How do we know that banks being too to big fail is still a problem? Because so few talk about it anymore. An issue that rallied public interest two years ago when it looked like the bailouts would spur change has faded into distant memory. Time breeds complacency.

When we do manage to discuss too big to fail, it's depressing.

Take a recent talk by a panel of financial executives at the Milken Institute. The panel was fascinating to listen to because they all had front-row seats to the financial crisis: Former Bear Stearns CEO Alan Schwartz, hedge fund manager Ken Griffin, Moody's (NYSE: MCO) CEO Ray McDaniel, former Treasury Chief Restructuring Officer Jim Milstein, and Allstate (NYSE: ALL) CEO Tom Wilson. My gut reaction to the group was, "Why should I listen to a panel at least half made up of people who helped cause the crisis?" Then it hit me: Because they were there. If you want to solve a crime, ask a criminal for help. These are the people we should be listening to the most.

The first topic of debate was about parts of the Dodd-Frank regulations that are designed to prevent future bailouts with so-called orderly liquidation authority. This gives regulators the power to wind down failing firms rather than letting them collapse, or sticking taxpayers with a bailout bill.

The panel's mood was unanimous: Orderly liquidation only works in theory. Banks are still capable of wreaking havoc on either the financial system or taxpayers -- likely the latter. 

Consider this comment from Moody's CEO McDaniel:                                             

The orderly liquidation mechanism as envisioned is probably not workable. As a consequence of that, we do think there will remain systemic support for the largest, most interconnected financial institutions. That systemic support may be somewhat less in the future, especially over the longer term horizon, than it was in the past. But we still think it's in place. We think it contributes to a credit positive for these largest and most systemically important institutions.

"Contributes to a credit positive" translates to "the taxpayers have their back." And keep in mind who this is coming from: the CEO of the rating agency that grades large banks. His view on too big to fail isn't an opinion. It's a deciding factor, and one that gives "too big to fail" banks a lower cost of capital over smaller rivals. Whenever someone insists big banks are competing in the free market, point them to this quote.

Milstein, who organized AIG's restructuring, was equally pessimistic about orderly liquidation authority:

My own estimation is that if we get close to the edge again, we're going to see a repeat of the drama we saw play out in late September and early October of 2008, when you saw Treasury Secretary Paulson and President Bush literally crawling on their hands and knees up to Capitol Hill begging for TARP authority, because the government didn't perceive itself to have tools sufficient to handle that crisis then.

What makes orderly liquidation unworkable? It doesn't address the meat of a crisis: panic. In 2008, regulators didn't have the authority, but they still found a way, to wind down AIG. While that kept the company from collapsing on the financial system, it didn't prevent investors from panicking -- it took the Federal Reserve and the Treasury's guarantee of nearly the entire financial system to do that. Having the power to wind down a systemically important bank isn't the problem. Letting them get systemically important in the first place is.

Part of the reason panic ensues amid a wind down is because banks aren't just U.S. institutions controlled by U.S. laws. They're global enterprises. As Milstein notes, AIG "operated in 130 different countries subject to 130 different regulators. So the idea that the FDIC can somehow do an orderly liquidation in the United States of an entity internationally is very, very challenging."

The most depressing quote of the talk came from Allstate CEO Thomas Wilson, who seemed to fully embrace the past three years of bailouts:

In some cases like this most recent thing, yes, there was a problem. But we kind of got through it. So I'm like, 'just let it go.' I think this idea of trying to figure out what systemic risk is, and we're going to stop it, like we're going to have companies that won't damage us if they're big enough to fail, it's just not going to ever happen.

Granted, Allstate is one of the few companies to refuse TARP funds. But the idea that "we kind of got through this," referring to the financial crisis and recession, is absurd. Banks got through it. The broader economy hasn't: unemployment is twice as high today as it was a few years ago. National debt is $5 trillion higher. Almost one-third of homes with mortgages are underwater. The final outcome of the Fed's monetary policies isn't yet known, but won't likely end well. More importantly, the idea that we should "just let it go" shouldn't jibe with anyone, regardless of ideology. The current system promotes a hands-off regulatory approach during boom years, and massive public intervention in bad ones. It's nauseating to almost everyone, which is why it's amazing it's still the status quo.

Lastly, after viewing a slide showing that just a few banks -- Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), US Bancorp (NYSE: USB) and Wells Fargo (NYSE: WFC) -- hold about half of all banking assets, hedge fund manager Ken Griffin provided some rationality:

When you have this much of the banking system controlled by so few parties -- really, it's four banks today that bank large corporate America -- you have oligopoly pricing, you have rampant tie-in sales, you have a sharp and powerful diminution of competition. I don't think this is good for our country. I think that we lost a lot in the financial crisis as we rolled one bank after another into these behemoths that have lost some of what has made America so great, which is free markets and competition between service providers.

That really ties the "too big to fail" argument together. There's a notion that breaking up large banks is hostile to capitalism. The opposite might be true. Many banks only became big, and remain big, because of public bailouts. Breaking them up to might be the most capitalistic move available. It's either that, or long live the concept of too big to fail.

What do you think? 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.