No Such Thing As Too Big to Fail

The Federal Reserve just announced that it was going to perform stress tests on 6 major banks, including Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo. This is a part of an annual review required by the Dodd-Frank law, with the intention of determining whether or not any of the big banks are vulnerable to collapse.

Clearly, the last thing the Fed wants is to be blindsided like they were when Lehman Brothers went under and when they were forced to institute TARP. In fact, some think that the collapse of another major financial entity would be disastrous, and would be enough to tip the economy into a full-blown recession. Not me. Instead, I think another bank collapse is what we need to get the economy back on track.

Think about it. The economy has been stuck in low gear for over three years now. Bank of America, for example, was trading near $40 per share in September, 2008, just before the banking meltdown. It got as low as $2.53 per share in February, 2009, just before the market bottomed. By October, 2009, it had moved back up close to $20 per share but stalled until it made a slightly higher high in April, 2010, which is where it peaked out. Since then, it has continued to falter, and now sits close to $5 per share.

In the meantime, even though it too has stalled, the S&P 500 is in much better shape than Bank of America and other major banks, like Morgan Stanley and Citigroup. The under performance of the banking sector sticks out like a sore thumb, and it’s what has kept the overall market from making much progress.

So, why are banks under performing so badly? It’s because no one really has a handle on their exposure to potential loan losses – including the Fed – whether in the US or in Europe. And, if there’s one thing the market hates above all, it’s uncertainty.

Thus, we have a real Catch 22. On the one hand, everyone worries what might happen to the US economy if another big bank goes under. On the other hand, the weakness of the banking sector has been largely responsible for the market going nowhere. So, what’s the solution? I say let as many banks as necessary go under, because it could be a cathartic moment; a true cleansing of everything that has been wrong with the “system” for a number of years.

Of course, such a solution has the potential to cause a calamity in the markets. So what? If you have an abscessed tooth and you do nothing about it, you are going to be in pain for an indefinite length of time, and unless dealt with, may not be able to function. So, I say take the pain now, get it over with and move on.

The good news about our economic system is there’s always someone ready to swoop in to take advantage of the weak hands; it’s just the way it is. Someone’s misfortune is someone else’s good fortune. If Bank of America, or any other bank was to go under, the surviving entities would be there to pick up the pieces.

One would argue that the remaining banks would then become even bigger, thus setting up an even worse case scenario than too big to fail. Nonsense. There are thousands of banks across the country; enough to absorb the fallout. Why do you think the major banks did an about-face on the debit card fees they were thinking of enacting? Because they saw the writing on the wall; the smaller regional and local banks were going to take away their business.

No longer fear too big to fail. Start thinking just the opposite. If we’re lucky, this will be the solution we’ve been looking for to get our economy back on track.

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