Too Big to Fail, Too Dangerous to Ignore

http://www.nationofchange.org/news/2016/04/26/big-fail-dangerous-ignore/

One of the key things to remember about financial institutions today is that they are deeply interconnected. Any one of them, whether it’s designated as a “bank” or is one of the more nontraditional corporations in the financial sector, will have interlocking financial relationships with a broad webwork of other players. Large “shadow banks” are financially entangled with too-big-to-fail banks. That’s why the failure of Lehman Brothers nearly brought down the global economy, and why it was necessary to spend $185 billion rescuing AIG.

Actually, a better term for the “AIG rescue” might be “the rescue of AIG and its counterparties” – that is, the banks that stood to lose billions if it went under. The list of counterparties cited by Pam Martens and Russ Martens includes Goldman Sachs, which received nearly $13 billion in rescue funds through AIG. Other U.S. banks that received billion-dollar payouts from the taxpayer, via AIG, include Citigroup and Merrill Lynch (along with its parent, Bank of America.)

The old distinctions mean less than they once did. Many shadow banks are clearly too big to fail. Their failure in 2008 would have certainly have caused irreparable harm to too-big-to-fail banks. What’s more, at least two non-banks (Goldman Sachs and GE Capital) were retroactively given bank status so that they could receive bailouts.

It’s a straw-man argument to say that “too big to fail” solutions ignore shadow banks. They, and the institutions that have already been designated “banks,” are all parts of the same problem. No financial institution, whatever it’s labeling, should be allowed to pose a threat to the economy. All of them should be properly regulated.