Plenty of banks are still too big to fail

Jeremy Hobson Sep 24, 2009
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Plenty of banks are still too big to fail

Jeremy Hobson Sep 24, 2009
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TEXT OF STORY

Kai Ryssdal: We heard some criticism of the Obama administration’s plans to reform the financial industry today. Criticism that came from one of the administration’s key economic advisers. Former Fed Chairman Paul Volcker told the House Financial Services Committee today that even with the reforms that are being proposed, there will still be plenty of firms, some that aren’t even banks, that are going to be too big to fail. And would still have to be bailed out.

PAUL VOLCKER: Some of the benefits anyway of the safety net have been extended outside the banking system. That’s what I want to change. But you can’t change it just by saying it’s not gonna happen because you’re gonna have problems.

Marketplace’s Jeremy Hobson reminds us that there are plenty of banks within that safety net that are now bigger than ever.


JEREMY HOBSON: Let’s start with Citigroup. It was so big, it got a $45 billion rescue loan from taxpayers last year when the financial crisis hit. It’s already sold off some of its businesses. And today, there are reports, which Citi is denying, that it’s planning to scale back retail banking operations.

But Morningstar analyst Matthew Warren says none of this even dents Citi’s status as too-big-to-fail.

MATTHEW WARREN: You know Citi’s still an enormous bank. We’re talking about the retail banking here, but you know they have an enormous investment bank that’s interconnected globally. And this doesn’t change that at all.

In fact, Warren says if anything’s changing at the nation’s largest financial institutions, it’s that they’re getting larger. JPMorgan now owns Washington Mutual. Wells Fargo snapped up Wachovia. And Warren says even today, several of the largest insurance companies and hedge funds would also require a taxpayer bailout to avert disaster.

WARREN: I think we’ve actually codified too big to fail. There’s no way that we’re going to be able to walk back from that. Now it’s more of a process of managing that situation.

Karen Shaw Petrou at Federal Financial Analytics in Washington agrees many firms are still too big to fail. But she says putting a cap on size isn’t the answer. Banks, she says, will find a way around those caps and take just as much risk.

KAREN SHAW PETROU: It makes much more sense to force institutions to de-connect so that if one of them experiences problems, a whole row of dominoes doesn’t go down.

And on that score, she says, the Obama administration’s plan as proposed would do what’s needed to reduce systemic risk. Lawmakers expect a bill to be ready for the president’s signature by the end of the year.

I’m Jeremy Hobson for Marketplace.

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