Is it, as Barney Frank insists, "too hard" to know when an institution is "too big"? Apparently not. A new group set up by the G-20 nations doesn't seem to have any trouble recognizing too-big-to-fail banks. It termed them as "global systemically important banks," or GSIBs, and has publicly listed 30 of them.
Sorkin based his "generalists just don't understand" argument on the MetLife case, in which the financial conglomerate successfully persuaded a federal judge to overturn its too-big-to-fail designation. Who but a highly trained specialist can know if Snoopy has become a global threat?
But economist, lawyer, and former bank regulator William K. Black notes that MetLife reported assets of $878 billion at the end of last year. As Black points out, "it has over $200 billion more in reported assets that Lehman claimed when it failed -- and Lehman triggered a global crisis."
It does not require specialized knowledge -- or any of the magical calculations Sorkin describes (and Black ruthlessly dismantles) -- to understand that MetLife could pose a systemic threat to the economy.
Then there's JPMorgan Chase. Pam Martens and Russ Martens point out that it has a vast derivatives portfolio, with a notional value of $51 trillion, and 63 percent of its derivatives do not pass through the clearing houses established by Dodd-Frank. Instead they are handled in over-the-counter transactions with unknown counterparties.
The risk in both cases is clear -- and other too-big-to-fail institutions have equally troubling profiles.
Standing In the Shadows Of Wall Street
What about shadow banks? Where do they fit in?
One of the key things to remember about financial institutions today is that they are deeply interconnected. Any one of them, whether it's designated as a "bank" or is one of the more nontraditional corporations in the financial sector, will have interlocking financial relationships with a broad webwork of other players. Large "shadow banks" are financially entangled with too-big-to-fail banks. That's why the failure of Lehman Brothers nearly brought down the global economy, and why it was necessary to spend $185 billion rescuing AIG.
Actually, a better term for the "AIG rescue" might be "the rescue of AIG and its counterparties" -- that is, the banks that stood to lose billions if it went under. The list of counterparties cited by Pam Martens and Russ Martens includes Goldman Sachs, which received nearly $13 billion in rescue funds through AIG. Other U.S. banks that received billion-dollar payouts from the taxpayer, via AIG, include Citigroup and Merrill Lynch (along with its parent, Bank of America.)
The old distinctions mean less than they once did. Many shadow banks are clearly too big to fail. Their failure in 2008 would certainly have caused irreparable harm to too-big-to-fail banks. What's more, at least two non-banks (Goldman Sachs and GE Capital) were retroactively given bank status so that they could receive bailouts.
It's a straw-man argument to say that "too big to fail" solutions ignore shadow banks. They, and the institutions that have already been designated "banks," are all parts of the same problem. No financial institution, whatever its labeling, should be allowed to pose a threat to the economy. All of them should be properly regulated.
Banks Merely Innocent Bystanders?
Without naming Krugman, Sen. Elizabeth Warren called arguments like his "revisionist history," adding that "Wall Street lobbyists have tried to deflect blame for years, but ... there would have been no crisis without these giant banks."
As Ben Walsh and Zach Carter wrote in their Krugman response, it would be foolish to ignore the role shadow banks played in the crisis, but "attempting to write big banks out of the history of the financial crisis ... reduces (that) history ... to campaign talking points."
They add that it's "weird" to be forced to argue the culpability of big banks in the financial crisis once again, in 2016. But, they add, "that's what the Financial Crisis Inquiry Commission found. Federal Reserve Chairman Ben Bernanke, former IMF chief economist Simon Johnson, former Federal Deposit Insurance Corp. Chair Sheila Bair, former bank bailout Inspector General Neil Barofsky, FDIC Vice Chairman Thomas Hoenig, and Sen. Elizabeth Warren (D-Mass.) have all concluded that 'too big to fail' was, in fact, central to the crisis."
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