Too-Big-to-Fail: Beginning of the End?

If this turns out to be true, it could be the end for the era of the “too big to fail” [TBTF] doctrine, which is essentially a notion that encourages everyone to want to become big enough to enjoy systemic risk protection. Now, we are not suggesting we punish or prevent organic growth that may result in an institution having TBTF status. That would be clearly non-capitalistic. However, TBTF institutions must be regulated in a way that at minimum partially offsets the risks they pose to the rest of the financial system.

From AP:

They are the biggest of the big — the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn’t want so many around anymore.
Financial regulations proposed by the president would result in leaner and simpler institutions that don’t carry the weight of the system on their marble columns.

Around Washington and Wall Street they have come to be known as TBTF — too big to fail. It’s not just size, though. These companies are so far-flung, so intertwined and so precariously leveraged that a single one’s collapse can create systemwide tremors that imperil the finances of millions of Americans.

With that fear in mind, the government stepped in to bail out Citigroup Inc., Bank of America Corp. and American International Group Inc. with tens of billions of public money last year.

Looking to avoid such a costly intervention, President Barack Obama’s regulatory plan calls for large, interconnected companies to pay a heavy price for the systemwide risk they pose.

In the perverse climate of suspicion that has enveloped the market for the last two years, we would be reluctant to put too much stock in any statement. At this point,  we’ll believe it when we see it.

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