"Too big to fail" will be remembered as the motto of the 2007-2008 financial crisis, which resulted in a number of large Wall Street institutions receiving billions of dollars in taxpayer bailouts. It was feared that if banks were left to fail like normal businesses, they would have brought the entire economy down with them.
Now critics of the banking industry worry that Wall Street is "too big to jail"—that financial institutions or so large and interconnected with the economy that, not only can they not be allowed to fail, even prosecuting those responsible for misbehavior would negatively impact the economy at large. Since the bailouts, a number of other scandals have plagued the financial industry; the most recent perpetrator, British bank HSBC, was caught illegally laundering money for nefarious clients in Iran, Libya, and even for Mexican drug cartels. It faced $1.9 billion in fines, but no criminal charges; speaking in front of the Senate Judiciary Committee, Attorney General Eric Holder explained:
"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy, and I think that is a function of the fact that some of these institutions have become too large."
Democratic Sen. Sherrod Brown of Ohio has teamed up with Republican Sen. David Vitter of Louisiana to introduce legislation to break up Wall Street's biggest banks. Their efforts are likely to meet heavy opposition from the banking industry as well as lawmakers who believe doing so would be government interference with the free market. The last measure of significant banking regulation, 2010's Dodd-Frank Act, is still highly controversial, with many Republicans calling for its repeal.
Should something be done about banks becoming "too big to jail"? Here is the Debate Club's take:
Hester Peirce Senior Research Fellow at the Mercatus Center
Wallace Turbeville Senior Fellow at Demos