How megabanks have turned 'too big to fail' from insult to security blanket: report

24 March 2023

When Wall Street went into full cardiac arrest in September 2008, supporters of the bank bailouts described Wells Fargo, Bank of America, Goldman Sachs and other megabanks as "too big to fail." The Great Recession was the United States' worst economic crisis since the Great Depression of the 1930s, but supporters of the bailouts argued that it would have been even worse had banks of that size been allowed to go under.

During the Great Recession, Americans who were angry about the bailouts — from liberals and progressives to far-right Tea Party Republicans — turned "too big to fail" into an insult. Liberal Sen. Elizabeth Warren (D-Massachusetts) and self-described "democratic socialist" Sen. Bernie Sanders (I-Vermont) proposed breaking up large banks into a bunch of smaller banks.

But in an article published by Axios on March 24, reporter Emily Peck stresses that the term "too big to fail" has gone from being "shorthand to villainize big banks" to being "a way to say, 'our money is safe.'"

"The number of banks in the U.S. has been falling steadily since the 1980s," Peck explains, "and crises tend to accelerate that process, says Aaron Klein, a senior fellow at Brookings…. Since the collapse of Silicon Valley Bank and Signature Bank, depositors have pulled money out of regional banks, i.e., the ones small enough to fail."

In an article published on March 21, the New York Times' Stacy Cowley reported that Scott Orn — chief operating officer for the accounting firm Kruze Consulting — found that many clients, following SVB's collapse, were moving their money to one of the megabanks: JPMorgan Chase.

Orn told the Times, "As things started getting scarier and the regional banks' stock prices started getting hit, it became clear that the only place you're totally safe is the too-big-to-fail banks. It's the prisoner's dilemma everyone has been talking about."

Peck notes that "the term TBTF was all over the place in the years after the financial crisis" and was often used to "slam both financial institutions" and "regulators who bailed them out with taxpayer money." But the Axios reporter adds that "the fight to break up the banks" that were "too big" didn't "quite materialize."

Warren, in an op-ed published by the New York Times on March 13, argued that SVB's collapse underscores the need for "stringent oversight" of banks. And Dennis Kelleher, CEO of the nonprofit Better Markets, told Axios that megabanks "still pose an existential threat to the country's financial system, economy and people."

Read Axios full report at this link.

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