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>In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and

>In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and Lehman did not. Why is this argument still around? Yes, "diversified financial institutions" (i.e., too-big-to-fail banks) survived, because they had tremendous political power as a result of their consolidation. The idea that there were too-big-to-fail institutions is not a victory, it's a defeat. These are the institutions that caused the problem in the first place! The fact that they live on is a travesty.

snowwrestler 11y ago
Because it's true. The topic has been so politicized now that it's almost impossible to have an even discussion about it, which is part of what I find annoying. Too big to fail is not about diversification, it is about the scope of capital assets and counterparty risk. USAA, for example, is a diversified institution that would have been illegal under Glass-Steagall but navigated the meltdown well on their own. Meanwhile every institution I list above was too big to fail but would never have been covered by Glass-Steagall--not to mention Fannie and Freddie. Edit to add: IMO "Glass-Steagall" has become political shorthand, a sort of litmus test to see if people are for or against big banks that socialize risk and privatize profits. But G-S was a real law that was rather limited in scope. If we fail to understand the detailed realities of the financial meltdown, we will fail to prevent the next one.
- astazangasta 11y ago
  This is the "regulation is ineffective, let's get rid of it" argument. Yes, by the time of its repeal banks had found ways around Glass-Steagall, both legal and illegal. The conclusion should not be that we should get rid of GS, we should extend it to cover those holes. Banks finding new ways to extend their size and reach is a metastatic event.
Spooky23 11y ago
I think the argument persists because it accelerated the shift towards a new banking paradigm, where regional banking was swallowed up by massive financial institutions. There are plenty of examples where the ability to diversify has strengthened many institutions. But there has also been some very negative affects. If you are too small to be big and too big to get government loan guarantees, or outside of a major metro, bank financing isn't really an option anymore. We had a few smaller manufacturing businesses in my area that folded up not due to foreign competition, but from being starved of capital. The banks they depended on got swallowed up, and the folks in the banks that understood their business were laid off. The dude in NYC or Boston who made loan decisions had no clue.

snowwrestler 11y ago

Because it's true. The topic has been so politicized now that it's almost impossible to have an even discussion about it, which is part of what I find annoying. Too big to fail is not about diversification, it is about the scope of capital assets and counterparty risk. USAA, for example, is a diversified institution that would have been illegal under Glass-Steagall but navigated the meltdown well on their own. Meanwhile every institution I list above was too big to fail but would never have been covered by Glass-Steagall--not to mention Fannie and Freddie. Edit to add: IMO "Glass-Steagall" has become political shorthand, a sort of litmus test to see if people are for or against big banks that socialize risk and privatize profits. But G-S was a real law that was rather limited in scope. If we fail to understand the detailed realities of the financial meltdown, we will fail to prevent the next one.

astazangasta 11y ago
This is the "regulation is ineffective, let's get rid of it" argument. Yes, by the time of its repeal banks had found ways around Glass-Steagall, both legal and illegal. The conclusion should not be that we should get rid of GS, we should extend it to cover those holes. Banks finding new ways to extend their size and reach is a metastatic event.

Spooky23 11y ago

I think the argument persists because it accelerated the shift towards a new banking paradigm, where regional banking was swallowed up by massive financial institutions. There are plenty of examples where the ability to diversify has strengthened many institutions. But there has also been some very negative affects. If you are too small to be big and too big to get government loan guarantees, or outside of a major metro, bank financing isn't really an option anymore. We had a few smaller manufacturing businesses in my area that folded up not due to foreign competition, but from being starved of capital. The banks they depended on got swallowed up, and the folks in the banks that understood their business were laid off. The dude in NYC or Boston who made loan decisions had no clue.