Even though the economy is slowly starting to recover from the excesses of spending of the George W. Bush administration (and the equally complicitous Congress), we are still far from out of the woods. The economy is in pain, in addition to the overspending, due to poor financial market regulation which destroyed several top-notch financial firms such as Lehman Brothers (who also appeared to break some standard accounting laws and best practices). The government responded to help these big institutions because they were “too big to fail.”

Let’s face it – there should be no such thing as “too big to fail.” Most of us work for companies that are not in that category. If our employers screw up and the company goes down the tubes then we will individually hurt and perhaps the micro-economy around that company will hurt a bit but for the most part the US GDP won’t even see the speed bump. This is the way that it should be – screw up and fail then just pick yourself up and get on with life.

“Too big to fail” simply stinks of a type of monopoly. I know that monopoly prevention is usually about consumer rights and price gouging, but is this that far from where we are now? Isn’t consumer price gouging exactly what we just went through with the TARP program?  I know that my taxes feel like I am getting gouged! This is especially true when I know that I am paying way too much in taxes and that still doesn’t cover what the US government spends! If it is a choice between taxing me more and the US Government (and the state governments) spending more, than I know the choice that I want to make – cut the damn spending!

So what is my suggestion?

The FDIC was nice enough to give us a list of banks here. The first thing that I see is there are some BIG banks! How can these not be monopolistic when they are that much larger than banks that are ranked just 10 places below them.  We need some sanity here.

1. No bank in the top 100 largest banks can be larger than double the size of the next smallest bank.
2. No bank in the top 100 largest banks can be more than five times larger than a bank that is ranked 10 spots below it.
3. No bank in the top 100 largest banks can be more than ten times larger than a bank that is ranked 20 spots below it.
4. No bank in the top 100 largest banks can be more than twenty times larger than a bank that is ranked 40 spots below it.
5. The top 100 banks combined size cannot exceed double the combined size of the banks ranked 101-500.
6. No FDIC insured bank can have more than 10% of its ownership by a non-US entity.

Yes, I know that the title of this article only says 5 rules but the list has 6 rules. The last rule is simply to reduce our banking exposure to undue influence by foreign nationals. We need to realize that our banking and financial systems is just as much of a strategic US asset as our defense contractors. We want the decisions of our strategic institutions to be governed by good business intentions and not the political aspirations of a foreign body.

Because of all of this re-arrangement, we would have to do this with plenty of warning. I would suggest that the law wouldn’t take effect for 5 years after signing to give the banks time to adjust. Also, in the first 5 years after the law is in effect (years 6-10 after signing), the penalty should simply be a 1% fine for the amount of out of compliance the bank was in e.g. if a bank was too large by $1B than the fine would by $10M. After the first decade, a bank would be taken over by a government agency to accelerate their divestitures, existing management and board of directors would be fired (and forbidden to run a bank for 10 years), and then new management would be installed by the shareholders.

There would also need to be a grace period of perhaps 3 years if banks ranked lower than the bank in violation decreased their size by more than 10% in a year and that caused the non-compliance. We cannot punish one institution due to the acts of another. However, we can require them to adapt to the current situation within a reasonable time, I suggest 3 years.

What would this do for the financial institutions?

The first thing that would likely happen is that the banks below 500 would likely start to get bought up pretty rapidly by the banks that are 101-500.Also, the top 100 banks would start to divest portions of their business to other banks (or create new entities) so that they could balance out. It definitely would mean that the top 10 banks would get smaller relative to the next 20 banks. That is the point, they would no longer be too big to fail. While we wouldn’t want them to fail, we also wouldn’t be on the hook as taxpayers to fix their screw-ups.

With the built-in delays and grace periods, it would probably take 20 years to get to a better balance. That is okay. In the words of some great philosopher: haste makes waste. It took us several decades to get the current mess that we are in and if we try to adjust too quickly, we will screw it up.

I know that there will be a lot of nay-sayers that think this won’t work or some other way will work better. I am sure there are good ideas out there but any idea that still concentrates wealth in the hands of a dozen corporations is simply not a solution to the core problem. Those suggestions are only to take care of a problem that presented itself already – in other words they are a band-aid to an existing cut. My suggestion is that we know that injuries and mistakes will happen in the future (banks will always fail) but let’s not get in trouble as a nation because of the problem.