Too Big to Fail Essay

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“Looking back, one sees that the crisis was inevitable, if for no other reason than that these too-big-to fail firms would push the boundaries until there was a crisis” Thomas Hoenig, FDIC director by Polina Mitsova March 2013 CONTENT INTRODUCTION 3 WHAT ACTUALLY “ TOO BIG TO FAIL” MEANS 4 INSTITUTIONS 6 THE SUBPRIME MORTGAGE CRISES 7 AN EXAMPLE FROM THE RECENT PAST 9 CONSLUSION 12 1. Introduction Too big to fail is a term that concerns the economists for a long time. During the financial crisis of 2007-2009, governments worldwide took extraordinary measures to prevent the failure of too big to fail institutions. So this became a problem that concerned also a large group of citizens. This problem of too big to fail is not new to the world. It dates back to 1984, when the FDIC (Federal Deposit Insurance Corporation) took over the Continental Illinois Bank and Trust Company, then the seventh-largest U.S. bank. Because of bad loans purchased from the failed Penn Square Bank N. A. of Oklahoma, Continental Illinois became insolvent but because of its size regulators were not willing to let it fail. A congressman said back then: “We have a new type of bank and its called “too big to fail””. So the term was born. The bailing out of big banks in case of need became official policy and everyone knew that. In the time between 1984 and 2007 big banks and institutions grew bigger and the financial system became more complicated. The financial system developed, the banks acted more and more risky but no regulatory measures were taken that would allow troubled big banks to fail. During the last financial crisis the Congress passed the $ 700 billion bailout of Wall Street. This was the largest taxpayer bailout in the history of the world. Additional the Federal Reserve has committed trillions of dollars in virtually zero-interest loans and other
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