EDITOR NOTE: The following is a short history lesson on “too big to fail” banks, government bailouts, and the 2008 financial crisis that nearly took down the global financial system. It answers the questions “how did 2008 change the landscape of investment and commercial banking?” and “where are those banks today?”. Both questions prompt us to ask another: should the financial system once again find itself in crisis, what are the chances that the government will step in to place the financial burden on American taxpayers like it did in 2008? The likely answer is yes, and even more so. After the passing of the Dodd-Frank Wall Street Reform, TBTF banks now have the option of implementing a “bail-in” to prevent their own collapse. Depositors may be rendered “unsecured creditors” whose funds may be temporarily converted to bank capital in exchange for securities (like a bank’s stock). Americans may be facing another series of bail-outs in addition to bail-ins to bolster the banking system--two ways the government can take more money from the people to save Wall Street, its top priority. Now, as of December 2020, top banks have amended their terms and conditions to seemingly grab the balance of what the Dodd-Frank reform act is leaving behind in the form of a 24-hour confiscatory clause! Read more here on Epoch Times: https://www.theepochtimes.com/major-us-banks-amend-agreement-to-freeze-your-money-on-bank-failure_3603826.html
On Sept. 15, 2008, Lehman Brothers, a well-known and respected investment bank, filed for bankruptcy protection after the Bush Administration's Treasury Secretary, Hank Paulson, refused to grant them a bailout.12 While there had been market volatility during the preceding months, the fall of Lehman Brothers marks what many consider the beginning of a global financial crisis.
After the Dow Jones Industrial Average closed down 504 points—roughly 4.4%—and the Nasdaq lost 3.6% in response to the Lehman bankruptcy, policymakers reversed their stance on bailouts and initiated a $700 billion program to stabilize financial markets.34 Companies deemed "too big to fail" received cash infusions in exchange for stock, commercial bank status, and access to discounted loans from the Federal Reserve.
So, what were the financial companies that received help from the government, and 13 years later, where are they?
Bear Stearns: The Harbinger of Too Big to Fail That Failed
The first "too big to fail" moment occurred months before the Lehman Brothers failure. The Bear Stearns deal was meant to shore up financial markets and promote stability in a system increasingly recognized as unstable since the middle of 2007.
In March 2008, the Federal Reserve agreed to lend up to $30 billion to JPMorgan Chase so they could buy Bear Stearns. JPMorgan did so; paying only $10 a share for the ailing investment bank. Rather than stopping the panic, the deal did little to allay fears, and ultimately more bailouts followed.5
Seven years later, in 2015, JPMorgan Chase CEO Jamie Dimon said he regretted the decision to buy Bear Stearns, even at the discounted price. "No, we would not do something like Bear Stearns again," he wrote in a shareholder letter, citing billions in losses and legal bills stemming from crisis-era acquisitions Bear Stearns and Washington Mutual.6
JPMorgan isn't suffering too much, though. It is the largest bank in the U.S. in terms of assets at the end of 2020, with just over three trillion dollars in assets.7
AIG: The Biggest Bailout in History
Just after letting Lehman Brothers fail, the government stepped in when it became clear that American International Group (AIG) would fail due to its heavy investments in credit default swaps and potentially bring down the entire financial system. With AIG, the infusions came in multiple stages, including a low-cost loan, preferred share purchases, and mortgage-backed securities. In the end, the government poured more than $180 billion into AIG.8
However, because the government took on a stake of nearly 80% of the company, the money spent was recovered by 2012, with a net profit to U.S. taxpayers.8
Today, after a few years of profits, AIG is once again struggling. In 2020, the company had $730 million in losses related to the Covid pandemic.9 The company used to have a triple A credit rating and now its senior debt has a BBB+ rating.10 Even before the pandemic, the company was having a tough time. In 2016, investing legends Carl Ichan and John Paulson called for its breakup. Since 2016, its profit margins have been either flat or negative, without any real growth.11 It's revenues in 2019 were only a 5% increase from 2018.1213The company is chugging along.
Morgan Stanley and Goldman Sachs: Becoming Commercial Banks
The bailouts of 2008 weren't just about the government buying shares, but also about changing the face of banking. Investment banks Morgan Stanley and Goldman Sachs couldn't get involved with commercial consumer banking until the financial crisis. At that point, the Federal Reserve allowed them to become commercial banks so they could access funds by borrowing heavily, using the discount window the Fed offers commercial banks, as well as access to other government guarantee programs extended to these types of banks.14
Both Morgan Stanley and Goldman Sachs borrowed billions at these low rates to help stabilize their operations. On top of that, becoming commercial banks has allowed them to tap into the consumer market in a way that they were unable to do before.
Today, Morgan Stanley offers a variety of banking services in addition to investment banking. For the full year ending 2020, the company had record revenues of $48.2 billion with an EPS of $6.46. Total net income for the year was $11 billion, up from $9 billion the previous year; a 22% increase. And revenues increased 16% from the previous year.15
Goldman Sachs is still one of the most powerful banks in the world with an esteemed reputation. In 2020, net revenues increased to $44.5 billion from $36.5 billion the year before. Earnings witnessed a slimmer growth to $9.5 billion from $8.5 billion. All core business units witnessed growth.16
Bank of America: Bailed out to Buy Failing Financial Institutions
Bank of America also received bailout money from the government, including more than $100 billion in guarantees, so that it could buy failing financial companies Countrywide Financial and Merrill Lynch. Bank of America had to take on losses related to those companies, including shouldering legal fees associated with Countrywide's questionable mortgage lending practices.17
Even with these costs, though, Bank of America is booming today. It's America's second-largest bank. It did struggle during the pandemic, with both revenues and income down in 2020 from 2019. However, its assets and deposits continue to steadily grow.18
Is "Too Big to Fail" Alive and Well?
More than a decade after the financial crisis, there's a good chance that facing a similar situation, the government would pledge money to bail out financial institutions. Even though Congress passed a $700 billion bailout package during the global financial crisis, some estimates indicate that the U.S. spent, lent, or guaranteed up to $12.8 trillion to rescue the economy. While that much money might not have been spent directly, the government essentially offered itself as a backstop to dozens of banks considered essential to the U.S. financial system and economy.19
Following the financial crisis, "too big to fail" put additional regulatory requirements on 44 banks with more than $50 billion in assets. Earlier in 2018, Congress changed the definition of "too big to fail" to banks with at least $250 billion in assets, reducing the list to 13 banks. However, if faced with another meltdown, it's doubtful that the government would stop at propping up so few financial institutions.20
The Bottom Line
The financial crisis threatened to wipe out trillions of assets in the U.S. economy with the expected closure of some of the nation's largest institutions. The government stepped in with a massive bailout package to prevent these institutions from going under and further damaging the economy. Though a few of these institutions were allowed to fail, such as Lehman and Bear, the government prevented the collapse of other large banks, all of which continue to thrive today.
Original post from Investopedia