Banks 'Too Big to Fail' Have Grown Even Bigger - washingtonpost.com: "Regulators' concerns are twofold: that consumers will wind up with fewer choices for services and that big banks will assume they always have the government's backing if things go wrong. That presumed guarantee means large companies could return to the risky behavior that led to the crisis if they figure federal officials will clean up their mess.
This problem, known as 'moral hazard,' is partly why government officials are keeping a tight rein on bailed-out banks -- monitoring executive pay, reviewing sales of major divisions -- and it is driving the Obama administration's efforts to create a new regulatory system to prevent another crisis. That plan would impose higher capital standards on large institutions and empower the government to take over a wide range of troubled financial firms to wind down their businesses in an orderly way."
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But who could have foreseen that shoveling vast quantities of government money into the nation's largest banks would make them bigger at the expense of smaller banks that had to ride out the crisis on their own? Well, everybody.
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According to author Barry Ritholtz, the big banks lobbied hard for a change in the Net Capital Rule. Prior to the change by the SEC, the debt was limited to about 12 times the bank's net capital. But after the rule change, it rose to 40. Huge leverage with little protection against declines.
"The U.S. Securities and Exchange Commission (“SEC”) made a change to its net capital rule in 2004 that is widely believed to have permitted Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley to increase their leverage."
If banks become too big to fail, then the Net Capital Rule should require a smaller and smaller number (smaller leverage) with increasing size.
This is another example where the lobbying leverage of big organizations has dumped on the citizens with government not understanding the risks to citizens who end up paying the bail out.
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