Are big banks becoming too big to jail?
That was the question posed by U.S. News & World Report to four reputable financial
experts – including Dr. James Barth, Lowder Eminent Scholar in Finance at Auburn University.
Barth answered “no” for the online panel, dubbed “The Debate Club,” but chose point
the finger squarely at individuals within banks and not at the banking institution
as a whole.
“It’s individuals within banks that cause the problems,” he said Monday, March 11,
from his Lowder Hall office at the Auburn University College of Business. “It’s not the banks themselves. The bank is simply run by individuals, so it’s the
individuals that are the source of the problem, not the institution itself. We know
that because some individuals have indeed gotten into trouble operating within banks
– traders that have done wrong and have been punished. One has to distinguish between
a bank and an individual working within a bank.
“When one talks about “too big to jail” one should be talking about going after individuals
within big banks that engage in the wrongdoing rather than simply going after a big
bank, per se.”
Barth’s response, which can be accessed at http://bit.ly/13JYZQ6, is titled ‘No Bank Should Be Treated as Too Big to Jail.’
Part of his response reads, “No one working in the banking industry should be above
the law — period. … The message to be sent to everyone working in banks, or for that
matter working in any firm, is that breaking the law will lead to punishment, including
potential imprisonment. No exceptions should be made for anyone, and certainly not
bankers working in big banks. This would simply be sending a message to those individuals
with a proclivity for wrongdoing to migrate to big banks.”
Barth also took issue with a recent quote by U.S. Attorney General Eric Holder, who
suggested to the Senate Judiciary Committee that it might be “too difficult” to prosecute
wrongdoing at large banking institutions. Holder said, “… if you do bring a criminal
charge, it will have a negative impact on the national economy, perhaps even the world
“That’s wrong,” Barth said in a March 11 interview. “One can go after individuals
who engage in wrongdoing within a big bank without the bank necessarily failing, or
causing problems for the entire financial system.
“It (Holder’s opinion) is worse than just giving a free ticket or a pass. It sends
a message to individuals that if you go work for a big bank you’re not going to have
to worry about being prosecuted. Whereas … if you work for a small bank, then you
will indeed be prosecuted? Individuals who engage in wrongdoing tend to migrate to
the bigger banks. The bigger banks would then be housing individuals who engage in
In his response to U.S. News & World Report, Barth wrote, “Just as efforts to eliminate
‘too big to fail’ are being undertaken, every effort should be made to ensure there
is no dividing line between ‘too big to jail’ and ‘too small to let go’ in the banking
industry. There should be no safe haven for wrongdoers at any bank, big or small.
To ensure that ‘too big to jail’ does not exist is simple; it only requires that the
law be enforced on an equal basis across banks of all sizes.”
Barth, also the Senior Finance Fellow at the Milken Institute, is joined in this issue
of The Debate Club by Hester Pierce, Senior Research Fellow at the Mercatus Center
at George Mason University; Wallace Turbeville, Senior Fellow at Demos; and Dean Baker,
Co-director of the Center for Economic and Policy Research.
Barth said this was the second such online debate that U.S. News & World Report requested
his expertise. In May of 2012, he was on a four-person panel that was asked, “Does
the J.P. Morgan loss prove the need for tougher bank regulations?” Barth’s response
was titled: “Did bank regulators miss J.P. Morgan’s risky behaviors?” It can be found
“I assume it (Debate Club) is a new way to address public policy issues by U.S. News
& World Report,” Barth said.
Barth, who has taught at Auburn since 1989. is author of the 2012 book, “Guardians
of Finance” Making Regulators Work for Us”.
Too big to jail is one thing. Too big to fail is another. Barth said the 2008 banking
bailout was necessary at the time, but begrudged the fact the nation’s financial system
got to that point.
“There wasn’t an alternative at that time,” he said. “What I would have liked is for
regulators to have done their jobs leading up to that point. If they would have done
their jobs earlier, we might not have needed a bailout. By September of 2008, it was
too late to do anything but bail out many banking institutions. Corrective actions
should have been taken much earlier.”
“Banks are so important. If banks get into serious trouble, the entire (financial)
system could crash. If so, that could lead to a recession or worse.”