I keep a file of issues that I mean to write about one day. Since I'm about to take a short leave from this column—six weeks or so—I'm going to take the opportunity to do a little housekeeping. Here, in no particular order, are five questions that have been troubling me about our financial future.
Is TBTF really dead? Do you remember the never-ending series of Friday the 13th slasher films? No matter how many ways we killed Jason, he would never die. Well, the concept of "too big to fail" is the new Jason: We may never be able to kill it off.
The Dodd-Frank financial reform legislation was supposed to fix TBTF. Remember President Obama's words when he signed the bill? "There will be no more taxpayer-funded bailouts. Period." But I can't find anyone—besides the bankers at the TBTF firms and a few politicians who are eager to defend their handiwork—who argue we don't need to worry about future bailouts. Skeptics say that once the government establishes, as Dodd-Frank does, a process to prevent failing big firms from taking down the whole economy—funded not by taxpayers but by industry—then by definition you already have a big, or rather a too-big, problem, because politics will enter into what should be purely market-driven decisions. (Speaking of horror films, the Dodd-Frank requirements are actually kind of spooky themselves. Firms that are deemed systemically important are supposed to create "living wills," or lay out a process for winding themselves down; the business can also be subjected to something called the Orderly Liquidation Facility.)
There's a pretty strong consensus that TBTF is alive and well. Indeed, it may be worse than ever, because the financial crisis led to even more consolidation in the financial sector. In a Feb. 23 speech, Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, said, "I am convinced that the existence of "too big to fail" institutions poses the greatest risk to the US economy." He noted that in 1999, the five largest U.S. banking organizations had about 38 percent of total banking assets. Now, the top five banks have 52 percent of all bank assets.
In a recent paper, former Federal Reserve Chairman Alan Greenspan, who helped create the 2008 financial mess, wrote this:
The American government, in response to the Lehman crisis, did what to most had been unthinkable previously. Henceforth, it will be exceedingly difficult to contain the range of possible [government] activism. Promises of future government restraint will not be believed by markets.
Then, in an interview with the Wall Street Journal, hedge fund manager Paul Singer, the founder of Elliott Management, had this to say about the big banks:
It's a very important part of this equation that a few survivors exist in the peculiar relationship with government, having to kowtow to government, make relationships with regulators. Are they puppets of the government? Are they cronies of the government? Will their lending be affected by the perceived shims or beliefs of the particular government regulators existing at a particular time? Yes.
And Neal Barofsky, who is leaving his position as the inspector general for the Troubled Asset Relief Program, or TARP, said in his final testimony before the Senate, "For all its help in rescuing the financial system from the brink of collapse, TARP may have left a truly frightening legacy. It has increased the potential need for future government bailouts by encouraging the 'too big to fail' financial institutions to become even bigger and more interconnected that before, therefore increasing their ultimate danger to the financial system."
Stay tuned for Friday the 13th Part XIII: Jason Takes Manhattan.