Banks "too big to fail" should be broken up

AMERICA now has a handful of trillion-dollar banks that have been declared, in effect, too big to fail. And yet Americans have learned that any of them — or all of them — may fail. To reduce the risk to the federal taxpayer and to American investors and workers, the biggest banks may need to be broken up.

Many voices are saying banks need to be regulated more. Done carefully, this is a good idea. But banks are already regulated, and the old regulation did not do the job. The innovators of finance went around it. Nor can innovation be outlawed. There must always be risk, and the bigger the player, the bigger the risk.

And that is why it may be wise to break up the biggest financial companies. We think of the trillion-dollar-asset banks — Citigroup, J.P. Morgan Chase, Bank of America and Wells Fargo — and insurance giants like AIG.

The federal government has broken up companies before, through the antitrust laws. But the big breakups can be counted on one hand: Northern Securities, Standard Oil, American Tobacco, Paramount Studios and American Telephone & Telegraph.

The first three were a century ago. Paramount — the case that separated the motion picture studios from the theaters — was 60 years ago. The Bell System breakup was 25 years ago. None was a financial company — and none was for reasons of risk to the American economy as a whole.

Former Federal Trade Commission investigator Jack Kirkwood, now associate professor of law at Seattle University, says antitrust law has come to focus on economic harm to the consumer. "Too-big-to-fail relates to a different issue," he says.

A century ago, there was widespread worry about corporate bigness. But over many decades, the courts and the government decided that company size was not a consumer problem.

"We have ceded the size issue," Kirkwood says.

It is time to take that issue back, for different and more compelling reasons.

In the case of banking and insurance, the reasons are harm that bailouts cause to the FDIC, the Treasury and the federal taxpayer, and the harm economic panics cause America's investors and workers.

A new antitrust law is needed. No American company should be too big to fail.