Still Too Big To Fail

I was reading a speech given last Monday by Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, and while some of it was a bit over my head a few things popped out at me. One was his concern that the new financial regulation in Dodd-Frank does not separate the risk-taking of financial investment from deposit banking institutions, another was his concern that it does not eliminate “too big to fail,” and the third was his concern for its impact on smaller financial institutions,

Post-crisis, the large institutions are even larger: The top 10 now account for 64 percent of assets, up from 58 percent before the crisis and substantially higher than the 25 percent they accounted for in 1990. In effect, more prudent and better-managed banks have been denied the market share that would have been theirs if mismanaged big banks had been allowed to go out of business. This strikes me as counter to the very essence of competition that is the hallmark of American capitalism: Prudently managed banks are being victimized by publicly subsidized competition from less-prudent institutions.

So not only has “too big to fail” not been eliminated, it has actually gotten bigger. The reason for that is that the FDIC has taken control of failed smaller banks and sold them to the (also failed) larger banks, making the big banks bigger and the market share of small banks smaller. Not only is this contrary to the principle of “free enterprise” that we are supposed to embrace, but it is entirely contrary to good sense.

The only disagreement I would have with Fisher is his implication that the failure of the “too big to fail” institutions was caused by error and/or stupidity. I believe the management of these institutions knew exactly what they were doing and knew exactly what the outcome would be. That the nation and investors would be impoverished was known to them in advance and was of absolutely no concern. They knew that they, personally, would be enriched and that was their motive.