Saving Private Bankers

Are the big banks still too big to fail? You bet they are.

The top four banks in the US have over $6 trillion in assets. Goldman and Morgan Stanley probably have that much exposure in swaps and other off-balance-sheet items. If one of them faced insolvency, the interconnectedness of our financial system demands that government step in and guarantee their financial operations, even if shareholders are wiped out. When Lehman failed, its global web of assets and liabilities led to a financial panic.

Since officials don’t want to see another Lehman-inspired collapse, the implicit backing of the government supplies intangible capital to every firm seen as too important to be cut loose. There’s no doubt that the large firms benefit from this implied support—their bonds yield far less than they otherwise would. So what to do?

It’s simply not tenable to say “Never again,” and write them off. Politicians won’t go there. And breaking them up by governmental fiat seems Orwellian at the least. It’s never been a crime to be successful here. The solution should be financial: since implicit taxpayer support has a financial benefit, make that support explicit and charge a fee, as we do with the FDIC. That would incent firms to be profitable and small, creating less systemic risk in the process.

Dodd-Frank was an attempt to control systemic risk through regulation. But regulators can be captured, and regulations can be circumvented. Financial incentives seem far more robust. Because even when it comes to banks, death and taxes are inevitable.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By |2014-09-11T13:49:57+00:00March 24th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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