Four major banks in America, JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC), Wells Fargo & Co. (NYSE:WFC) and Citigroup Inc. (NYSE:C), are among those considered as needing to be broken up by hedge-fund manager David Einhorn, who said the focus should be on making it extremely difficult for any bank to be considered “too big to fail” in the future.
Talking to Bloomberg, Einhorn stated that “The lesson of Lehman should not be that the government should have prevented its failure, the lesson of Lehman should be that Lehman should not have existed at a scale that allowed it to jeopardize the financial system.”
He’s right in this regard, and the idea that being too big to fail has now gotten worse, makes it even harder to allow these gigantic financial institutions to fail in the future, now that they’ve absorbed a number of their competitors and are even larger.
Some may think this would have created giant banks anyway, but that’s not necessarily true, as all the healthy banks in America could have taken over a number of the pieces of the failed banks, spreading the growth in size out to a number of companies, rather than those chosen by the government to be bailed out.
That would have been the way a truly free market would have handled the situation, but that wasn’t what happened, but we still face the problem of “too big to fail,” which hasn’t been dealt with a all, but as Einhorn mentioned, still remains a threat.
What Einhorn feels should happen is for the government to examine all the large banks and determine which ones pose a risk to the economic system and force them to downsize to manageable entities which wouldn’t be a threat to the overall U.S. or global economy.
While that’s not a bad idea, it doesn’t deal with the real problem of the crisis, which is the Federal Reserve, who made the determination that the banks were “too big to fail,” and took the actions to prop them up no matter what the long-term consequences of their actions would be, citing they basically saved the world from a calamity, although we’ll never know if that was true because it wasn’t allowed to work itself out.
So it’s a good idea to shrink the sizes of the banks, but it doesn’t deal with the underlying wrong philosophy that the Federal Reserve is operated by, and so until that’s dealt with, we won’t see much change in that regard, no matter what else is done as far as protections and regulations go.
