TBTF: A Too Big To Fail Problem

«By treating Lehman differently, the authorities shattered the illusion that some major financial institutions were "too big to fail(TBTF)". But starting with the bailout of AIG just a day later, they quickly began the expensive process of trying to restore that illusion.

The TBTFs are able to pay crazy money because they reap all the rewards of risk-taking without the cost: the risk of going bust. Ask yourself, how did Goldman make those handsome second--quarter profits of $3.4 billion? Yes, by leveraging up and taking on more risk.

What's needed is a serious application of antitrust law to the financial-services sector and a speedy end to institutions that are "too big to fail." In particular, the government needs to clarify that federal insurance applies only to bank deposits and that bank bondholders will no longer protected, as they have been in this crisis. In other words, when a bank goes bankrupt, the creditors should take the hit, not the taxpayers.

The political will is ebbing fast, health-care reform is looming too large, and guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs.»

Niall Fergunson, Newsweek, 21-set-2009