It has been over 25 years since the concept of Too Big To Fail seems to have become established in the financial markets in the US. My first inclination was to use the term banking instead of financial but then it dawned on me that neither Lehman nor AIG were commercial banks and definitely not Bear.
Continental Bank of Illinois was eventually effectively nationalized and the regulators did not push Citi over the edge during the banking crisis of the late 1980's. I for one never understood the rationale behind TBTF. It is reasonable to make exceptions when an unanticipated event takes place but to go on living ,for a period of close to 30 years, under the shadow of a devastating financial collapse without taking any measures to protect the system from these catastrophic failures is unacceptable and maybe even unconscionable. In the words of Mervyn King, the head of the Bank of England (the UK"s central bank) if an institution is too big to fail then it is simply too big.
Personally , though, I do not favour the breaking up of banks but I believe that regulations and tax policies are a better way to dissuade banks from getting too big and too risky. It looks that Barack Obama has chosen to listen to the advice of Paul Volcker on this issue and I for one support the Volcker, Stiglitz, Soros remedy for the big banks. Tax them and regulate them so as to take away the preferential perception that they are too big to fail and thus they do not have to abide by the same rules as other lesser institutions.
For a cogent discussion read the article by Mr Volcker in the Sunday issue of the NYT January 31, 2010.
