Behavioral Finance

Too “Even Bigger to Fail”

Ron Gambassi
December 13, 2011

The banks were “too big to fail” before the 2008 crash. Do you know those same banks are even bigger today?

According to data compiled by Capital IQ,  JP Morgan had assets of $1.3 trillion before the crash, now it has $2.3 Trillion. BofA went from $1.4T to $2.2T,  Citi from $1.8T to $1.9T and Wells Fargo from $0.5T to $1.3T.

These four banks have the equivalent of more than half the entire output of the U.S. economy of $14.4 Trillion! That’s just too risky for the fiscal health of the country.

The U.S. government had no choice but to bail out the banks. Had they not done so the economic catastrophe in this country would probably have been at least as bad as that of the Great Depression. Sometimes you can learn from  history. Why aren’t we learning from this piece of recent and painful history by still allowing these banks to get bigger than they were before the crash of ’08?

JP Morgan consumed Bear Stearns and Washington Mutual. Bank of America gobbled up Merrill Lynch and Countrywide. Wells Fargo picked up Wachovia. Citibank was in such tough shape back in 2008 they were not in a position to  acquire any of the troubled financial firms.

So what will happen when one of these financial mega outfits gets in trouble the next time? Most likely, the same exact thing as the last time, a government bailout. In fairness, these institutions are much better capitalized  then they were in the period leading up to the crash. One might argue the oversight is better now, though after what recently happened to MF Global that hope seems overly optimistic.

The fact remains, these banks are at the core of the financial lives of millions of Americans and they are once again “too big to fail”. Why? Because the repercussions of failure would be devastating to our way of life.

By all accounts the probability of failure of any of these institutions is extremely low but should we even allow a low probability scenario to remain in play? When the financial engine of the world’s biggest economy is at stake it  seems the answer should be a resounding, ‘no’. While we may agree that the prospect of a mega bank failure is highly unlikely there is another and much more likely outcome. Let’s call it “too big to serve”. That is, too big to serve its customer base effectively. It’s a daunting task to merge big corporations. The different corporate cultures, information technology, politics, compensation systems and so on make these mergers almost doomed from the start.

We’ve recently seen one example of how the hubris of a mega bank can impact the customer experience. Just a few months ago Bank of America was about to roll out a monthly fee for customers using their debit cards. The backlash was  fast and furious which led to the bank retracting its position.

Customers will decide for themselves if their Merrill Lynch experience is better now that it’s a Bank of America experience. or if their Wachovia relationship is better coming from Wells Fargo, or their Washington Mutual  interactions are better now that they are JP Morgan Chase.

Too big to fail…too big to serve. Either way, “too big” in this instance is not good for the country or the customer.

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