> http://www.bloomberg.com/apps/news?pid=email_en&sid=aJ8HPmNUfchg
>
> By Michael McKee and Scott Lanman
>
> Oct. 15 (Bloomberg) -- U.S. regulators should consider breaking up
> large financial institutions considered “too big to fail,” former
> Federal Reserve Chairman Alan Greenspan said.
>
> Those banks have an implicit subsidy allowing them to borrow at lower
> cost because lenders believe the government will always step in to
> guarantee their obligations. That squeezes out competition and creates
> a danger to the financial system, Greenspan told the Council on
> Foreign Relations in New York.
>
> “If they’re too big to fail, they’re too big,” Greenspan said today.
> “In 1911 we broke up Standard Oil -- so what happened? The individual
> parts became more valuable than the whole. Maybe that’s what we need
> to do.”
>
> At one point, no bank was considered too big to fail, Greenspan said.
> That changed after the Treasury Department under then-Secretary Hank
> Paulson effectively nationalized Fannie Mae and Freddie Mac, and the
> Treasury and Fed bailed out Bear Stearns Cos. and American
> International Group Inc.
>
> “It’s going to be very difficult to repair their credibility on that
> because when push came to shove, they didn’t stand up,” Greenspan
> said.
>
> Fed officials have suggested imposing a tax or requiring higher
> capital ratios on larger banks to ensure the firms’ safety and reduce
> some of the competitive advantage from the implied subsidy. Greenspan
> said that won’t work.
>
> “I don’t think merely raising the fees or capital on large
> institutions or taxing them is enough,” Greenspan said. “I think
> they’ll absorb that, they’ll work with that, and it’s totally
> inefficient and they’ll still be using the savings.”
>
> ‘Really Arbitrarily’
>
> The former Fed chairman said while “just really arbitrarily breaking
> down organizations into various different sizes” goes against his
> philosophical leanings, something must be done to solve the
> too-big-to-fail issue.
>
> “If you don’t neutralize that, you’re going to get a moribund group of
> obsolescent institutions which will be a big drain on the savings of
> the society,” he said.
>
> “Failure is an integral part, a necessary part of a market system,” he
> said. “If you start focusing on those who should be shrinking, it
> undermines growing standards of living and can even bring them down.”
Obvious issue: if a bank acts in the same way as most of the rest of the banks, it still receives the implicit subsidy.