One of the basic rules of saving and investing is “don’t put all your eggs in one basket.” Here’s what happens when you have most of your eggs in the TBTF basket:

“This framework has failed to serve us well,” he said. “During the recent financial crisis, losses quickly depleted the capital of these large, over-leveraged companies. As expected, these firms were rescued using government funds from the Troubled Asset Relief Program (TARP). The result was an immediate reduction in lending to Main Street, as the financial institutions tried to rebuild their capital. Although these institutions have raised substantial amounts of new capital, much of it has been used to repay the TARP funds instead of supporting new lending.”

Small banks, on the other hand, continued to lend. “In 2009, 45 percent of banks with assets under $1 billion increased their business lending,” Hoenig noted.

Problem is, so many of the small and regional banks have been consolidated and so much of the industry is concentrated at the top that the small fry hardly make a ripple.

Hoenig reiterates Johnson’s point on the oligarchical aspects of the financial industry, though he puts it much nicer.

These large institutions wield considerable influence,” Hoenig said. “Looking back, one sees that the crisis was inevitable, if for no other reason than that these TBTF firms would push the boundaries until there was a crisis.”

Also interesting is that allowing this consolidation has distorted the playing field against the remaining smaller banks. Hoenig (emphasis mine):

“TBTF status provides a direct cost advantage to these firms. Without the fear of loss to creditors, these large firms can use higher leverage, which allows them to fund more assets with lower cost debt instead of more expensive equity. As of year-end, the top 20 banking firms held Tier 1 common equity equal to only 5.1 percent of their assets. In contrast, other banking institutions held 6.7 percent equity.

“If the top 20 firms held the same equity capital levels as other smaller banking institutions, they would require $210 billion in new equity or reduced assets of over $3 trillion, or some combination of both.

This is a basic fairness issue. There are many untold stories here. Find a small bank, compare it to the BofA across the street, and tell us a story. TBTF banks need to justify their existence.

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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 rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.