Confirmed: Big Banks Are "Too Big to Jail"

You can't touch this.

Alex Dumortier
Alex Dumortier, CFA
Mar 7, 2013 at 10:15AM

On the back of another Dow (DJINDICES:^DJI) record yesterday, stocks opened slightly higher this morning, with the S&P 500 (SNPINDEX:^GSPC) and the narrower, price-weighted Dow Jones Industrial Average(DJINDICES:^DJI) up 0.11% and 0.32%, respectively, as of 10:10 a.m. EST.

You can't touch this
In an astonishing admission, the nation's top law-enforcement officer, U.S. Attorney General Eric Holder told members of Congress that size has a dissuasive effect when it comes to prosecuting large financial institutions due to concerns about the potential ripple effect on the economy, stating: "That is a function of the fact that some of these institutions have become too large. ... [The size of large banks] has an inhibiting influence -- impact on our ability to bring resolutions that I think would be more appropriate."

It appears that "too big to fail" has brought about the equally undesirable "too big to jail." Mind you, that didn't stop federal prosecutors in New York from bringing a billion-dollar civil suit against Bank of America (NYSE:BAC) last October for allegedly defrauding government mortgage agencies Fannie Mae and Freddie Mac through activities in its Countrywide Financial unit.

The consequences of "too big to fail" are apparent outside the U.S., too. Yesterday, in testimony to the Commission on Banking Standards, the outgoing governor of the Bank of England, Sir Mervyn King, recommended that nationalized lender Royal Bank of Scotland (NYSE:RBS) be broken up, reasoning that "at present RBS is a portfolio of different activities that doesn't sit well enough together to make the market want to bid for it."

Last month, when appearing before Congress for his semiannual monetary policy report, Federal Reserve Chairman Ben Bernanke clashed with freshman Senator Elizabeth Warren on this topic, suggesting that the implicit subsidy big banks receive through lower funding costs is a case of the market getting it wrong and that these institutions would be allowed to fail. Either Mr. Bernanke is bluffing or he is in denial. Mr. Holder's admission has provided a new political impetus for the breakup of big banks -- this is no bad thing.