Too Big to Fail. It’s not just a description, it’s a political mantra – we have banks which have grown to the point where government cannot manage a potential collapse and the whole system goes down. Why not just bust them up?
There are actually a lot of good reasons why something much more subtle has to be done, as well as something more comprehensive. That doesn’t sell as well on the campaign trail, where the evil banks are a handy villain for all of our economic ills. Yet it’s vitally important because it’s entirely possible that in a rush to regulate we might do something which is not only dangerous but misses the real problem entirely.
“Too Big To Fail” (TBTF) is the standard for socialized risk and privatized profits. The biggest banks enjoy an implied bailout under Dodd-Frank regulations that give them a tremendous advantage over smaller banks. The complex weave of financial innovations that are their signature is impossible for anyone to understand, making the risk we have taken on as taxpayers almost impossible to quantify.
This legislation, introduced by Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, cuts through the complexity, levels the playing field among banks, and ends “Too Big To Fail” once and for all. What chance does it have? Actually, a very good one because of some terrific politics.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” – Henry Ford
In case you were wondering what the cost is of “Too Big to Fail” banks, the Federal Reserve has an answer – $440 million (about $4 for every household in the US). If that seems low, well, it is. It’s just what it costs to have “enhanced regulation” of those banks that have been declared “systemic” – legalese for protected by you and I.
Where did that number come from? It comes at the end of a long, watered-down process that has finally defined just what it means to be one of the protected investment banks. It’s all the result of Dodd-Frank regulation that does more harm than good if this is all they can manage. But perhaps we can make a bit more out of it …
“Too Big to Fail” has been a standard for a number of international investment banks, including JP Morgan (JPM) for many years now. We’ve seen that turn into “Too Big to Jail” where major violations of law result in nothing more than fines which have clearly been absorbed into the cost of doing business as they please. But the real problem is one of consistent hubris from a company too big for anyone to understand or even manage effectively. That’s the conclusion of the report issued by Sen Carl Levin into the “London Whale” losses at JPM’s London Office last April.
What happens when a company this large becomes so reckless that a major problem is inevitable? We might soon find out – at terrible expense. No matter what, their behavior is becoming a major problem that could give life to a movement that puts an end to the cozy relationship once and for all. Assuming, of course, we aren’t already too late.