Larry Fink says we're already dealing with too-big-to-fail

Shorter Larry Fink: "Trust us. Next time it's gonna be different."

I think Mr. Finks is confused about what exactly too-big-to-fail means.
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He's arguing that by reducing the leverage of the big banks and investment houses, they're being shrunk because they're responsible for fewer total asset and liability $$'s. This is true.
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However, even if something like Citi was only leveraged at a 2-1 or 3-1 ratio, we're still talking about something like a trillion total $ at stake. The government simply CAN'T let a financial institution of that size fail.
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And that's the problem. Yes, it's better if all of these institutions "shrink" by reducing leverage, but until the sheer size, diversification, and inertia of the larger firms are addressed, the problem is still there, even if it less risky.

Whatever happened to anti-Trust legislation? Oh, that's right, we ended up flushing it down the toilet. Heck, let's bring back Ma Bell while we're at it. She knows what's good for us.

Agree with Sean DeCoursey. This has nothing to do with solving too-big-too-fail. Finks just thinks we're making it less likely.

He could very well be right about that. Firms probably would have fared better during the crisis if they had different balance sheets. Less leverage means more core capital to meet fewer margin calls.

Still, I can't help but think Fink (Ha! Rhyme.) is missing the point. Look, everyone talks about how securitization distributes risk more evenly. Look at mortgages. In premise, we've reduced risk, by taking the possibility of individual default and spreading it throughout a number of security holders.

But the flipside to this is that each holder's risk starts to look pretty identical - they have the same market position, the same risk profile, the same portfolio. In the short run, that makes it less likely that investors will lose money. But in the long run, it means that major disruptions are going to cause large institutions to pull back from their positions at the same time. That's catastrophic, and nothing Fink says has really addressed that.

strawmn,
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What you refer to is the problem that is inherent with the mis-applied Guassian coppula function. It was supposed to provide a risk assessment of non-corresponding events.
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What is did though was give people an unjustified assurance that they could perform miracles like walking on water, turning water to wine and raise from the dead. This is all fine and dandy as long as the Big Man upstairs has your back, but when the 1% situation arises and you've got no support (read capital).....we've found the miracles (read leverage and securitization) we thought WE were performing to be truly miraculous.
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To not extend that tortured metaphor above....risk cannot be eliminated. It can be spread, shared and reallocated, but the risk is still there and hopefully it is set up so that it is diversified for different determinative outcomes. The problem with the way it was previously set up is that risk wasn't hedged. It was coagulated into a mountain of chips on black which everybody doubled down on to the exclusion of every other position on the roulette table. When the color switched, everybody owed the house all at the same time.
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If we had diversified across many industries, and people had sat on both sides of the bet....this would not have been quite the economic catastrophe it has turned out to be.
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As far as public policy being the cause of the housing problem...don't forget the regulators. Had Greenspan and Bernanke raised interest rates....well, you start running out of alcohol at your New Year's Eve party and see if anybody sticks around!

Justin - Can we talk about Dodd vs. Frank? I sent you a couple of follow-up e-mails. Could you check? Thanks. Sincerely, Not Larry.

When an institution gets the label Too Big To Fail, that means we are making them a government sponsored entity or government subsidized entity. So, no matter how poorly they are run, they continue to exist. To take it a step further, their existence is guaranteed.

This is very bad economics. Firms have to be allowed to fail, otherwise you misallocate resources to a badly managed firm. As opposed to dispersing those assets to firms that are better managed.

Financial reform has to include language that says the US government should NEVER guarantee the existence of a private firm. The government, through bankruptcy court, should have the authority to take over a firm and sell off the assets, in an orderly fashion.

We had a panic last year because there was no transparency, nobody trusted that their counterparties assets were value correctly. With adequate transparency, you could have taken AIG into bankruptcy, protected the insurance customers, paid the Financial Products counterparties, X cents on the dollar, and we would have found out if GS REALLY had a 100 cent on the dollar hedge for AIG failure.

AIG Financial Products counterparties showed poor judgment in trusting FP to pay off in the event of a default. They had poor judgment because they had poor information on the ability of AIG FP to pay off. And they should pay a price for that poor judgment.

So, financial reform needs:

-A statute specifically saying the US Government will never guarantee the existence of any private or publicly traded firm
-Statutory authority to resolve dispersal of the assets of any firm in an orderly fashion.
-Transparency, meaning quality information coming from rating agencies.

Somebody ask Larry Summers and Mr Fink why AIG is at $36, when the company's true net worth does not justify that.

[...] Larry Fink, CEO of BlackRock (BLK), is bullish or confused or both.  (The Pragmatic Capitalist also Curious Capitalist) [...]

[...] Larry Fink says we’re already dealing with too-big-to-fail [...]

[...] Larry Fink, CEO of BlackRock (BLK), is bullish or confused or both.  (The Pragmatic Capitalist also Curious Capitalist) [...]

The era of “structured finance” should come to and end. Period!

Oh and get rocket scientist out of Wall Street, and back into main stream science. Wall Street is sucking scientific innovation from the US with the promise of bloated paychecks. Where would we be if say Doyen Farmer had stayed in the study of complex system and chaos theory?