Have Banks Been 'Too Big To Fail' Since 1975?

Holman Jenkins, Jr.'s column in last Wednesday's Wall Street Journal contended that there's really nothing new about large US banks being bailed out by Bernanke's Fed.

After arguing that if BofA shareholders had known about Merrill's worse-than-expected condition, they may have voted down the deal. As it was, Jenkins notes, BofA's Ken Lewis promptly sought Fed financial aid after the deal closed.

Fair enough. But I don't think it's correct to say that US government policy for 30-odd years has been to save all large commercial banks.

The period Jenkins references just about covers the time from when I was in college, so I have a fairly good recollection of the era.

Names which were once prominent, but are no longer with us, include: First Pennsylvania, Seattle First, Texas Commerce, Bank of New England, Continental and Bankers Trust.

In fact, it was just about the mid-1970s when technology was beginning to lead to excess capacity in banking, setting the stage for eventual consolidation.

Usually, I agree with Mr. Jenkins. But not this time.

There hasn't been a 'too big to fail' ethic in US banking for three decades. Rather, it's been more like the last ten years, dating roughly to Greenspan's Fed stage-managing Long Term Capital Management's demise.

So, oddly, I would contend that it wasn't even a commercial bank that was the first instance of the 'too big to fail' doctrine. In today's financial sector, any sufficiently large institution, even a privately-owned one, such as a hedge fund, has enough implicit influence on asset prices, and enough complicated entanglements with other firms, to cause regulatory panic at the thought of failure.

For the most part, though, with size goes mediocrity. Most of the financial utilities- Citigroup, Chase, BofA, to name three- got that way through federally-approved mergers, not organic growth.

These super-sized financial entities are our own governmental creation, rather than that of simple business acumen.

Maybe it's appropriate, given government's permissiveness in allowing these gargantuan banks to merge themselves into existence, that government must clean up the mess when they begin to fail.