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Too Big to Fail: A History

Too Big to Fail: A History

Big bailouts weren't unprecedented in 2008—but their numbers were.

“All were handled behind closed doors,” Sprague observes and adds that the cost of congressionally approved bailouts of commercial firms, which were publicly debated and narrowly approved, was far less than the under-the-table bailouts of large banks over the past few decades by federal regulators like the FDIC.

“Bear Stearns wasn't bailed out by Jamie Dimon,” argues one veteran staffer and observer of Capitol Hill. “JPMorgan was bailed out by the U.S. government, and as part of that, Bear was bailed out, even though Volcker himself has claimed the Fed lacked the authority to do this. Similarly, Bank of America was bailed out and then enabled to take over Merrill Lynch.”

The moral of the story is that the tendency to rely upon government bailouts, “too big to fail” when referring to banks, is a function of many factors, but none more important than the convenience of politicians and federal bank regulators. The story of Lehman Brothers is one of those rare occasions when the successors to Paul Volcker and Gerry Corrigan were not able to clean up the mess short of a public failure. But remember, such things can only happen in a free society.

While Americans may hate the idea of “too big too fail,” they would be a lot less happy if the ATM machines were all closed tomorrow, and the next day, and the next. That is precisely what happened to millions of Americans in 1932-1933, when many banks were closed for months at a time. And despite the rhetoric, that is why bailouts are likely to be around as long as we have banks and politicians.

Christopher Whalen is an author and investment banker who lives in New York. His website is www.rcwhalen.com.

Image: Flickr/Mike Poresky. CC BY 2.0.