Too Big to Fail: The New Monopoly

Includes: BAC, C, GS, JPM, WFC
by: Bo Peng

Monopoly was the inevitable product of the old jungle-style capitalism. Without adequate legal and regulatory barriers and sufficient enforcement, it was only natural for capital and wealth to concentrate and for monopolies to emerge. Moral prohibition alone cannot be expected to be strong enough to fight such a trend. But the western world learned the lesson well and did the right thing. It started with the Sherman Anti-trust Law of 1890 and enforcement became very effective after the Great Depression. It's been so effective that the word "monopoly" has permanently entered the common dictionary with a negative connotation.

Much like monopolies of the old capitalism, "Too Big to Fail" (TBTF) is an inevitable evolutionary end of the new capitalism. The tendency for capital and wealth to congregate is not changed, nor will it ever change. With monopoly banned, we end up having a few ever-larger, ever-dominant companies in each sector, i.e. pluropoly.

This by itself needs not be a problem given effective regulation and enforcement, which is at least theoretically possible. The problem arises when pluropoly is coupled with globalization and today's increasingly complex, inter-dependent economic/financial structure. If any of them fails, it may cause a systemic failure, or at least so they'd like you to believe. In other words, TBTFs hijack society with their strategic position of systemic failure points, and get a free ticket to take risk, reaping rewards while shedding risk. Which is exactly what's been happening -- and we all know it.

What I'm stressing here is that what's been happening since World War II and culminating since 2008 is no accident. TBTF is the systemic instability itself, and the inevitable evolutionary end unless we tackle it with the same resolve as we did monopoly. CDS/CDO is merely a technical medium; subprime is merely a trigger; leverage and capital reserve ratios are merely superficial symptoms. As long as TBTFs are not completely banned like monopolies, similar crises will keep coming back and haunt us until we either (a.) collapse, or (b.) suffer enough pain to ban TBTFs as we did monopolies. (We know what to do; we just don't have enough pain to do it.)

Frank-Dodd is no Sherman.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.