The notion of too big to fail

The following bubble chart compares the current market capitalization of our nation's biggest banks to what they were in the second quarter of 2007:

The chart is a little fuzzy, but the blue bubble represents Q2'07 and the green bubble represents Q1'09 YTD. The giant bubble with the tiny inset bubble that looks like the earth against the sun is Citigroup.

This link leads to a state-by-state breakdown of the allocation of TARP funds. Interestingly, those states that are politically known as "blue" are the reddest of red in this depiction.

Nouriel Roubini, a professor at NYU who has been getting a lot of press lately for correctly predicting the current banking crisis, thinks that losses may reach $3.6 trillion before we're through the woods:

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Losses and writedowns at financial companies worldwide have risen to more than $1 trillion since the U.S. subprime mortgage market collapsed in 2007, according to data compiled by Bloomberg.

President Barack Obama will have to use as much as $1 trillion of public funds to shore up the capitalization of the banking sector, following the $350 billion injection by the Bush administration, Roubini told Bloomberg News. Congress last year approved a $700 billion rescue fund, of which half remains to be disbursed.

I have been opposed to the TARP bailout since it was first proposed on the grounds that nobody is too big to fail. What we have is a perversion of capitalism, where fiscally irresponsible behavior is rewarded not with failure, but with a government handout. This is then presented as "proof" that capitalism does not work by those who fail to consider that what it really is is an example of crony capitalism. It takes two to tango, so as easy as it is to blame all of this mess on greedy bankers as many do, even the current darling of progressive economic circles, J M Keynes, realized that, "it is a mistake to believe that businessmen are more immoral than politicians" as he wrote in a letter to FDR in 1938. What we are now witnessing are the legislative fruits of millions of dollars in lobbying efforts and generous campaign donations paid for by hedge funds and banks.

If we were living in a pure capitalistic system, those banks that chose to leverage themselves 40 to 1, chose to engage in hyper-risky lending and chose to create and sell derivatives with little to no intrinsic value would have to live with the consequences of their actions, which most likely would be either reorganization in bankruptcy or going out of business altogether. For every bank that failed, there would be another--a fiscally responsible one with a strong balance sheet--to take its place. These banks would then be allowed to sink or swim based on their ability to navigate the rough seas of finance. Contrary to what those "too big to fail" banks may tell you, these banks do exist.

Like many Americans, I "get" TARP, I just can't stand it either. Unlike the practitioners of crony capitalism who run our nation, I can see that the billions already spent and the billions more promised will have little to no effect in stimulating our economy. So why spend it in the first place?