An End to ‘Too Big to Fail’
Our amendment did not pass the Senate, but to judge from the numerous recent calls to limit the size and risk of Wall Street banks — calls that are coming not only from public squares but from boardrooms too — it’s clear that this commonsense idea is starting to take hold.
A few weeks ago, our nation’s largest bank revealed that it had lost $2 billion in a mere six weeks on trades that were supposedly intended to lessen its risk profile. Even at the best-managed firms, there are dangerous consequences of large, complex institutions undertaking large, complex activities. These companies are simply too big to manage, and they’re still too big to fail.
While the Dodd-Frank Wall Street Reform Act made some important changes, the government might once again be tempted to bail out a megabank in trouble.
When the Treasury Department decided which banks to rescue and which to let falter in the fall of 2008, it set the precedent that certain institutions are “too big to fail.” This status comes with an implicit guarantee from the federal government: As a result, ratings agencies give these megabanks a boost, and bondholders charge the banks less to borrow because they know that the government won’t let the institutions go under. Right now, about 20 of the nation’s largest banks can borrow money at a lower rate — ranging from 50 to 80 basis points by some estimates — than community banks can, thanks to this government guarantee.