The methods for what could end “too big to fail” are complex, but we believe that one idea with merit is to make the banks smaller. This could be acheived in many ways: 1) putting a cap on bank size, relative to GDP, 2) separating investment and commercial banking by reinstating some form of Glass-Steagall, 3) separating insurance and mortgage lending, 4) taxing banks that get bigger than a certain threshold, and—most importantly for the average person—5) encouraging citizens to leave “too big to fail” banks and instead support local lenders.
Here is a small handful of the many people who have spoken out on this issue. When people ask who has spoken out about “too big to fail,” you can point them here.
Who should we add?
Bankers/Regulators
Sheila Bair, former FDIC Chair, has said that “even with very good management these institutions are just too big to manage.”
Neil Barofsky, former Inspector General for TARP: “Pretending that Dodd-Frank solved all our problems, as some Democrats do, or simply saying that big banks won’t be bailed out again, as some Republicans have suggested, is unrealistic. Congress needs to proactively break up the “too big to fail” banks through legislation.”
Brooksley Born, former chairman of the CFTC: “too big to fail is the primary problem” and “the Glass-Steagall Act, before it began to be eroded by the bank regulators, was a good idea.”
James Bullard, president of the St. Louis Fed: “We do not need these companies to be as big as they are … We should say we want smaller institutions so that they can safely fail if they need to fail.”
William Dudley, president of the NY Fed: “We are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society.”
Camden Fine, president of ICBA: “Consolidation in the banking industry and the emergence of financial institutions with explicit government guarantees against failure haven’t exactly contributed to an economic boom. It’s been just the reverse—they triggered an economic collapse.”
Richard Fisher, president of the Dallas Fed: “Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size—more manageable for both the executives of these institutions and their regulatory supervisors.”
Alan Greenspan, former Fed president: “If they’re too big to fail, they’re too big.”
Andrew Haldane, executive director, Bank of England: “Have we solved ‘too big to fail’? No. That’s not my pessimistic verdit; it is the market’s. … Too-big-to-fail is far from gone. It is even more important it is not forgotten.”
Thomas Hoenig, FDIC Chair: “Looking back, one sees that the crisis was inevitable, if for no other reason than that these TBTF firms would push the boundaries until there was a crisis.”
Mervyn King, governor of the Bank of England: “It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk.”
David Komansky, former Merrill Lynch CEO: “Unfortunately, I was one of the people who led the charge to get Glass-Steagall repealed. As I sit here today, I regret those activities and wish we hadn’t done that.”
Phil Purcell, former Chairman and CEO of Morgan Stanley: “There is one benefit of breakups that hasn’t gotten much publicity: Shareholders would get greater value from their investments.”
Wilbur Ross, CEO of WL Ross & Co: “Running an insurance company is not the same thing as running a retail bank. We don’t think there’s any logic in them being in the same entity.”
Scott Shay, founder of Signature Bank: “Fixing the banking system and reinstating Glass Steagall should be the highest priority.” Also: ”We wouldn’t trust our national defense to four military bases, but we trust our national economic security to four big banks.”
Roy Smith, former partner at Goldman Sachs: “Based on changing markets and increasing regulatory pressures, it is time to unwind the mega-banks into smaller, simpler, less risky business models.”
Dan Tarullo, governor of the Fed:”To the extent one can fairly induce an underlying principle, it is that the moral hazard associated with too-big- to-fail institutions should be counteracted in a variety of ways.”
Paul Volcker, former Fed chair: “There is an expectation that very large and complicated financial institutions will not be allowed to fail. Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits.”
Sandy Weill, former Citi CEO: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.”
Professors/PhDs
Anat Admati, economics professor at Stanford: “We’re not safer and there’s still a lot of systemic risks in large banks and in the financial sector overall.”
Dean Baker, economist at the Center for Economic and Policy Research: “A break-up of the big banks will at least give the country some hope that things can change. As it stands now, the big banks are back on their feet, and in some cases more profitable than ever, feasting on the now explicit government guarantee of support in the event of a crisis.”
Tony Dophin, economist and director at IPPR: “The best way to increase competition in the financial sector would be to break up the banks.”
Niall Ferguson, Harvard history professor: “Right now we don’t need a charade in which politicians claim they are going to regulate the big banks more tightly. … 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.”
Simon Johnson, economics professor at MIT: “The structural problems are worse. Their size, incentives—none of that has changed.”
Arnold Kling, CATO scholar: “My biggest objection to large financial institutions continues to be what I see as the inevitable collusion of politics and economics that results. When large banks have resources, politicians will be tempted to treat them as piñatas, taking whacks at them in order to extract money to distribute to constituents …. When large banks get in trouble, politicians will be tempted to bail them out.”
Russ Roberts, economist at Stanford’s Hoover Institute: “To me breaking up the banks would be better than the current situation, which is: fake capitalism where they [big banks] make money at taxpayers’ expense.”
Robert Reich, economist at Berkeley: “We did it to the giant oil companies a century ago because they were too powerful, economically and politically. It’s time to apply the same medicine to Wall Street.”
Nouriel Roubini, economics professor at NYU: “These institutions know they’re large, they know they’ve been bailed out once, and they know that if they get in trouble they’re going to be bailed out again.”
Luigi Zingales, finance professor at U of Chicago: “The too big to fail policy creates an unfair competitive advantage for large banks.” In the link Zingales also says that breaking up the banks is “not an unreasonable thing to do.”
Also see this survey of 36 economists who were asked whether they thought the US ”should make further efforts to shrink the size of the country’s largest banks.” (Over 50% agreed or strongly agreed, while only 10% disagreed.)
Pundits/Journalists
Erick Erickson, managing editor of RedState.com: ”It is absolutely a conservative imperative to break up the big banks. Conservatism should eschew public-private partnership at this level. The banks have, in effect, become an extension of the government in that they now exist in a wholly symbiotic and unhealthy relationship with Washington. If we want smaller government, we need smaller banks too.”
Michael Lewis, author: “I look at the financial system as it is now, and it feels like it’s built on sand. We did not cure the problem of too big to fail. Institutions have gotten bigger.”
Mike Mayo, analyst: ”The largest banks have underperformed not only on returns but also on efficiency, revenue, risk, transparency, reputation and stock price … When we ask, a large majority of investors indicate that breakups—divestitures, downsizings and de-mergers—would be good for stock prices.”
Gretchen Morgenson, financial editor NYTimes: “Big banks are bigger than ever, and they exert enormous power over regulators and lawmakers. Increasingly, smaller institutions can’t compete.”
Peggy Noonan, WSJ columnist: “Too big to fail is too big to continue. The megabanks have too much power in Washington and too much weight within the financial system.”
James Pethokoukis, writer for AEI, ”Breaking up the biggest banks would allow markets to work better, by cutting down on crony capitalist rent-seeking by big money from big government.”
Joseph Stiglitz, economist at Columbia University: “You look at the “too big to fail” banks, and you look at their incentive structures. They know that they’re too big to fail, so if they gamble and win, they walk off with the profits.”
Matt Taibbi, writer at Rolling Stone: “By now, virtually everybody who has an informed opinion on the matter thinks the TBTF system makes no sense and must end — the only people who really disagree are the leaders of those firms, the politicians who depend on their money.”
Jimmy Wales, Wikipedia co-founder (we know, he’s not really a pundit, but we didn’t know which category to put him in, so…): “Too big to fail is an abomination.”
George Will, Washington Post columnist: “Capitalism—which is, as Milton Friedman tirelessly insisted, a profit and loss system—is subverted by TBTF, which socializes losses while leaving profits private.”
Politicians
Sen. Sherrod Brown, Ohio: “Allowing Wall Street megabanks to grow so large and over-leveraged that their downfall would send ripples throughout our entire economy isn’t fair to taxpayers and it isn’t fair to mid-sized and community banks who don’t enjoy the implicit guarantee from the Treasury Department that comes with too big to fail status.”
Sen. Maria Cantwell, Washington: “So much U.S. taxpayer-backed money is going into speculation in dark markets that it has diverted lending capital from our community banks and small businesses … It’s time to go back to separating commercial banking from Wall Street investment banking.”
Sen. Robert Casey, Pennsylvania: “These banks are such big institutions and have tentacles reaching so far into the economy that the failure of one or more of these institutions can wreck the economy. That is why I am supporting an amendment to limit the size of the mega-banks and end “too big to fail.”
Rep. Scott Garrett, New Jersey: “We cannot allow “Too-Big-To-Fail” to take root in our non-bank financial institutions. These institutions must not be allowed to be captured in the same regulatory scheme that will protect them from market forces, stifle innovation and creativity in the broader financial sector, and ensure taxpayers remain on the hook for their failure.”
Sen. Ted Kaufman, (former) Delaware “I’d like to return to Glass-Steagall. But even if you did break these banks apart, you need to place caps on their size.”
Rep. Tom Harkin, (former) Iowa: “It is clear to me that going back to the Glass-Steagall era regulations will help end the problem of ‘too big to fail’ and will restore order to our financial sector.”
Jon Huntsman, former governor of Utah: “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.”
Sen. Mike Lee, Utah, referring to Glass-Steagall, “Hardly ever will you hear me say, ‘yeah, I think we ought to bring back the 1933 law.’ This is one of those very rare instances when I think, ‘yeah, we should probably bring back the 1933 law’… I think we need to bring that law back.”
Sen. Carl Levin, Michigan: “What banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making.”
Sen. John McCain, Arizona: “No single financial institution should be so big that its failure would bring ruin to our economy and destroy millions of American jobs. This country would be better served if we limit the activities of these financial institutions.”
Sen. Jeff Merkley, Oregon: “Our banking system and our economy do better if bad bets blow up only those who make the bets and not the entire banking system that fuels economic growth and job creation.”
Rep. Brad Miller, (former) North Carolina: “We can just break the biggest banks up. A bank would almost certainly be easier to understand, both for the bank’s managers and for safety and soundness regulators.”
Sen. Rand Paul, Kentucky: “Ask the Facebook generation if they want to bailout too big to fail banks with their tax dollars, and you’ll hear a ‘hell, no.’ There is nothing conservative about bailing out Wall Street.”
Sen. David Vitter, Louisiana: “There is growing bipartisan concern across the whole political spectrum about the fact—I believe it’s a fact—that ‘too big to fail’ is alive and well.”
Sen. Elizabeth Warren, Massachusetts: “A new Glass-Steagall would separate high-risk investment banks from more traditional banking. It would allow Wall Street to take risks, but not by dipping into the life savings and retirement accounts of regular people.”
Here’s a list of 33 Senators who voted for the Brown-Kaufmann amendment, an amendment to the Dodd-Frank Act that would have broken up the megabanks. While we’re disappointed that it didn’t pass, the fact that it got 33 votes means that there is hope that with enough public pressure, we could see a similar bill garner the needed 50 votes in the future.
Begich (AK), Bingaman (NM), Boxer (CA), Brown (OH), Burris (IL), Cantwell (WA), Cardin (MD), Casey (PA), Coburn (OK), Dorgan (ND), Durbin (IL), Ensign (NV), Feingold (WI), Franken (MN), Harkin (IA), Kaufman (DE), Leahy (VT), Levin (MI), Lincoln (AR), Merkley (OR), Mikulski (MD), Murray (WA), Pryor (AR), Reid (NV), Rockefeller (WV), Sanders (VT), Shelby (AL), Specter (PA), Stabenow (MI), Udall (NM), Webb (VA), Whitehouse (RI), Wyden (OR)
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