be allowed to have lower captial requirements. The net result is the smaller banks better compete with the bigger banks, and the executives would have less incentive to merge like they did over the last decades, and thereby fewer mega banks to bail out.

• Report this Comment On June 29, 2011, at 6:23 PM, tramagli wrote:

  Break 'em up!

• Report this Comment On June 29, 2011, at 6:25 PM, Gary1030 wrote:

  At some point this country has to decide to break up these large banks and set a tone for the future that merging smaller banks into large banks will face high scrutinty. These banks were not merged and become large for just efficiency sake. They were merged to hide poor earning from banking, or to allow executives the chance to cash in on their shares. I watched it when a local 4 bank-location was eaten up by another firm and eventually into the current bank group which my family owns stock. It would have continued except for the music stopping due to Bear and Lehmann failures starting the downturn. Those bank executive made off like a bandit, and I know because my father bought into that 4-bank-location years ago to help them fom closing for lack of capital.

• Report this Comment On June 30, 2011, at 8:19 AM, Onigato wrote:

  Having read this article, and the various comments after has gotten me thinking.

  The reason banks got big was because it was convenient, profitable, and very easy to do. Admitedly, some banking companies got big by being the first, others by being aquisitive, and others by offering services that other initially didn't, but in the end, the "Big Three" are little more than carbon copies of each other. If one tries to offer some new service or product, the others make a similar service or product, usually within a quarter or two. In and of itself, this isn't a bad thing, as it means that there is still some form of competition for my, your, and everybody else's business.

  It does mean that when one bank, in an effort to bring in more revenue, started offering loans to people it knew were more likely to not pay them off, the others simply followed suit. This sprialed, and now we have a credit crunch, housing market collapse, and masses of people wondering if they will be able to keep themselves "afloat."

  Will breaking up the banks change this pattern of monkey see, monkey do? Probably not. It is a matter of course that if one company, regardless of product or service, does not offer a matching aspect when their direct competition begins offer something new, that company will lose customers.

  Does breaking them up mean that future collapses would be avoided? Probably not, but it might mean that such collapses are easier to fire-break and contain, or it might not. I really don't know for sure.

  What I DO know for sure is that shareholders, customers, and board members would fight tooth and nail to prevent any form of break-up, and that there would be a period of uncertainty in both the markets and populace when doing so.

  Would it be worth it? Maybe. Would it be difficult? Certainly.

• Report this Comment On June 30, 2011, at 3:09 PM, damilkman wrote:

  I have been reading Chrisis Economics by Nouriel Roubini. He points out that CITI has required federal assistance 4 times in the last 80 years. How can CITI in its current very big form be of use if it requires a bailout every 20 years?

  Nouriel Roubini implies that CITI can only retain this size because they know they will get prefered treatment, access to capital no else can have, and a get out of jail free card.

  Using food imary, CITI has become that TYSON chicken that due to intense antibiotics and feedgrain is more massive then it's free range counterparts. But stick that TYSON chicken in the wild and it would have no chance at survival.

  I agree, this is not capitalism force feeding these giant chickens and letting them wallow about.

  stevep

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