“Too big to fail” is a new phrase in the American lexicon, born in the economic crisis that gave us a bankrupt Lehman Brothers and the shotgun marriage of Merrill Lynch with Bank of America. Nobody really knows what it means, except that somehow in the banking world, central bankers can decide that some institutions–like AIG, Citigroup, JPMorgan Chase and BofA–are so big they simply have to be kept alive.
Despite those interventions, bank failures are at highs not seen since the Great Depression, and we’re told more than 400 institutions are on a government list of likely additional failures. Clearly, Lehman was just the tip of the proverbial iceberg. To know why these institutions have done so poorly, we have to look beyond the obvious discussions about mortgages and complex derivatives, and look beyond arguments that America’s top bankers were simply foolish or greedy.