A Bill to Pass the Too Big to Fail Act

Bernie Sanders Too Big to Fail Act (2019)

The “Too Big to Fail, Too Big to Exist Act” is designed to break up financial institutions that are so big they create the risk of blowing up the American or global economy. The bill would:

 Require the breakup of JP Morgan Chase, Citigroup, Goldman Sachs, Bank of America, and Morgan Stanley within one year of enactment.  Create a “Too Big to Fail List” of banks and bank holding companies who pose a threat to the financial system. This list will be compiled by a super-committee of bank regulators, or the Financial Stability Oversight Council (FSOC), based on a variety of factors enumerated in the bill.
 Direct the Secretary, within a year of enactment, to break up these institutions.
 Prohibit any institutions on the “Too Big to Fail list” from accessing Federal Reserve discount facilities and from using insured deposits for speculative activities, derivatives, or hedging. “Too Big to Fail” is defined as any entity whose failure, due to its size, exposure to counterparties, liquidity position, interdependencies, role in critical markets, or other characteristics or factors, would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial Government assistance.


American Banker (2018). Too big to fail is alive and kicking.

As legislative, regulatory and judicial deregulation continues, the very pillars of financial stability, consumer protection and revived lending are being systemically weakened by the Trump administration. Contrary to the rhetoric, all these actions make the problem of too-big-to-fail firms worse and greatly increase the likelihood of another financial crash and more taxpayer bailouts. If this continues, as all indications suggest, the Trump administration, the financial industry and its lobbyists will snatch defeat from the jaws of financial reform victory, with Main Street American families the victims once again.

NACFU Aruges for a Modern Glass Steagal (2018). NACFU argues for a modern Glass-Steagall 

NAFCU, in a new white paper released Wednesday, is calling for members of Congress to discuss creating a modernized Glass-Steagall Act in order to protect consumers from banks that are too big to fail. The association is supportive of reform efforts that allow credit unions and other financial institutions to compete without putting consumers at risk.

“American families and small financial institutions are still recovering of the bank-led 2008 financial crisis. With support now on both sides of the political aisle, we believe Congress should seriously consider evaluating a modernized Glass-Steagall Act to reduce the impact of ‘too big to fail,'” said NAFCU President and CEO Dan Berger. “As we look to the future and economists hint at another recession on the horizon, we need to make sure history does not repeat itself. Wall Street banks cannot be allowed to bring the financial system – and a nation full of consumers – to ruin again.”

In the report, NAFCU highlights that enacting a modern Glass-Steagall Act has bipartisan support – from former Speaker of the House Newt Gingrich to Sen. Elizabeth Warren, D-Mass., and which the administration has said it will consider. It also cites investigations into the cause of the 2008 financial crisis: the repeal of the Glass-Steagall Act in 1999 with the enactment of the Gramm-Leach-Bliley Act led to weakened regulation and supervision of traditional banking and likely set the stage for the crisis.

“Federal deposit insurance should not be used to subsidize big banks’ reckless gambles with their consumers’ deposits,” NAFCU states in the report. “Consumers should have confidence in the system and know that their financial institution cares more about maintaining a mutually-beneficial relationship with its consumers than allowing private investors to influence their decisions all in the name of profits.”

Rolling Stone. Tabbi an Sanders Take on the Banks (2018)

Mother Jones. Is Sander’s Plan Too Big to Succeed? (2018)


Chicago Tribune. Too Big to Fail is an empty phrase (2018).

There is a fundamental weakness in the position of those who insist that the only way to deal with financial institutions that are “too big to fail” is to break them up: their acknowledgment that the central question of how big is “too big” is too hard to answer. This is rarely made explicit, but it is universal. Across the ideological range from Sen. Bernie Sanders, I-Vt., to Neel Kashkari, president of the Minneapolis branch of the Federal Reserve, the “break ’em up” advocates scrupulously avoid suggesting any size beyond which banks must not be allowed to exist.

The reason for this glaring omission — which renders their argument of little practical use for makers of actual decisions — is clear, once the focus is on the meaning of “too big to fail,” as opposed to its invocation as a general expression of distrust of banks. The issue is how to avoid a situation in which an institution has incurred so much debt that its inability to pay threatens the stability of the financial system. In other words, how do we prevent a repetition of the damage caused by the collapse of Lehman Brothers in 2008? Therein lies their dilemma.

Politico. Don’t Break Up the Big Banks (2019).

Breaking up the banks is one of those ideas that sound great in theory but less so in reality, a no-brainer until you run it through your brain. It’s not that size doesn’t matter at all, but the debate over size has been absurdly one-sided, ignoring the benefits of bigness, the potential costs of breakups, and what’s already been done to address the too-big-to-fail problem. With Wall Street salaries and bonuses once again as exorbitant as they were before the recent financial crisis,  there will be huge pressure on 2016 candidates to prove their hostility to financial elites; on the Democratic side, Sanders and Martin O’Malley are already calling for bank breakups, so Hillary Clinton will surely be tempted to join them. But before financial disintegration becomes a populist litmus test, people ought to understand what it would mean.

For example: Did you know that the financial institutions at the heart of the 2008 crisis were not the very biggest banks? That the very biggest banks were actually indispensable to defusing the crisis? That the U.S. banking system is far less top-heavy than its foreign counterparts? It’s possible to know those facts and still support the Too Big to Fail, Too Big to Exist Act, the chainsaw of a bill that Senator Sanders and Congressman Brad Sherman filed in early May. But they’re important facts.

Before I explain, I should disclose that I helped former Treasury Secretary Timothy Geithner with his memoir about the recent crisis. But you can’t blame Secretary Geithner for my views; I was writing favorably about the financial bailouts (which, by the way, ended up turning a profit for taxpayers) even before I met him. In any case, nobody wants the government to bail out irresponsible bankers. The question is how to structure and monitor the financial system to minimize the risk of the devastating crises that make bailouts inevitable.

Is splitting up financial behemoths the best way to minimize that risk? Some reformers think so. So do the small but well-organized “community banks” that tend to get their way on Capitol Hill. “This isn’t a left-wing solution,” Sherman told me. “Most banks endorse it!” They would, wouldn’t they? There are about 6,800 banks in the U.S., and most of them would love to see the government take a hatchet to their largest competitors. Here are some points they rarely mention:

It’s a radical solution. The United States government does not normally cap the size of private firms, even gigantic firms like Apple or Wal-Mart. Who would invest in a company that’s legally prohibited from growing? It makes sense that Sanders, who is running for president as a critic of capitalism, would support such heavy-handed interference with the market economy. But it’s odd to see less extreme politicians support such extreme measures. They say they’re determined to eradicate too-big-to-fail—as well as “moral hazard,” the temptation for a too-big-to-fail bank to take excessive risks when it can rely on a government bailout if things go wrong. But have they gamed out what that would mean?

Put it this way: Bear Stearns wasn’t even one of the fifteen largest U.S. financial institutions in March 2008, when the Fed had to engineer a massive rescue to prevent it from collapsing and dragging down the global economy with it. Lehman Brothers wasn’t even in America’s top ten when its failure did trigger a global meltdown that September. Today, with over $2.5 trillion in assets, JP Morgan Chase is about eight times larger than Bear was when it was deemed too big to fail, so it would presumably have to be split into at least nine firms to get small enough to fail. Bank of America’s CEO recently noted that if it were forced to spin off some of its divisions, like investment banking and retail branches, each of the spun-off companies would still be “systemically important,” banker jargon for too big to fail.

Mark Hendrickson. (2018). Is Sanders trying to sell snake oil?

xcuse me, but he hasn’t. I mean, when a presidential candidate goes to college campuses and tells his audience he would love to provide them with a free college education, it sure sounds to me like he’s offering a quid pro quo: You vote for me and I give tens of thousands of dollars’ worth of education to you.

Big Is Bad?

Just last month, Sanders introduced his “Too Big to Fail, Too Big to Exist Act” that would break up any financial institution with assets greater than 3 percent of GDP. This appeals to those who have fallen for the idyllic “small is beautiful” line of thought that erroneously believes that big is bad.

Socialists such as Sanders spew forth scare stories about big, evil corporations dominating society. Really? Tell that to Sears, or Toys “R” Us, or Circuit City. Or most of the 30 corporations that constituted the Dow Jones Industrial Average in the 1930s, most of which few Americans under the age of 70 have never heard of.

The bigness of those corporations resulted in economies of scale that, in turn, resulted in lower prices that raised Americans’ standard of living. But when those big, allegedly powerful corporations failed to keep up with other businesses in serving the most current wants of consumers, it was the “little guy”—those millions of consumers—who voted the corporate behemoths of yesteryear into bankruptcy, radical downsizing, or complete liquidation.

The only corporations to fear are those who play the crony game and make an unholy alliance with government to thwart the will of the consumer, by way of government handouts and protection.

Oh, by the way, Sanders must be a recent convert to the “big banks must go” crowd, because, in 2010, he voted for the Dodd-Frank Act that codified federal bailouts of our country’s largest SIFIs (systemically important financial institutions). In fact, it is utterly consistent for Big Government advocates such as Sanders to vote for such bailouts for entirely practical reasons.

The fact is that Big Government and Big Finance are joined at the hip. The only way that Uncle Sam can maintain a functioning market to handle the massive amount of government debt ($21.6 trillion and counting) is for there to be a viable, large-scale financial infrastructure that is capable of operating on such a massive scale. Given that financial reality, of course, there are going to be mega-banks. Sanders’ “break up the banks” act is so much left-wing populist demagoguery.

Government Monopoly

Sanders, of course, isn’t inherently opposed to the idea of bigness. He just opposes bigness in the private sector. In the public sector, he’s all for bigness. Take his position on health care, for example. In his “Medicare for All Act of 2017,” the bill states that it “shall be unlawful for—(1) a private health insurer [or an employer] to sell health insurance coverage that duplicates the benefits provided under this Act.” In other words, Sanders proposes to outlaw all competition and, instead, institute a government monopoly.

Sanders’ policy prescriptions remind me of the Hollywood actress who, during the Iranian oil crisis of 1979–80, proposed that the way to “break up” the oligopoly of the Big Seven oil companies (hardly a real oligopoly, since there were about 4,000 other American oil and gas companies operating at the time) was to have the federal government seize them. That’s right: The left-wing cure for “oligopoly” is monopoly—a government monopoly.

Well, that is exactly what socialism is, when you stop to think about it: It’s a complete, economy-wide network of government monopolies. It always amazes me that some of the same gullible Americans who denounce monopolies are clamoring for socialism, the ultimate monopoly.

Seen in an overall context, Sanders’ proposed “Too Big to Fail, Too Big to Exist Act” doesn’t signify that Sanders is opposed to large, influential institutions. He wants the biggest and most powerful institution in our country—the federal government—to expand its bigness and power to the exclusion of any private alternatives.

So, is Sanders the modern equivalent of a snake oil salesman? No, not really. That comparison isn’t fair to those legendary peddlers of snake oil. When a snake oil salesman enticed a few gullible, ignorant suckers, the damage was limited and short-lived. Socialism, by contrast, can collapse an entire economy and plunge millions of people into long-term misery and suffering.

What Sanders and his political tribe are peddling isn’t snake oil, but poison. Let the buyer (voter) beware.