Too-Big-to-Fail is Too Big to End

Not even the most powerful man in the financial world has been able to stop the greatest affront to free-market capitalism since Karl Marx.

The perverse doctrine of too-big-to-fail still guarantees that taxpayers will bail out large financial institutions, at any cost, no matter how reckless or stupid they become, just because they are systemically important.   "I'm in complete agreement that we need to stop too-big-to-fail," Federal Reserve Chairman Ben Bernanke said during his semi-annual appearance before the Senate Banking Committee on Tuesday.

He was agreeing with his Democratic inquisitor Sen. Elizabeth Warren of Massachusetts.

"We've now understood this problem for nearly five years," Ms. Warren needled the chairman. "So when are we going to get rid of too-big-to-fail?"

Ms. Warren, by the way, is brand-spanking new to the Senate. Republicans refused to approve her as head of the new Consumer Financial Protection Bureau established in response to the 2008 financial crisis. So she did the next best thing: She ran for office, beat a Republican out of his Senate seat, and now Republicans must put up with her as a colleague instead of a regulator they could try to control.

Mr. Bernanke has to put up with her, too. And, boy, did she have him stammering. Let's roll the tape:

"Some of these rules take time to develop--um, uh, the orderly liquidation authority, I think we've made progress on that. We've got the living wills--I think we're moving in the right direction. If additional steps are needed, I think Congress can obviously discuss those, but we do have a plan, and I think it's moving in the right direction."

"Any idea about when we're going to arrive in the right direction?" Ms. Warren pressed again.

"It's not a zero-one kind of thing," Bernanke answered. "Over time you will see increasing, uh, increasing market expectations that these institutions can fail. ...

"I would make another prediction--predictions are always dangerous--that the benefits of being large are going to decline over time, which means that some banks are going to voluntarily reduce their size because they're not getting the benefit they're going to get."

Um, oh, ah, I think what Mr. Bernanke just said was, uh, don't worry, the problem will just go away by itself.

Ms. Warren grilled Mr. Bernanke about a reported "subsidy" that too-big-to-fail banks receive just for being too-big-to-fail. Because the marketplace believes these banks will be bailed out no matter what, they get funds and deposits at lower rates than smaller banks that would be left to fail in a crisis.

Ms. Warren and Mr. Bernanke tussled over a Bloomberg analysis that put the value of this risk-premium perk at $83 billion a year. But Mr. Bernanke did not deny that this market subsidy from the continuing expectation of bailouts exists. "That's the expectation," Mr. Bernanke said, "but that doesn't mean we have to do it."

In any case, Mr. Bernanke made it clear he believes the game board remains slanted.

"The big banks are getting a terrific break and the little banks are just getting smashed," Ms. Warren said.

"I agree with you 100%," Mr. Bernanke responded.

Big banks, however, don't seem to agree even 1%.

Tony Fratto, a former deputy assistant to President George W. Bush, is now with Washington, D.C.-based Hamilton Place Strategies doing strategic communications for large financial institutions and associations. In a telephone interview, he told me these analyses about supposed too-big-to-fail subsidies are being debunked, and that too-big-to-fail is really a thing of the past.

The nation's largest banks are much safer today, he said. They have met improved capital requirements and they've actually been getting smaller over the past few years, spinning off pieces of their global businesses, he said.

Furthermore, new banking regulations, established by the Dodd-Frank Act, set up rules for the orderly wind-down of large institutions if they fail.

"I actually think it goes too far," Mr. Fratto said. "If you read Title II of Dodd-Frank of what to do with a failing large financial institution, it reads like the procedure manual for a morgue. It's not bailing out. It's not saving. It's like, "This is how you disembowel the body." It's about how to do the autopsy and take it apart."

For his part, though, Mr. Bernanke gave only hedged assurances that too-big-to-fail would not live on as a fundamental rule of banking or even just a market perception.

"It's a problem we've had for a very long time," he told Ms. Warren. "I don't think we can solve it immediately, but I assure you that as somebody who's spent a lot of late nights dealing with these problems, I would very much like to have confidence we can close down a large institution without causing damage to the rest of the economy."

What was that? Replay that tape. "I would very much like to have confidence??????." Stop. He'd like to have confidence? Does that mean he doesn't? Mr. Bernanke was so unconvincing he even had some Republicans siding with Ms. Warren.

"My top concern is exactly the same as Ms. Warren's, and I think that is a statement in and of itself," Sen. David Vitter, a Republican from Louisiana, told Mr. Bernanke. "I believe it is a fact that too-big-to-fail is alive and well."

(Al's Emporium, written by Dow Jones Newswires columnist Al Lewis, offers commentary and analysis on a wide range of business subjects through an unconventional perspective. The column is published each Tuesday and Thursday at 9 a.m. ET. Contact Al at or