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The cat that got the cream
Fed Chair Ben Bernanke said today that about 25 financial companies are "systemically important." Too big to fail, in other words.
What? 25?
First thought: I knew some banks would inevitably be too big to fail. JP Morgan and Goldman Sachs, certainly. Wells Fargo, maybe. But I thought we were talking about a handful of banks, not a truckload.
Second thought: beware the empire builder! Bernanke seems intent on expanding the powers of the Fed, which already has oversight of many of the megabanks that are presumably on his list of 25. Corralling the whole lot into his jurisdication would be a sweet power play. Perhaps that explains the smile on the face of the tiger.
Third thought: buy banks! (This isn't financial advice, by the way, just my gut reaction. Which I have not acted upon.) If 25 banks are too big to fail, that means the government won't let them fail, which means they won't fail. Right? Implicit guarantee? Sounds to me like a bulletproof investment on the debt side, if not on the equity side. No wonder private equity firms are interested in getting involved in the banking sector. With a guarantee like that, it would be worth a little hassle from the FDIC.
Here's a strategy: snap up four or five banks, power up your balance sheet with cheap government money and MAKE yourself too big to fail.
Still not acting on that gut reaction.
What does "too big to fail" mean? Economically, it must imply that the cost to the economy of such a bank becoming insolvent is greater than the cost of bailing it out. So far no one has produced the evidence especially as it applies Goldman Sachs and JP Morgan. The government’s actions including a change in accounting rules have led to a fiction in which insolvent financial institutions are made to look solvent in the hope that a resurgent economy will make it so (for example, AIG). Nor have we heard any arguments that the economy would be worse off with banks and financial institutions that are not too big to fail. Even Liddy (AIG CEO) said that AIG is “too complex, too unwieldy, and too opaque†to manage. According to James Galbraith such “institutions exist, in pat, to help with international tax evasion, to evade regulations, to project political power, to facilitate the kind of “financial innovation†that is the essence of systemic risk.â€
If politically well connected financial institutions are deemed too big to fail then we would need regulations to protect the economy from their profit-maximizing proclivities. But the very people who would be put in charge of such an important task would likely suffer cognitive regulatory capture, and leave us holding the bag, just as Greenspan and Bernanke have. The likelihood of moral hazard by both regulated and a regulator is too great to risk. The bailout of GM shows that any large corporation can be deemed too big to fail economically and politically. Shouldn’t all economic actors be entitled to such assistance?
Why hasn't Congress actually enforced the rules to keep banks and other financial firms from even becoming "too big to fail" in the first place? I mean, I know why -- those firms hold enormous power and control over the political/regulatory proces. But it's still shocking to see that really, after all that went down in the last year and longer, the goal really does seem to be waiting out public outrage and get back to the status quo. The whole system is broken and apparently there is no way to fix it.
