Mitch Feierstein: Firms too big to fail before, like JPMorgan, are bigger now – and not any safer

City View: Bankruptcies are integral to capitalism, like forest fires, clearing underbrush to allow renewed growth

On 15 September 2008, Lehman Brothers, a "bulge bracket" investment bank, filed for bankruptcy. That should have been no big deal. The failure of a single, poorly run institution should have had no broader effect on the domestic US economy, let alone the global one.

Things didn't pan out that way. Lehman Brothers was the exception that proved the rule of "too big to fail". In the maelstrom that followed, policy-makers took the view that an awful lot of firms were now too big to let go. Not just banks, but also insurance companies, mortgage lenders, car companies – even Harley-Davidson, for crying out loud.

If policymakers had drawn only one lesson from the tumult of 2008-09, they should have learnt that no firm should ever again be too large to fail. No set of policies will eliminate bankruptcies, but they shouldn't even try. Bankruptcies are an integral component of capitalism, acting like forest fires: clearing the underbrush to allow renewed growth.

So, five years on, just how are we doing? The answer, the truly shocking answer, is that we've made no progress at all. Indeed, we have arguably made negative progress. The firms that were too big to fail before are bigger now, and no safer.

Since 2007, figures compiled by Bloomberg show that the biggest half-dozen American banks have seen a 27 per cent increase in their combined assets. Sheila Bair of the Federal Deposit Insurance Corporation says: "You don't really get rid of 'Too Big To Fail' unless you convince the market that it's over." She calls for the Fed to announce publicly: "It's over guys… You invest in these banks, you buy their debt, but do your homework because you're going to take a loss when they go under." Even Bob Diamond, the former Barclays boss and no shrinking violet when it comes to defending his industry, writes in the Finanical Times that recent regulatory changes have fallen well short of ending "too big to fail".

The facts bear him out. As just one example of a much broader problem, the larger banks carry risks so vast that it is hard even to imagine the amount of capital that would neutralize them. Take JPMorgan. It has long argued that it is one of the best managed, and most safely managed, universal banks in the world. It is probably right … but would you care to guess the notional principal of its on-balance sheet derivatives book? Last year, the firm's book weighed in at some $71,800,516,000,000, or more than 70 trillion dollars, a few trillion dollars greater than the GDP of Planet Earth. Others – Bank of America, Citigroup, Morgan Stanley, Goldman Sachs – are not far behind. The top 25 banks, some of them British, hold about three hundred trillion dollars of derivatives.

And please note that these staggering sums relate only to those derivatives where exposures are held on-balance sheet. I would guess the off-balance sheet exposures are greater than the on-balance sheet ones, perhaps by a factor of five or 10.

Now, it's true that to some extent these things net off. So JPMorgan, for example, will hold trillions of dollars in interest rate swaps that make money when rates move up, and a broadly offsetting number of trillions that make money when rates move the other way. So, these banks would argue, their real risk exposures are a tiny fraction of the nominal amounts.

Yet reality isn't always as clean as theory. Just suppose a major bank were hit by some out-of-the-blue disaster that called its solvency into question. Those trillions of dollars of derivative contracts are made up of a whole heap of densely complex legal contracts, made with zillions of different counter-parties, each of which will be looking to protect their own financial interests. Just how is the sorting out process meant to be done? And just who, in practice, can trust the efficacy, speed and justice of that process? The Lehman bankruptcy process is still ongoing – five years on – and has so far accumulated more than $2bn (£1.3bn) in fees.

Indeed, who can trust those banks' risk management systems? JPMorgan claims to be "best of class". Yet when rumours spread of huge losses emanating from the actions of a single London trader, the bank's chief executive, Jamie Dimon, dismissed them as a "tempest in a teapot". That tempest ended up costing the bank more than $6bn.

If that's competent risk management – not simply making losses, but not even knowing that you had made them – then I'm a Dutchman's maiden auntie, plaits, clogs, cheese and all.

It's not simply me that thinks these things. President Richard Fisher of the Federal Reserve Bank of Dallas used a recent speech to rail against the "injustice of perpetuating financial institutions that are so large, complex and opaque that they … are considered Too Big To Fail.

"These institutions operate under a privileged status that exacts an unfair and non-transparent tax upon the American people and represents not only a threat to the American people but to the … hallmarks of the democratic capitalism that makes our country great."

He's right. The same is true in the UK. The same thing is thought by any sober observer who understands the system, but who hasn't yet been bought off by it. Too Big To Fail is alive and more dangerous than ever today. Our country, and our democracy, is the worse for it.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent