The Case Against ‘Too Big to Fail’

Download Document: TooBigFail

It is a brisk October morning in Flushing. Rachel Karas, like every other Flushing 18 year old, is driving to school. She is a senior, and although the morning rout she has taken practically all her life hasn’t changed, the rout itself has. Rachel used to be driven down a more crowded road. She used to see kids running around the yard sprinkler, while their parents sat outside and read the paper before work, just outside the tinted windows. The sounds of dogs barking everywhere, and bird feeders attracting the gentle sounds of humming birds, defined the quaint Michigan suburb. Now, Rachel drives by more foreclosure signs than traffic lights. “Foreclosure doesn’t affect just people who couldn’t pay their mortgages,” Rachel says. “It affects everyone.”

If there were any benefits to be salvaged from the 2008 Global Financial Crisis, a stark improvement of the national economic lexicon would have to be one of them. Before 2008, if you weren’t receiving a multi-million dollar bonus for Christmas, you simply weren’t using phrases such as “credit default swap.”

Another term, people rarely used before 2008 is “too big to fail.” And if only people did, for it is a word that destroys lives, lives such as many of Rachel’s friends, the good people of Flushing, Michigan. Corporations that are too big to fail increases the likelihood of an economic crisis, has the potential to hold the taxpayer and the government basically for ransom, and limits free enterprise. It is on those grounds that it is in the best interest of the United States and its people to prohibit companies from growing too big to fail and break up the ones that do, or put our economic prosperity and democratic tradition at grave risk.

Senator Bernie Sanders of Vermont, introduced a bill to the senate called The Too Big to Fail, Too Big to Exist Act of 2009 that defined the term too big to fail as “any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial Government assistance (Stein).” Avery different definition than how the phrase was understood pre 2008.

“Too big to fail” was a phrase that used to refer to companies that were literally perceived to be too big to fail. Companies that had funds so diversified and so tied up in every crevasse of the economy that they came to represent such a substantial and stable portion of our economic system, their collapse seemed impossible. Yet in reality, these companies were as too big to fail, as the Titanic was unsinkable, and like the Titanic, resulted in the destruction of innocent lives and families.

This leads us back to Rachel. It’s hard to imagine, giant investment firms all the way on the east coast can alter a small town like Flushing. But it drastically can. It all begins with a bit of deregulation and a mortgage.

About a decade ago, three Republican senators named Gramm, Leach and Bliley, unveiled the Financial Services Modernization Act of 1999 (Gramm). After callously being signed into law by a president, desperately wanting to appear middle of the road, Bill Clinton shamed the New Deal and nailed one of President Franklin Delano Roosevelt’s crowning legislative achievements into the coffin.

The Financial Services Modernization Act of 1999 repealed the Glass-Steagall Act of 1933 (Gramm). What this means is that until 1999, it was against the law for a commercial bank, an insurance company and or an investment bank to combine. This essentially stopped any company from becoming “too big to fail.” By repealing the act, “Gramm-Leach-Bliley in turn gave bankers what they had craved all along: unfettered ability to mingle banks and brokerages and watch them grow, grow, grow (Serchuk).” This gave rise to the hegemony of firms like Citigroup, AIG and Lehman Brothers.

In fact, lending that terminology to companies like Lehman Brothers and AIG aided in their collapse by causing a moral hazard. Since these firms knew that in the unlikelihood of their collapse the United States government would be left with no choice but to bail them out. They had no incentives to take precautions when making risky investments. If the investments paid off, huge profits, if they did not, it would be the taxpayer who picks up the gambling debt. Heads Wall Street wins, tails, the people lose.

During the 1990s, there was a massive push to get people into homes. Housing prices were on the rise. The mentality was even if you can’t afford a house now, take out a mortgage, buy it, and when the price of your home rises, refinance your mortgage and make money. Allen Greenspan, chairman of the Federal Reserve at the time, basically said that your house was like your own personal bank (Warning).

“When I was little, there were new people all the time,” Rachel seemed to remember fondly. “Now people are fleeing their homes.” This is where the mortgage comes in.

When one buys a house, one typically takes out a mortgage. After the repeal of Glass-Steagall, the bank that lends you the mortgage can then sell that mortgage to an investment firm, who then gets the return from the interest rate. But the investment bank wants more, so they borrow a lot of money from a Wall Street firm such as AIG or Lehman Brothers to buy bundles of mortgages packed together by the bank lenders (

Everyone is making a lot of money because at this time it is rare for someone to default on their mortgage. When someone does, the bank repossesses the property. That property has risen in value so when the bank sells it, they still make a profit.

But what happens is that investment firms start to compete furiously for mortgages and banks keep making money off of them so they offer up more and more, and to get more mortgages, they eventually have to lower their loaning standards to the point where all you really need is a pulse to get a loan. Sometimes not even. The lowering of loan standards got so bad that there was a case in Ohio, where 23 dead guys were approved for mortgages (Blumberg).

Eventually so many people were in houses the demand went down, and when the demand went down, house prices went down. When that happened, all the un-loan-worthy homeowners started to rapidly default on their mortgages causing the homes of everyone around to go down in value. Now investment firms cannot pay Wall Street back the money they leveraged to pay for all the mortgages and huge, giant, “too big to fail firms,” start to collapse ( All this could have been avoided if Glass-Steagall act still remained on the law books.

There are two very serious misconceptions about the housing crisis. The first is that no one saw it coming. The second is that only the irrespirable got hurt by it.

The claim that these investment firms never expected the housing market to burst is false. The eight senators who voted against the Financial Services Modernization Act of 1999 saw it coming. In fact Senator Byron Dorgan even said “I want to sound a warning call today about this legislation. I think this legislation is just fundamentally terrible (Stein).” He later went on to make further statements practically predicting the collapse of the financial market.

Financial Service firms, such as Goldman Sachs placed bets on when it would happen. In this way they were able to make huge short term profits before the bubble burst, then profit some more once it did and then have all the bad investments made along the way be subsidized by the government.

It was this vicious cycle of logic and perpetual greed that not only caused the financial crisis but actually increased the size of major too big to fail companies. Bank of America’s combined assets grew by 138% since the crisis (Cho). In the first quarter of 2009, Goldman Sachs earned $1.8 billion dollar profit. As opposed to the $ .8 billion it earned in the third quarter of 2008 and the $2.1 billion it lost in the forth quarter (Barr).

The claim that only those responsible, the risk taking firms and the people who should not have taken out loans they could not pay back, were hurt by the crisis can be dis-proven by Rachel’s story. Her parents are in good financial standing, always paid the mortgage on time. But those who defaulted on their loans around her caused her family’s property value to go down. As property values decrease and people flee their homes, the town’s property tax revenue is dealt a huge blow and cuts must be made to compensate. The quality of public works and maintenance worsens and the neighborhood appeal worsens with it.

The only school district in the area is forced to make serious cuts and lay off teachers. Rachel’s mother, who has a master’s degree in education, now can’t get a job and their family cannot move because they cannot afford to sell their house, because of the decrease in its property value. Thus the innocent circumstantially suffers at hands of a level of greed and irresponsibility far outside the realm of control.

The moral hazard, too big to fail companies vindictively take advantage of poses a threat to United States democracy. These institutions become so large and so deeply engrained into the fabric of American society that when the gambles they take start to bring them down, they can literally hold our economy at ransom for the money they need.

These CEOs and bankers were not elected or appointed and yet have significant leverage over the success of the nation. We are forced to cater to their needs or risk losing our jobs, our homes or any possibility of economic prosperity. It has gotten to the point where these firms literally hold our money hostage. It’s not democracy, it’s economic slavery.

What is most frightening with this reality is that in modern American culture, where children are basically taught from elementary school on, that capitalism is the supreme system, that greed is good, the poor are lazy, and the American dream is being able to afford a private jet with enough room to fit your hummer, many of us see nothing wrong with these business practices. In fact the higher ups are often admired and hailed for their financial genius. Yet what the average capitalist advocating American fails to see is “too big to fail” firms actually establish a socialist system. But it is socialism of the worst kind, socialism for the rich and cold, unforgiving capitalism for the poor.

During the housing crisis, the wealth of every individual in the Untied States needed to be redistributed to all the banks and investment firms that were loaded with toxic assets and involved in mortgaged back securities, in order to keep them from going under. Yet on the flip side the hundreds of thousands of Americans who had their homes foreclosed upon as a result of their recklessness were left to pick themselves up by their bootstraps. In the first four months of 2008, 156,463 families had their homes repossessed, and that number kept steadily rising as the crisis persisted (Christie). From the financial crisis to now, that number has jumped to over one million (Collins).

What is most tragic is the fact that it would have been cheaper for the American people to bailout all the families who lost their homes then the multi billion dollar corporations who screwed them over. $800 billion could have easily paid for the mortgages of one million homes. That is why too big to fail forces us to socialize the losses of the rich and let them capitalize on the gains. The people in return receive nothing.

Too big to fail firms limit free enterprise. Because they make up such a large portion of the financial industry, they often merge, buy up smaller banks and companies or force them to go under. The fewer the financial companies and the bigger they are, the more of the wealth they control. So when financial firms start to get wrapped in a cycle of risky investments and go under, and they control such a large portion of the economy, everybody suffers.

A strong economy is a diverse one. Preventing corporations from growing too big to fail would mean there would be more finical institutions, making less risky investments, given rise to a stronger middle class. Right now there is a very wide class disparity. Before the financial crisis the top 20% of the US population controlled 93% of the wealth. The last time the concentration of wealth was that high was right before the Great Depression (Domhoff). When the concentration of wealth is in the hands of the many, the risk is pooled and the economy is more stable as a result.

Since the 2008 financial crisis, there has been no significant change in the way Wall Street is regulated. No bill has yet been passed. In fact, the actions the US government took in containing the crisis, although necessary, without proper reform to come swiftly after, shows Wall Street that we will always be ready to pick up there tab when they make risky investments. Therefore, once again, leaving no incentive for them to make careful ones.

It was once a crime for financial institutions to grow too big to fail and it ought to be again. If congress brought back Glass-Steagall, it would show Wall Street that the people of the United States don’t take kindly to having their livelihoods gambled with. Rachel Karas and her family do not take kindly to being gambled with. Her, her neighbors, the American people are not assets, are not investments, but hard working and sound individuals, trying to make their way in our free society. Bringing back such legislation, legislation that President Roosevelt deemed essential in repairing the damage caused by the Great Depression, would now serve to eliminate the leverage corporations have over the American people, and we will be a more secure and prosperous nation for it.



Works Cited

Barr, Collin. “Goldman Posts a Huge Profit – Apr. 13, 2009.” CNN Money. 14 Apr. 2009. Web. 08 Apr. 2010. <;.

Blumberg, Alex, and Adam Davidson, dirs. “The Giant Pool of Money.” This American Life. NPR. Chicago, Illinois. 09 May 2008.

Blumberg, Alex, and Adam Davidson, dirs. “Another Frightening Show About the Economy.” This American Life. NPR. Chicago, Illinois. 3 Oct. 2008.

Cho, David. “Banks ‘Too Big to Fail’ Have Grown Even Bigger –” Washington Post, 28 Aug. 2009. Web. 08 Apr. 2010. <;.

Christie, Les. “Foreclosures Spike 112%, with No End in Sight – Apr. 29, 2008.” CNN Money. 29 Apr. 2009. Web. 08 Apr. 2010. <;.

Collins, Jeff. “1 Million U.S. Homes Lost to Foreclosure since 2008.” Mortgage Insider. The Orange County Register, 8 Mar. 2009. Web. 07 Apr. 2010. <;.

Domhoff, William. “Who Rules America: Wealth, Income, and Power.” Sociology.usc. University of California Santa Cruze, Feb. 2010. Web. 08 Apr. 2010. <;.

Glass, and Steagall. “The Glass-Steagall Act A.k.a. The Banking Act of 1933.” Internet Archive. Web. 08 Apr. 2010. <;.

Gramm, Leach, and Bliley. “S. 900 [106th].” Tracking the U.S. Congress. 9 Nov. 1999. Web. 08 Apr. 2010. <;.

“Gramm-Leach-Bliley Act of 1999.” United States Senate Committee on Banking, Housing and Urban Affairs. 1 Nov. 1999. Web. 08 Apr. 2010. <;.

Jarvis, Jonathan. “The Short and Simple Story of the Credit Crisis.” The Crisis of Credit Visualized. 17 Feb. 2009. Web. 08 Apr. 2010. <;.

Kirk, Michael. “FRONTLINE: The Warning.” PBS. 20 Oct. 2009. Web. 08 Apr. 2010. <;.

Serchuk, David. “Glass-Steagall Fans Are Not Fools.” The Huffington Post. 2 Apr. 2010. Web. 08 Apr. 2010. <;.

Stein, Sam. “Glass-Steagall Act: The Senators And Economists Who Got It Right.” The Huffington Post. 11 May 2009. Web. 07 Apr. 2010. <;.



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