Small Banks Did Not Perform Worst in This Crisis

It would take 3,800 Georgia bank failures to equal one Bank of America

The Atlantic’s Derek Thompson quotes a friend in finance saying:

“Small banks did the worst in this crisis,” he once wrote to me. “Making banks smaller would not have changed a thing. If you have 100 little banks with the same portfolio as one giant bank, how are those little banks any more acceptable as failures? If they all go, we’re in the same position. In fact it’s worse, because it’s disorganized and disaggregated.”

That’s all kinds of wrong.

On Friday I criticized a McClatchy story for making too much of the problems with small banks. McClatchy zeroed in on Georgia, which has the most bank failures of any state.

But when I added up the assets of the thirty-eight Georgia banks that have failed thus far in the crisis and they came to just $23.4 billion—or one-hundredth of the assets of Bank of America alone.

In other words, it would take 3,800 Georgia bank failures (using the average size) to equal one Bank of America bank failure.

Or how about putting it yet another way: There are 775 “problem banks” in the country right now, according to the FDIC. Total assets? $431 billion. Or less than one-fifth the assets of Bank of America alone. If you took all those 775 problem banks and rolled them together into a gigantic ball of suck, they’d still only be the eighth biggest bank in the country.

And what about those big banks? How many of them got into trouble and needed bailing out? Well, all of them (with the exception, perhaps, of JPMorgan).
Bank of America and Citigroup got mega-bailouts. Washington Mutual went bust. Wachovia was pushed into Wells Fargo’s arms to keep it from going under. Despite its denials, Goldman Sachs would likely have failed if not for its mega-bailouts (backdoor and otherwise). So would have Morgan Stanley. Oh yeah, and then there’s Lehman Brothers, which Thompson says “was not a huge bank and its collapse triggered a worldwide financial catastrophe.”

I think $639 billion in assets fits the definition of “huge bank.”

So, no, it’s just flat false that small banks performed worst.

What’s so hard to understand about this stuff? Yes, lots of small banks made lots of bad loans and bad investments. Lots of small banks have gone under and will go under.

That’s the point: We can afford to let them go under.

That’s how a real market is supposed to work.

Further Reading:

All the Banks in Georgia: Small-bank failures are child’s play in a too-big-to-fail world

Goldman’s Backdoor Bailout
: A call for transparency in the taxpayer rescue of Wall Street.

“Too Big to Fail” Gets Big Play in the NYT.

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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.