Hank Paulson’s Build-Confidence-Without-Saying-Anything-That-Will-Sound-Dimwittedly-Pollyannaish-a-Year-From-Now Tour continued with a speech in New York this morning. It’s actually pretty good, as these things go. But this paragraph struck me as problematic:
Looking beyond today’s market challenges, we need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail. Essential to this objective is improved market infrastructure and operating practices to increase transparency and efficiency, especially in the OTC derivatives market and the tri-party repo system. Improved infrastructure will add to market stability and mitigate the likelihood that a failing institution can spur a systemic event. We also need additional powers to manage the resolution, or wind-down, of large non-depository financial institutions, such as larger hedge funds, so as to limit the impact of a failure on the broader financial system.
Great, in theory. But the reality in a downturn like this is that big financial institutions get bigger as they, with encouragement from regulators, acquire troubled competitors (as JP Morgan Chase and Bank of America have done this year). Meaning that they’re even more likely to be “perceived to be too big or too interconnected to fail” in the future, right?