Failing on “Too Big to Fail”

The Journal, Bloomberg, and Reuters have stories on a Fed president, Gary Stern, saying the government is to blame for failing to prevent the “too big to fail” scenario.

The WSJ frustrates me to no end by headlining its story “Preventing ‘Too Big to Fail’ Isn’t Easy” and writing a lede that says:

Stronger regulation alone won’t prevent firms from becoming so large that their failure threatens the financial system, current and former Federal Reserve officials said Tuesday.

There’s no explanation of that assertion, and the Journal story is a he said/he said piece with no analysis and no context. Let’s not perpetuate this silly meme that “too big to fail” is “too hard to prevent.”

And the lede makes no sense. If “stronger regulation alone” won’t do it, what will? The goodness of banks’ hearts? We’re not told.

Back to the headline, which says that preventing banks from getting too big is hard. Just how hard is it to put a cap on the size of a company? Let’s throw a number out there: How about a $200 billion cap on total assets?

Well, the free-marketeers say, that will crush the incentive to compete and win more business. No it wouldn’t. Banks don’t grow organically to that size—they do it through acquisitions of other banks—deals that typically hurt their shareholders (read Dean Starkman on that).

If a bank creeps up on that $200 billion number, it must sell off part of itself stay under the limit. No fudging the rules like the government did for Bank of America last year so it could get more than 10 percent of all deposits in the U.S..

The Journal and Reuters mention Greenspan’s call for capital requirements that eliminate the advantages big banks have over their smaller ones. That’s a great idea—and capital requirements need to be raised across the board anyway. But that alone isn’t going to protect us from these leviathans.

Bloomberg’s lead quote makes more sense:

“Destiny did not require society to bear the cost of the current financial crisis,” Stern, the longest-serving Fed policy maker, said in a speech today in Washington. “The outcome reflects decisions, implicit or explicit, to ignore warnings of the large and growing too-big-to-fail problem and a failure to prepare for and address potential spillovers.”

And Bloomberg gets to the Journal’s point in its lede, which the WSJ never really got around to addressing:

The regional bank chief said he has “serious reservations” about simply making institutions smaller, “an idea born of desperation since it seems to admit that large, complex organizations cannot be supervised effectively.”

Ahh, that’s inside-the-bubble thinking. We can’t simply make banks smaller. That’s too easy. It shows that we in the industry aren’t smart enough to contain ourselves. Heaven forbid! It is the press’s job to puncture this kind of cloistered thinking, not to just report it and move on.

Let’s look more closely at that quote:

it seems to admit that large, complex organizations cannot be supervised effectively

Hey, I’ll admit it for you. You can’t supervise banks with $3.2 trillion (see Citigroup) in assets effectively. That company can’t even supervise itself. If anything’s been proved over the last year and a half it’s this.

I’ve said it a million times: Don’t let companies get too big to fail. If they already are, break them up. Get some “onions” as Bill Raftery would say. This is a cancer on our society.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.