Eleven of the nation’s largest banks have failed to convince federal regulators they could safely be wound down if they neared failure, government authorities said Tuesday, reinforcing the idea that they are too big to fail.
The Federal Deposit Insurance Corp. said October blueprints submitted by banks, including JPMorgan Chase, Goldman Sachs and Bank of America, detailing how they think they’d be resolved in bankruptcy if they neared collapse were “not credible.” The Federal Reserve, another bank regulator, said the so-called living wills need significant improvement by July 2015 or the government may force them to shrink.
…The phenomenon known as too big to fail is based on the notion that government officials will always rescue a failing financial company when it believes the failure would cause financial chaos. Since investors in the company believe they’d be bailed out, they accept a lower return for funding the company’s operations. That in turn enables the too big to fail company to enjoy a taxpayer-provided subsidy unavailable to its smaller rivals.
Tuesday’s announcement by federal regulators that the 11 banks’ living wills were inadequate strikes at the heart of the argument that the banks are no longer too big to fail.
TBTF means bailouts and bonuses for billionaires and corporate execs, and nothing for the ever-shrinking American middle class.