Banks 'Too Big to Fail' Have Grown Even Bigger

Source: WaPo

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

"It is at the top of the list of things that need to be fixed," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "It fed the crisis, and it has gotten worse because of the crisis."

Read more: http://www.washingtonpost.com/wp-dyn/content/article/2009/08/27/AR2009082704193.html

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Much, much more to read at the link.

"Too big" to fail was the reason we had to transfer our treasury to the very institutions who caused global economic collapse. It's only common sense that you tackle the too big to fail issue. Besides, the issue was not new.

Thanks to Teddy Roosevelt and others who thought like him, we had the too big to fail issue tackled. OK, Teddy's concern was monopolies, slightly different, but the infrastructure was in place.

Then, along came Raygun and others who thought like him and dismantled everything because "regulation bad, big business good." Almost all we had to do was put things back the way they were.

So, how come government did not do it? And don't tell me no one in Congress or the Fed or Treasury thought of it, only some DU poster somewhere. It leapt out the first time anyone said "wW have to bail out the greedy s.o.b.s because they are just too big to fail." So, they thought of it. Yet, they let this happen.

Why? And when and how are we going to hold them accountable?

Obama has indicated these mega-banks would be taken apart in an orderly fashion after the current economic crisis is stabilized. But I wonder how he's going to overcome powerful banking interests to do such a thing, particularly as I watch the health insurance reform battle unfold. If the banks are too big to fail, maybe they're also too big to oppose.

it seems clear that there has been an ongoing debate as to whether there is greater "efficiency" in a "bigger is better" consolidation model or if that type of consolidation poses a greater threat exponentially to global financial security due to a 'the bigger they are, the harder they fall' theory and the risk that a failed giant takes huge parts of the world economy with them when/if they fall. Of course there is also the question of the inequalities of such an extreme heirarchy or Big Brother system that would result from such global conglomerations, but that issue never seems to be at the top or even ON their agendas or a subject of debate in their white papers.

It seems that the consolidation group has won for now, and those focused on diversity and the small- and-nimble have lost. This, despite evidence that the 'bigger is better' group seem to have proven the other group's theory about the massive damage to the world economy upon failure. Unless the current 'failures' were just part of the consolidation plan.
I posted several articles about these trends and can't seem to find them in a search of DU archives. But I posted some below.

And this question - IF they were planning on a massive global consolidation HOW would financial leaders go about achieving that? Would the result look something like what we're seeing now (massive bank failures, acquisitions, etc.)? A great deal of consolidation occurred already during the 90's though I can't imagine that they were all lawful under current Anti-trust laws.

White Papers:

The Dollars and Sense of Bank Consolidation

Abstract

For nearly two decades banks in the United States have consolidated in record numbers—in terms of both frequency and the size of the merging institutions. Rhoades (1996) hypothesizes that the main motivations were increased potential for geographic expansion created by changes in state laws regulating branching and a more favorable antitrust climate. To look for evidence of economic incentives to exploit these improved opportunities for consolidation, we examine how consolidation affects expected profit, the riskiness of profit, profit efficiency, market value, market-value efficiencies, and the risk of insolvency. Our estimates of expected profit, profit risk, and profit efficiency are based on a structural model of leveraged portfolio production that was estimated for a sample of highest-level U.S. bank holding companies in Hughes, Lang, Mester, and Moon (1996). Here, we also estimate two additional measures that gauge efficiency in terms of the market values of assets and of equity. Our findings suggest that the economic benefits of consolidation are strongest for those banks engaged in interstate expansion and, in particular, interstate expansion that diversifies banks' macroeconomic risk. Not only do these banks experience clear gains in their financial performance, but society also benefits from the enhanced bank safety that follows from this type of consolidation.

http://ideas.repec.org/p/wop/pennin/99-04.html
(scroll down page for many other papers on this topic)


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Summary: This paper documents global trends in bank activity, consolidation, internationalization, and financial firm conglomeration, and explores the extent to which financial firm risk and systemic risk potential in banking are related to consolidation and conglomeration. We find that while there is a substantial upward trend in conglomeration globally, consolidation and internationalization exhibit uneven patterns across world regions. Trends in consolidation and conglomeration indicate increased risk profiles for large, conglomerate financial firms, and higher levels of systemic risk potential for more concentrated banking systems. We outline research directions aimed at explaining why bank consolidation and conglomeration do not necessarily yield either safer financial firms or more resilient banking systems.

Author/Editor: De Nicoló, Gianni | Bartholomew, Philip F. | Zaman, Jahanara | Zephirin, M. G.
Authorized for Distribution: July 1, 2003

http://www.imf.org/external/pubs/cat/longres.cfm?sk=16607.0

Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

I had a white one like that. Lived to be 18, was named "Snowball"

"Our system is not going to be significantly more concentrated than it is today," Geithner said. "And it's important to remember that even now, our system remains much less concentrated and will continue to provide more choice for consumers and businesses than any other major economy in the world."

He seems to be suggesting that the current state of consolidation, which is substantial, is acceptable. And there may be a bit more to come. But hey, it's even better than what other countries have, so be happy!
He doesn't suggest that what has been done needs to be UNdone.
So it's my guess this was the plan all along.

Well, that's because it was more of a robbery, really, than a crisis.

Actually it's an I-Ching line that goes something like this:

An unfortunate occurrence. The cattle belonging to the city people have vanished.
This is a calamity for them, but the nomads who took them acquire new strength and
capacity. You can take your pick. Which would you rather be?
-- Wu Wang (Innocence)

If you knew the nomads were going to steal, you would have become a nomad? Do you really have a choice in which group you are born into? It sound more like luck has the biggest role.

Aside fromm the proverb, this supposed consolidation of banks/Wall Street/Insurance firms is nothing more than creating MONOPOLIES.

So now these Monopolies are too, too big to fail. Let's just hand over the treasury to them. It's what these banks/Wall Street/Insurance monopolies want.

I maintain that any institution powerful enough to hold the government hostage and credibly threaten blackmail against the economy as a whole should be treated as a military threat. I would like to see the Army called in and every last employee of every one of these "too big to fail" put in military prison while we go through their records and sort out exactly who was pulling what strings.

We are watching a private, financial coup d'etat go on in this country and I for one have had enough!

The answer is to regulate them, not to break them up.

There are bank regulations galore already in place....and what good does REGULATIONS serve without
ENFORCEMENT....zip.

As an aside...we had better get our act together here before we even think about this GLOBAL CRAP.

Because you can rest assured the rest of the nations on this globe are more concerned with their own affairs far and above what happens to us in this nation.

They were fairly well off during the recent crises.

The top 20 US banks should be merged down to 5-10 as well. Most of the other 8000 should be allowed to find niche markets or die out.

"We the (the masses of common citizens) People"