Citigroup alumn and current U.S. Treasury Secretary Jack Lew has claimed that if the ever looming threat of banking institutions that are so big their failure would bring down the economy is not eliminated by year’s end further actions will be needed. Too Big To Fail institutions are even bigger now than they were during the 2008 crisis when Congress voted to bail the banks out with TARP because the bank failures were alleged to threaten the overall economy.
The threat posed by too-big-to-fail banks should be eradicated by year’s end, and if not, more restrictive measures targeting large financial groups may be necessary, U.S. Treasury Secretary Jack Lew said Wednesday…
“It’s unacceptable to be in a place where too-big-to-fail has not been ended,” Lew said. “If we get to the end of this year and we cannot, with an honest, straight face, say that we have ended too-big-to-fail, we are going to have to look at other options.”
This is a somewhat new position for the Treasury Department as according to Lew’s predecessor, Tim Geithner, Too Big To Fail doesn’t exist. In theory Dodd-Frank ended Too Big To Fail, but as everyone knows, the markets don’t believe it.
The 2007-09 financial crisis cemented the view in some market participants that the government would always bail out the nation’s largest banks, due to the bailout schemes that helped big banks such as Citigroup and Bank of America survive the market meltdown.
“As a matter of law, Dodd-Frank ended the notion that any firm is too big to fail,” Lew said Wednesday. But three years after Dodd-Frank, ending too-big-to-fail remains an incomplete task, regulators and lawmakers have said, adding significance to Lew’s remarks of possible further action.
Aye there’s the rub. No one in the markets believes the government. They believe, with considerable evidence, that in the final analysis the government will intervene to save the TBTF banks. One of the results of this perception is that the Too Big To Fail banks get more favorable treatment in the market than other banks.
And, of course, if the banks believe they are Too Big To Fail they have every incentive in the world to be reckless. Like the kind of recklessness that created the 2008 financial crisis.