When it comes to bailouts and banks, there is a line you don’t cross, apparently. And in early 2009, Bank of America was on the right side of it; that is, if it wanted a bailout, which, in early 2009, it sort of did.
In in a mid-January conference call, then-Federal Reserve Chairman Ben Bernanke told others at the central bank that while he was “uncomfortable” with a deal to give Bank of America (BAC) the money it needed to complete its acquisition of Merrill Lynch, there was no way he was going to let BofA fail.
“I am not going to draw the line somewhere that involves the failure of a firm the size of Bank of America,” Bernanke said at the time.
The conversation about BofA, and ultimately bailouts and the issue of too big to fail banks, is contained in the Fed’s transcripts from 2009, which were made public on Wednesday after the standard five years delay.
At the time, BofA had $1.6 trillion in assets. So, that means if BofA was on the “okay to bail out” side of the line, so was Citigroup ($2.1 trillion) and JPMorgan Chase ($1.6 trillion).
Other members of the Fed expressed concerns about the bailouts. Dallas Fed President Richard Fisher and Tom Hoenig (who was at the Fed at the time but is now at the FDIC) both voiced fears that the Fed’s attempts to stabilize the financial system, particularly its backing of the BofA-Merrill Lynch deal and helping Citi (C) stay afloat, would create even bigger banks in the global financial system, making the too big to fail problem even worse.
At the time, Bernanke said he was worried about too big to fail as well and that the big banks might have to be broken up in the future, but that other issues were more critical. Kevin Warsh, another Fed governor, said he thought the market would quickly force Citi and others to slim down.
It turns out Fisher and Hoenig were mostly correct. Citi is smaller than it was, but only slightly. It still has nearly $1.8 trillion in assets, even after this week’s deal to sell its subprime lender OneMain. JPMorgan (JPM) now has $2.6 trillion in assets. And assets at Wells Fargo (WFC) have nearly tripled to $1.6 trillion, from less than $575 billion at the end of 2007. So all the big banks are now safely on the bailout side of the line, at least according to 2009 standards. And JPMorgan is well into the bailout comfort zone.
The question is whether the line has moved since 2009. Some say Dodd-Frank and other post-financial crisis regulations have moved the line, making it much less likely that the government would bail out a big bank. Bernanke himself has said so. And while that may be true right now, the transcripts from 2009 give us a window into how, even under the control of free market economists, the bailout line can swing pretty quickly back.