Should "Too Big to Fail" be "Too big to exist" regarding banks and other companies?

Lutherf said:

You have to remember that when an entity fails its assets don't disappear. I don't have information on hand to break out the assets of those banks and I don't have the time right now to look it up but I'm going to assume that a large chunk of those assets are loans. If all of those loans suddenly began to underperform there would definitely be a problem but, theoretically, the loans are also secured by tangible assets that have some kind of value. In the event of a collapse there would be LOTS of stuff the scavengers could pick up quickly. Values would be redetermined and life would go on. Yeah, some people would get hurt really bad but after that pain they could start rebuilding.

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DA60 said:

If you are referring to the bank bailouts, there is zero factual proof that had the bailouts not occurred that anything truly bad would have occurred.

The only two groups that say otherwise were bankers and economists...

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Cephus said:

It all depends on the bank, of course. The overall banking industry was largely responsible for the eventual real estate market crash because of how they behaved, but you can't blame it on individual banks which may have had either no clue or no power to do anything about it. Had we just kept banks out of the mortgage industry entirely, none of this would have happened. Had we regulated how mortgages were allowed to be chopped up until nobody had a clue what they actually had, none of this would have happened. Had we not allowed banks and mortgage companies to lie to the American people and especially had we not allowed fly-by-night mortgage companies to make known bad loans, only to sell them off to the big companies and run off to a beach in the South Pacific before anyone knew that they had a load of junk, none of this would have happened. And people knew this was going on and the government did nothing to stop it because the economy was flying and nobody wanted to recognize the problems with the system that existed.

Bank failures are relatively rare because the banks have traditionally been closely regulated. They aren't allowed to make tons of bad loans and take unmitigated risks. They have to act relatively conservatively. It's when that regulation breaks down that we see stretches of time where banks fall apart. We ought to learn from those situations.

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gdgyva said:

right now, there are a number of banks, especially in texas and north dakota that are in watch mode

too many loans out in one area....energy

and we all know what is happening with the price of oil right now

drilling has slowed, the shale companies in dakota are in trouble, and there are a lot of loans out on both areas

mostly little banks, and all secured

if they go under, 999/1000 will never even know it happens

shareholders, and those holding coupon notes will feel the pinch....

the FDIC will protect assets up to 200k on every account ( i think that is the amount)banks failing happens....part of the cycle of business once in a while

only issue is when it is something like a citibank, or a chase and the dollars lost can be more substantial

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Cephus said:

It all depends on the bank, of course. The overall banking industry was largely responsible for the eventual real estate market crash because of how they behaved, but you can't blame it on individual banks which may have had either no clue or no power to do anything about it. Had we just kept banks out of the mortgage industry entirely, none of this would have happened. Had we regulated how mortgages were allowed to be chopped up until nobody had a clue what they actually had, none of this would have happened. Had we not allowed banks and mortgage companies to lie to the American people and especially had we not allowed fly-by-night mortgage companies to make known bad loans, only to sell them off to the big companies and run off to a beach in the South Pacific before anyone knew that they had a load of junk, none of this would have happened. And people knew this was going on and the government did nothing to stop it because the economy was flying and nobody wanted to recognize the problems with the system that existed.

Bank failures are relatively rare because the banks have traditionally been closely regulated. They aren't allowed to make tons of bad loans and take unmitigated risks. They have to act relatively conservatively. It's when that regulation breaks down that we see stretches of time where banks fall apart. We ought to learn from those situations.

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upsideguy said:

The four largest US banks have total assets equal to about 40% of the US GDP. What if one fails?

https://www.snl.com/InteractiveX/Article.aspx?cdid=A-29064271-12846

Somewhat runs against the adage about putting all of one's eggs in one basket

don't put all your eggs in one basket

Don't dedicate all your resources into one thing.
Don’t count on any one thing to keep what is valuable safe.

So, when one of these banks fails we:
a) Let it, even though it could be a 15% hit to GDP or bail it out, b) adding 15% to the debt?

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soot said:

So your argument is that all four of those banks have every last penny of all of that money invested in the exact same asset?

There's no diversification at all?

No, as you put it, spreading those "eggs" out across thousands, perhaps even tens of thousands, of different "baskets"?

All ~$6T of it is tucked away in the same widget stock, and God help us all of if that one stock ever goes belly up!

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soot said:

So your argument is that all four of those banks have every last penny of all of that money invested in the exact same asset?

There's no diversification at all?

No, as you put it, spreading those "eggs" out across thousands, perhaps even tens of thousands, of different "baskets"?

All ~$6T of it is tucked away in the same widget stock, and God help us all of if that one stock ever goes belly up!

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Oberon said:

There are some incorrect assumptions here about what caused the 'banking crisis', the major one being 'government regulations caused it', which isn't remotely true. What caused it was unregulated derivative trades and outrageous leverage levels on the underlying values of the mortgages, many of which became so large fewer and fewer banks and funds had the means to trade in them, until finally a panic set in that essentially shut down all liquidity.

The First U.S. domino to fall, after the Swiss USB Bank wrote down their assets for a huge loss, was Thornburg, a company that held nothing but AAA prime mortgages on high end real estate with a loan default rate in the range of 0.02%, and no that isn't a typo. Why did they fail? Because they had leveraged some $1.7 billion in equity of their own on outstanding debts in CDO's and other debt of some $27 billion, and routinely leveraged monthly loans at 35 to 50 to 1 ratios, while at the same time paying out nearly all the interest income on their mortgage revenues in dividends, as required for REIT's, paying down no debt at all. Pretty simple to see that as soon as there was nobody around to take their notes any more they would crash within 60 days or so, and that is what happened, the 10 or so banks large enough to handle their business suddenly cut them off all at once and began calling in their margins, against Thornburg and each other, as they were all trading among themselves.

It had little to do with 'bad mortgages' at the low end of the housing market, though that is what crashed CountryWide, pure dishonesty and greed. The government wasn't to blame, bad business decisions and blind arrogance among the big players caused the crash, and of course hardly anything has been done about that since then, either, so they are all still it, after being bailed out.

Also see the failure of Long Term Capital Management in the '90's; same thing, and nothing done about it then either. The great math wizards who created that failure were given Nobel Prizes in Economics, some months after they crashed, which is just hilarious, and a telling commentary on just how worthless economists are in a real market. As a writer pointed out a couple of decades ago, when it comes to Wall Street, the smarter the players are, the bigger the disaster.

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upsideguy said:

.... yes, and how many "other companies" are capable of absorbing a wounded entity who's assets represent 15% of GDP? (hint, very, very few.... and when you have few buyers and a desperate seller, guess what?)



Should people lose ownership of property when they become a security threat to the US? That is what "too big to fail" is all about....

We have broken up oil companies and the phone companies in the past. While the owners may have lost monopolistic control, no one lost money. In fact, in both case, I believe the shareholders did quite well over the long term.

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Grand Mal said:

There's never been a bank failure in Canada. There were 8 in the US last year and that was low for the past decade.
In a few cases, regulation is a good thing.

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Fledermaus said:

Not entirely true.

http://www.bankofcanada.ca/wp-content/uploads/2010/07/bank.pdf

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Grand Mal said:

What is that about? I've never heard of the Canadian Commercial Bank or the Northland Bank of Canada.

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Fledermaus said:

What is that about? "There's never been a bank failure in Canada."

False.

Deal with it.

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Grand Mal said:

You're right. Both banks were short-lived and local to Edmonton- that's why I'd never heard of them.
There. Dealt with.

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