Too Big to Fail Has NOT Ended … It’s Only Gotten WORSE

George Washington's picture

Last week, Paul Krugman said too big to fail is over:

There was indeed a large-bank funding advantage during and for some time after the crisis, but it has now been diminished or gone away — maybe even slightly reversed. That is, financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008.


This news is part of broader evidence that Dodd-Frank has actually done considerable good, on fronts from consumer protection to bank capitalization ….

But as David Dayen notes, Krugman’s stretching the facts:

The report [that Krugman relies on for his claim that too big to fail] doesn’t really say that future bailouts won’t be as favorable to the fat cats, or even that market participants believe that: it does say that large financial institutions would likely continue to enjoy lower funding costs than their counterparts in times of high credit risk (see page 40). Furthermore, the report so completely second-guesses itself that it shouldn’t be taken as evidence of anything, as the report itself states in numerous spots. Presumably a Nobel Prize winner has come across reports with muted conclusions before and would know not to get too far out in front of the facts by amplifying them.




The report did not say that the advantage has “essentially disappeared.” GAO ran 42 models to try and assess the subsidy. In 2013, 18 of those models effectively tested positive for the subsidy, 8 tested negative, and 16 showed nothing. That’s fairly inconclusive, and not at all as definitive as Krugman makes it.




Gretchen Morgenson reported on the same study in the news, and managed to get it right, contrawhat Krugman thought he could get away with on the op-ed page.

(GAO’s) methodology was convoluted and its conclusions hardly definitive. The report said that while the big banks had enjoyed a subsidy during the financial crisis, that benefit “may have declined or reversed in recent years.” [...]


The trouble with this mishmash is that big bankers and even policy makers will cite these figures as proof that the problem of too-big-to-fail institutions has been resolved. Mary J. Miller, the departing under secretary for domestic finance at the United States Treasury, wrote in a letter about the report: “We believe these results reflect increased market recognition of what should now be evident — Dodd-Frank ended ‘too big to fail’ as a matter of law.”


Not exactly. As the report noted, the value of the implied guarantee varies, skyrocketing with economic stress (such as in 2008) and settling back down in periods of calm.


In other words, were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-cost taxpayer bailouts remains very much with us.

There’s more: Morgenson actually watched the hearing about the report, and found credible questioning of GAO’s methodology, in particular the narrow way in which they defined the subsidy as entirely about lower debt costs, instead of the lower cost of equity and benefits to stockholders. I’ve also heard that bond prices, with their focus on immediate-term risk, are simply an inaccurate indicator of short-term borrowing costs, particularly those in the securities lending markets.

And a few days after Krugman wrote his piece, the Washington Post reported:

Eleven of the biggest U.S. banks have no viable plan for unwinding their businesses without rattling the economy, federal regulators said Tuesday, ordering the firms to address their shortcomings by July 2015 or face tougher rules.



The Federal Reserve and the Federal Deposit Insurance Corp. called the banks’ resolution plans, or “living wills,” “unrealistic or inadequately supported.” They said the plans “fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for” an orderly resolution.




“Each plan being discussed today is deficient and fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis,” Thomas M. Hoenig, vice chairman of the FDIC, said in a statement Tuesday.




Regulators, especially Hoenig at the FDIC, worry that banks are generally larger, more complicated and more interconnected than they were before the meltdown.




And the average notional value of derivatives for the three largest firms exceeded $60 trillion at the end of 2013, up 30 percent from the start of the crisis.



“There have been no fundamental changes in their reliance on wholesale funding markets, bank-like money-market funds, or repos [repurchase agreements], activities that have proven to be major sources of volatility.”

David Stockman – Ronald Reagan’s budget director – writes:

the giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous. Indeed, JPM and BAC were taken to their present unmanageable size by regulators—ostensibly fighting the last outbreak of TBTF—who imposed or acquiesced to the shotgun mergers of late 2008.


So now these same regulators, who have spent four years stumbling around in the Dodd-Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their wards for not having sufficiently robust “living wills”. C’mon! This is just another Washington double-shuffle.


The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.

And Michael Winship notes:

In The New York Times, columnist Gretchen Morgenson writes, “Six years after the financial crisis, it’s clear that some institutions remain too complex and interconnected to be unwound quickly and efficiently if they get into trouble.“It is also clear that this status confers financial benefits on those institutions. Stated simply, there is an enormous value in a bank’s ability to tap the taxpayer for a bailout rather than being forced to go through bankruptcy.”


Morgenson adds, “Were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-taxpayer bailouts remains very much with us.”


Financial professionals echo her concern. Camden Fine, president and CEO of the Independent Community Bankers of America, notes in American Banker (not without self-interest) that while the size of big bank subsidies may have “diminished since the crisis … the larger point is that the biggest and riskiest financial firms still have a competitive advantage in the marketplace. They can still access subsidized funding more cheaply than smaller financial firms because creditors believe the government would bail them out in the event of a crisis. No matter how you cut it, a subsidy is a subsidy. And this subsidy is one that puts the American taxpayer on the hook. …


“Meanwhile, the largest financial institutions are only getting bigger. According to our analysis of call report data from the Federal Deposit Insurance Corp., since the end of 2009, the assets of the six largest financial institutions have grown each year. Their total assets rose from $6.41 trillion in 2009 to $7.22 trillion in 2014 — a total increase of $800 billion. The top six banks are also responsible for more than half of the $2 trillion increase in total U.S. banking assets in the years since 2009.”




As Senators Brown and Vitter stated, “Today’s report confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions. Wall Street lobbyists may try to spin that the advantage has lessened. But if the Army Corps of Engineers came out with a study that said a levee system works pretty well when it’s sunny — but couldn’t be trusted in a hurricane — we would take that as evidence we need to act.”

We’ve noted for years that, the Dodd-Frank financial “reform” bill is a joke which:

  • Was just a P.R. stunt which didn’t really change anything

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VWAndy's picture

We are kind of out of good options.

kchrisc's picture

They may be too big to fail, but they are not too big to guillotine.

Too big to fail, guillotine instead: TBTFGI

VWAndy's picture

bit by bit I am starting to see things your way. And that sucks!

kchrisc's picture

Yup, if they would just go away without violence, I would be all for it, except I do not support "truth and reconciliation," as their crimes and criminality must be answered for as a testament to later generations.

However, as witnessed by NDAA, equipment and bullet purchases and the actions of the local gun and badge thugs, they, the DC US, are already actively in a state of violence, war and treason, against the American people and country.

I also maintain a CAAP-DB list.


In addition to the Four Rs, the American people should be compiling a list, call it the Crimes Against the American People Database (CAAP-DB)

 A list of known pol, crat, functionaries (funcs) and bankster criminals in their sphere of influence. Oath violating and treasonous gun and badge thugs, corrupt pols and crats, thieving banksters, etc. should be placed on it. Their names, crimes and positions should be, at a minimum, kept for future reference and trial.

When the DC US finally collapses, these lists can then be used to root out the known criminals that will think that they can hide among their victims--no "Truth and Reconciliation" and no quarter.


ajax's picture



US taxpayers = more money than god?

dontgoforit's picture

This is because the powers that be care more about money than God.  How do you think He feels about it?  How would you feel if you were Him?  Yeah, me too.  I'd be pissed; but I'd also feel totally taken for granted and that those to whom I'd given everything are the biggest group of ingrates the world has ever seen.  Judgement time?  Well, can you blame Him?

moneybots's picture


"In other words, were we to return to panic mode, the value of the implied taxpayer backing would rocket. The threat of high-cost taxpayer bailouts remains very much with us."


Tax paying depositor bail-ins.


Vendetta's picture

Takeaway:  banks are bigger, nothing has been done to correct anything, political system and real leadership is awol.   Got it.

Reaper's picture

It's the stupidity of trust in government agencies and swallowing the government/media/financial industrial complex's pabulum. One stupidity justifies another stupidity. TBTF is Holder's excuse for TBTP. Krugman is a pitchman squawking outside the sheeple fleecing and butchering tents.

TBTF = TBTP = More Big Theft

lester1's picture

Whats the lesson from this article?.. Get your money out of the big banks!

Title II of Dodd-Frank Act allows for the big banks to confiscate your deposits should the bank fail. FDIC wont have the resources to bail out depositors. Its called a "bail-in". Amazing how bail-ins are not talked about in this article. It's pretty significant.

Imagine waking up one day and your account balance is $0.

Scary stuff. It's coming.

one-in-nine's picture

If your account suddenly goes to zero it will be due to Russian hackers. It will have been Putin's fault for a change, not Bush's. ;)

3rd Pig's picture


Well its wolves and pigs... I mean wolves and sheep... I mean two wolves and a sheep deciding to eat pork for dinner. No that’s democracy... what do I mean..?

Someone’s lunch... that’s it!


nmewn's picture

"the giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous."

Well sure.

You take two of THE MOST corrupt, in-the-pocket-of-the-commercial-banks (besides Schumer) politicians and have them "negotiate" a law between themselves, to be called Dodd-Frank...and what did you expect would happen?

Someone had to do something! ;-)

AdvancingTime's picture

The authorities are acting primarily to prop up governments as well as the economy by saving the financial system. It is important to remember these authorities are politicians and bureaucrats that want increased power and influence, and guess what, they may have hit the jackpot. Those in power have joined with the banks to create the "Financial-Political Complex" that promotes the current financial policy and supports banks that are "to big to fail".

Many people say that the way out of the housing crisis is to let everyone fix their mortgage debt at super low fixed rates, then inflate, inflate, inflate? Well perhaps the government's way out of its own debt is to secure low fixed rates for itself then inflate away when it becomes necessary.It should not bring comfort to the average man that these to unholy forces have joined together in such a union. More on this subject in the article below.

AdvancingTime's picture

 The more and more I study derivatives it now appears the main goal of QE may have been to hold up the underlying value of assets that feed into and support the massive derivative market more than help the economy.The economy is in big trouble.

QE has up to now stopped an implosion of derivatives and the resulting contagion and shock that would have spread throughout the financial system. In postponing this collapse the Fed has created a whole slew of new problems. More on this subject in the article below.

dontgoforit's picture

financial ebola in a syringe - who gets stuck first?

ebworthen's picture

Yes, "mission accomplished" - make it seem as if bailing out corrupt banks/insurers/corporations is "good for the country" (the 1%) and isn't crushing the middle class, savers, and retirees.

Brian Williams and the rest of the MSM helping out; thanks "journalists".

dontgoforit's picture

Yeah - the 4th estate.....the one before the fifth dimension - liberal nirvana.

Watson's picture

Too Big to Fail Has NOT Ended

Perhaps 'Fail' is too strong, but, IMO, politics (not regulation) has ended the blanket bailout culture.

Suppose there was a problem at JPM today.
IMO, Obama, Yellen, etc., would appear on TV to assure Joe Sixpack that his checking account and anything under FDIC was protected (probably giving a US guarantee to FDIC to back this, and executing the protection by moving all those JPM accounts to a Newco under FDIC control).

And then JPM goes into run-off, and maybe Chapter-11 if things bad enough.

There might be a bit of 'bailout' left in the sense that I think there would be (IMO misplaced) reluctance to allow senior bondholders/depositors outside FDIC protection to lose out.
But forget blanket bailout (government buying new shares, etc.).

In summary, today, it is simply _not politically acceptable_ to run a blanket bailout.
To a politician, today, there are only lost votes in supporting a new round of bailouts.
And, for the banks, that political reality is far more dangerous than any amount of regulation.


El Vaquero's picture

GW, I'm going to repeat this over and over:  A lot of those derivatives held by the banks are held by subsidiaries of the bank holding companies that have N.A. after their name.  National Association.  This means that they are FDIC insured deposit taking subsidiaries.  This means that if that shit blows up, taxpayers are on the hook, and we all know that isn't going to work.  So go ahead, convince congress that it should do something about TBTF.  Our economy will be held hostage, and the gutless wonders in congress won't do anything that jeopardizes their reelection prospects. 


You want liberty?  Put yourself in a position where you can take it.  Put yourself in a position where you can keep it.  Plant a garden.  Learn how to butcher at least small animals.  At least read up on how to make things like soap and how to spin your own thread.  Roll the guillotines.  It's not the solution that I want, but I suspect that it is the solution that I'll get.  Nothing is changing.  And to any NSA fucks reading this, your totalitarian spying is part of the problem that will likely lead to guillotines as the solution. 

conscious being's picture

Replying because I noticed if I just navigate away my vote won't stick. TD sacralidge - platform issues.


ajax's picture



"TD sacralidge": try sacrilege, it looks better

dontgoforit's picture

In tha nu norm, u kin spel anyting u want anywaa u want. 

El Vaquero's picture

Fuck speeling shit right anyway.  English is a whore of a language, and its shit ain't phonetic. 

Obamanism's picture

Yes, Too big Too Fail has gone away and been replaced by Customer Bail-in. Think about it a Bank is going round the U-bend, goes with its hand out to the Fed or Treasury and the Government  say use the Bail in and we will help. The light will go on above the banks head, suddenly you have a Cyprus type bail-in and customers have to fork up 10-40% of their deposits. Krugman (Krudman) will say "see TBTF cannot happen."

Nexus789's picture

I think Krugman has finally lost the plot...doubt if he ever really understood. 

Obamanism's picture

More like Krudman has lost his pot

George Washington's picture

Calling Mr. Banzai, paging Mr. Banzai (I have the photoshop skills of an earthworm ...)

Kelly's picture

You did great. It's kinda dreamy. 

TeethVillage88s's picture

Krugman CIA - Paid Shill
Krugman just a stuffy Economist