Too Big to Fail

by Marilou Moursund on September 22, 2009

in Banks,Credit Crisis,Debt,TARP

The Epicurean Dealmaker has a very good post up about how excessive leverage combined with the intertwined nature of the global financial system was at the epicenter of the financial crisis.

Much of the discussion about reforming the financial system is focused on creating a new regulator and reining in executive pay.  The regulatory structure is already in place:  it just needs to be updated and enforced.  If we raise capital ratios and reduce leverage in the system, the excessive profits from taking on too much risk would evaporate and executive pay would shrink. 

Too big to fail is no longer an option.  If an institution is too big to fail, executives will continue to take on too much risk in the quest for ever increasing profits.  For most of us, it is the possibility of failure that makes prudence so necessary.

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