In an interview with the Financial Times, Bank of America's (NYSE:BAC) CEO called his request for $20 billion in aid from the government to complete the acquisition of Merrill Lynch "a tactical mistake" because it led investors to lump the lender in with troubled giant Citigroup (NYSE:C). Instead, he says he should have requested … just $10 billion.

Lewis is right (little picture) and wrong (big picture)
Whether $10 billion or $20 billion, it's still taxpayer-funded support. Ken Lewis is right that B of A and Citi have been lumped together somewhat unfairly, given that there is a difference in quality between the two franchises. However, that is a discussion of degree that obscures a much more important debate regarding a characteristic that the two banks do share: They are both too big to fail (TBTF).

The TBTF doctrine asserts that, beyond a certain size, the government will step in to protect a bank's uninsured depositors and creditors in the event of insolvency. It's been more or less explicit government policy since 1984, when the Comptroller of the Currency characterized the nation's 11 largest banking groups this way (in 1984, the government rescued Continental Illinois, which was later acquired by … Bank of America).

The big bank subsidy comes due
TBTF is a misguided policy that distorts competitive behavior -- it amounts to a taxpayer subsidy to these banks. The trouble is, most of the time, the subsidy is invisible -- big banks don't fail all that often, after all. During a massive banking crisis, however, it hits the taxpayer with the light touch of a Mack truck. So, who are we (potentially) on the hook for? The threshold for TBTF is estimated to be approximately $100 billion in assets. Today, the list of banks that qualify on that count includes:


Total Assets (U.S.$)

Tier 1 Capital Ratio

Wells Fargo (NYSE:WFC)

$1,310 billion


US Bancorp (NYSE:USB)

$266 billion


SunTrust Banks (NYSE:STI)

$185 billion


Goldman Sachs (NYSE:GS)

$884 billion


Morgan Stanley (NYSE:MS)

$659 billion


Sources: Standard & Poor's Capital IQ, SEC Filings, and investor presentation.

Mr. Lewis and the Obama administration are missing the point. A stress test won't do the trick; either a bank poses a genuine systemic risk, in which case it should be broken up, or it doesn't, and it should be allowed to fail. That's the state of affairs that bankers and regulators should be pursuing.

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Alex Dumortier, CFA, has a beneficial interest in Wells Fargo, but not in any of the other companies mentioned in this article. US Bancorp is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.