Moody’s Says Too Big To Fail Is Over

It’s a mega-banking world turned upside down.

Photo by FABRICE COFFRINI/AFP/Getty Images

If there’s one thing the left and the right agree on American, it’s that the Dodd-Frank financial reform bill was a wishy-washy jokes, the banksters still run America, and too-big-to-fail mega-institutions hold all the cards in Washington, DC. In my experience just about the only people who don’t agree with this analysis are bankers, bank regulators, and financial industry lawyers. And now the non-skeptics are joined by Moody’s, one of the big bond ratingagencies, who offered a report late yesterday that should have been big news.

The report downgraded the credit ratings of a whole bunch of large banks. In doing so, it made two points.

One was that in the future bailouts of these firms are much less likely so the risk of losing money from lending to them is higher.

Second—and partially offsetting the first—was that tighter capital requirements are making the megabanks less likely to fail by forcing them to behave in a less risky (but also less profitable) manner.

Standard & Poor’s reached a similar conclusion make in June. Obviously these ratings agencies are not flawless. Faced with conflicts of interest, they erred egregiously during the housing boom years. And I think they’re ratings of large sovereign countries largely reflect politics rather than real economic analysis. But corporate debt is close to their core competencies and I think people should take these claims from Moody’s and S&P seriously. The new regulatory regime absolutely has not dislodged finance from its large role in the American economy or transformed the nature of the financial system in any radical way. But it really does seem to have taken a big bite out of “heads I win, tales taxpayers lose” finance.