“Too Big To Fail:" The Hazards Of Bank Bailouts

Too Big Too Fail
Too Big Too Fail
Too Big Too Fail

Back in the day - we're talking 2004 - Minneapolis Federal Reserve President Gary Stern and Sr VP Ron Feldman wrote “TOO BIG TO FAIL: THE HAZARDS OF BANK BAILOUTS.”

Back in 2004!

Way before Lehman and AIG and the others.

Now the book is back – with new insight and new recommendations.

The authors told NPR they got a look at the “too big to fail”phenomenon in 2001 when – a broker-dealer firm in Minneapolis (not Wall Street) got into trouble.

“The firm’s counsel made an interesting argument: If it was allowed to go under, the lawyer said, it could disrupt economic activity in the Midwest” they told the network.

That didn’t happen – and the authors argue that the idea that “government might be expected to step in is dangerous, because it encourages people to take risks they shouldn’t.”

“Right now, we don’t have an entity – an oversight entity, a government entity – that thinks to itself, ‘What happens if this institution gets into trouble and is going to fail. What would we do about it at that time …The primary focus of most supervision is to prevent them from getting into trouble. And I think it sounds like a generic thing – 'Well, you change your focus.’ That’s not trivial. That’s important. Because it’s by focusing on what we would do if they got into trouble that this stuff gets revealed,” says Feldman.

You can imagine all the questions the authors are fielding now – like why wasn’t their book written back in 2004 given more attention? Oy!




Alan Greenspan

Alan Greenspan

NPR says at a recent DC tour among those in attendance was former Federal Reserve Chairman Alan Greenspan.

He reportedly said he considered the quandary of "too big to fail" when he was in office, and he has thought about it more lately, too.

"Fannie and Freddie were not too big to fail," he told those in attendance. "How do I know? That's what the law said. On the debentures, when they used to be physical paper, it literally said, 'These instruments are not protected by the full faith and credit of the United States government.' "

Greenspan told NPR no government official could really say otherwise.

"Indeed, I always took the position when I ended up [testifying on Capitol] Hill that Fannie and Freddie were not too big to fail," Greenspan remembers. "Needless to say, my fingers were crossed behind my back. But you cannot have that position and still argue that the federal government has credibility."

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