The 800 Pound Gorilla in the Room

Something has been bugging me throughout the long-winded analysis and never-ending media coverage of the U.S. financial markets. It's this concept that several gargantuan banks in this country are 'too big to fail'.

First and foremost, we are supposedly a free market economy, and that means that if you stink in business, rip off customers and take chances that don't pay off you are allowed to fail. Not to mention the fact that, in spite of huge injections of taxpayer money, several financial giants are in fact failing and failing miserably. There's no way they will still be in business in 20 years no matter what we do.

After taking the time to learn about the little 'securities shell game' that led to the stock market debacle, and after listening to the pathetic excuses offered by top bank executives, I am convinced that quite a few bloated multi-national banks deserve to fold. They have been reckless... they have securitized the nation to the brink of disaster... and when their bets haven't pay off they have held out their hands to Washington with the excuse that they are 'too big to fail'. And we bought it!

Bankruptcy and annihilation are exactly what these banks deserve. There are literally thousands of smaller banking institutions in this country who are fiscally sound, who have strong loan portfolios and who are still lending. They have a right to grab the market share of over-sized behemoths who fold. They are far more capable of building a diversified system that spreads risk around, cares for consumers and enforces accountability. No one should get a free pass or an automatic bailout simply because they dominate a huge percentage of the market. All the more reason to let them fade quietly in the night to trouble us no more.

The surf industry is not banking, but there's a lesson to be learned from recent events. In December of 2005 a monopoly folded. Surf legend 'Grubby' Clark faxed out a letter to shapers around the globe saying that his factory was closing effective immediately. Clark Foam at the time manufactured an estimated 90% of the surfboard blanks used in board production worldwide. Surf magazines and blogs from California to Hawaii to Australia predicted ruin for the entire industry.

Can you guess what happened? The free market economy kicked in. There were several lean months in which shapers had a tough time getting enough blanks to keep going, but a new crop of innovative and driven blank manufacturer's cranked up production and filled the gap. Within 6 months supply levels were strong and prices had stabilized due to increased competition. Clark Foam cornered the market because they were there, not because they were the only ones who could... and when a gap opened up capitalism flowed in with new upstarts, better technology, wider selection and fair prices.

Both Washington and Wall St. should take note. Right now the quandary is this: we can't undo the past. We can't go back and fix billions in toxic assets. We can't retroactively limit the size of banks. We can't launch new rules right in the middle of a recession and allow the immediate failure of the banking system. It would spiral the U.S. into a real Depression! So for now, we'll probably have to prop up some financial institutions that have been completely irresponsible.

But I hope that the government will learn from past mistakes. In a free market economy nobody is guaranteed a rescue - nobody gets to dodge the rules. I don't know what all the solutions are. A socialist state doesn't seem alluring; limits on bank sizes, government-ownership of private firms or heavy-handed regulation. But there must be a balance somewhere in which the fundamentals of the banking system change and common sense reigns. CitiGroup, AIG, Bank of America and other institutions should probably be broken up into smaller, more palatable units. Some deregulation should probably be rolled back to bring in more oversight and accountability.

Corporations can never again be allowed to become 'too big to fail'. Massive failure is supposed to be the fate of businesses that make dumb decisions. Smarter survivors will pick up the pieces, take over the customer bases of extinct companies and enrich the economy. We cannot allow the current crisis to reoccur.

Right now we need to deal with the 800 pound gorilla in the room. The stimulus plan doesn't address this crucial issue. Neither does the Treasury Department's proposal for the remainder of the TARP money. But someone has to - and soon.