There are too many too-big-to-fail megabanks in this country that only exist because the government supports them with guarantees of unlimited taxpayer money. They are the biggest Wall Street behemoths like Goldman, JP Morgan, Bank of America, Morgan Stanley, Citicorp and a few others. Being too-big-to-fail means that not one of them would be allowed to fail and go bankrupt like every other company in America and like capitalism is supposed to work.
They all talk about free markets and capitalism, but none of them practice it or, frankly, even believe in it: if any one of them were to fail, the US government would save them by bailing them out with taxpayer money to prevent a repeat of 2008 when our entire financial system and economy was at risk of collapse – that’s the guarantee that keeps them alive in their current otherwise unsustainable size. That’s what people mean when they say those megabanks are subsidized by or benefit from an implicit guarantee from the government (although it has really become an explicit guarantee). This is also why people say, correctly, that megabanks get the upside of their bets, but taxpayers get the bill when they lose those bets.
None of these risks would exist if these megabanks weren’t so big or, even though they were so big, they could nonetheless fail without risking another financial crisis. THAT is what all of financial reform is aimed at doing. That is why the Dodd Frank reform law exists.
The best recent example of how the system and capitalism is supposed to work? MF Global. It took huge, reckless bets with borrowed money and, when those bets didn’t pay off, it failed and filed for bankruptcy. Thankfully, MF Global was not too-big-to-fail. It didn’t threaten our financial system or our economy so it didn’t get bailed out. The CEO and many others lost their jobs and a lot of people lost money, including the investors and lenders.
That’s what’s supposed to happen. That’s capitalism. That’s free markets. That’s the discipline of the markets. And, that’s what should happen to Goldman, JP Morgan, Bank of America, Morgan Stanley, Citicorp and all the other megabanks that are now too-big-to-fail.
How do we get from here to there? First and foremost, we have to implement the financial reform law as fully and quickly as possible. That means fighting the megabanks who are trying to delay, gut and kill financial reform so that they can stay too-big-to-fail, keep making huge reckless bets that line their pockets with billions in bonuses and get bailed out by the government when the lose. That means that those megabanks actually never lose, which is what happened when taxpayers bailout out Goldman, Morgan Stanley, Bank of America, AIG, Citicorp, and all the other too-big-to-fail banks in 2008. After Lehman failed, not one of them had to file bankruptcy (although all were bankrupt), not one CEO lost his job, no stockholders or lenders lost money and most didn’t even lose their riches or bonuses.
That’s what the fight about financial reform is really all about: do those megabanks and Wall Street CEOs get to keep US taxpayers on the hook for their gambling losses or do those megabanks and their CEOs go bankrupt like everyone else in America when they fail? Of course, that’s not what the megabanks say. They say they only want to lend to small business, they want the economy to grow, they want to bring unemployment down and all sorts of other things we all want. Ever notice how the megabanks and their mouthpieces never mention their too-big-to-fail banks’ profits, market share or bonuses? Funny that.
To really end too-big-to-fail and to protect taxpayers we have to have a credible plan to break up a megabank if it gets into trouble and do it in a way that doesn’t threaten the entire system or the economy. That’s what the FDIC is trying to do, as I wrote about recently.
A must read New York Times column also spells out why this is so important and how to do it.
Let’s make sure Goldman can fail like MF Global failed. (I’m not talking about the MF Global customers who lost money; that’s wrong and shouldn’t have happened. Someone should be punished for that, but it doesn’t change the fact that MF Global wasn’t systemically important, failed, was allowed to fail and didn’t require a taxpayer bailout – that’s the real lesson of MF Global.)