"More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose."
"The major banks' too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today's market."
"The best would be to eliminate Dodd-Frank's backstop. Congress should explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy. It could impose a fee on banks whose size exceeds a certain percentage of the GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. Congress could also implement tax reform that eliminates the deduction for interest payments that gives a preference to debt over equity, thus ending subsidies for excess leverage."
"Eliminating subsidies would encourage the affected institutions to downsize by selling off certain operations or face having to pay the real costs of bailouts. We need banks that are small and simple enough to fail, not financial public utilities."
In a recent policy statement, Huntsman states: "To protect taxpayers from future bailouts and stabilize America's economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices."
With the Eurozone approaching a meltdown that promises to more catastrophic than the failure of Lehman Brothers, and with big bailouts now too often assumed to be forthcoming in both the Eurozone and the US, there is no single issue more important in the coming election campaign than Too-Big-to-Fail. We need a President willing to let the banks fail. Once they fail, and their sound assets separated from their toxic assets we need to form new banks under competent management. Our precious public wealth is far better spent forming new banks with new managers and clean balance sheets than constantly running to the rescue of our current zombie bank sector that hoards cash and does not lend.
So, which candidate can we trust to bust up the banks? Right now, Huntsman makes sense and seems sincere. I might disagree with him on many other issues--including issues relating to financial regulation. But, I would vote for him if he were the candidate most likely to let the megabanks fail.
Even very recently, we learned that the bailouts were larger than we realized--amounting to trillions and trillions in secret Fed loans alone. The next set of bailouts will be larger. It will be tens of trillions. And, it is totally unjustified economically. This is the most pressing issue of our times--and the recent coordinated action by the world's major central banks confirms my point. A major crisis is afoot. We must end TBTF right now.
Loyola University Chicago