Investing News

Too Big To Fail Banks: Where Are They Now?

Reviewed by Andy SmithFact checked by David RubinReviewed by Andy SmithFact checked by David Rubin

On Sept. 15, 2008, Lehman Brothers, a well-known and respected investment bank, filed for bankruptcy protection after the Bush Administration’s Treasury Secretary, Hank Paulson, refused to grant them a bailout. While there had been market volatility during the preceding months, the fall of Lehman Brothers marks what many consider the beginning of a global financial crisis.

After the Dow Jones Industrial Average closed down 504 points—roughly 4.4%—and the Nasdaq lost 3.6% in response to the Lehman bankruptcy, policymakers reversed their stance on bailouts and initiated a $700 billion program to stabilize financial markets. Companies deemed “too big to fail” received cash infusions in exchange for stock, commercial bank status, and access to discounted loans from the Federal Reserve.

So, what were the financial companies that received help from the government, and in 2024, where are they?

Key Takeaways

  • The financial crisis started with Bear Stearns and Lehman brothers. The U.S. government did not bail out Lehman and the institution filed for bankruptcy and eventually closed. Bear Stearns was picked up by JP Morgan and no longer exists.
  • As the financial crisis got worse, the U.S. government approved a $700 billion program to bail out institutions that were considered “too big to fail.” Some analysts put the real number at $12.8 trillion.
  • AIG, which received the biggest bailout in history at $180 billion, continued to operate, though as a shell of its former self struggling in the marketplace.
  • Other large banks that received some sort of government benefit continued to do well, including JP Morgan, Bank of America, Morgan Stanley, and Goldman Sachs.

Bear Stearns: The Harbinger of Too Big To Fail That Failed

The first “too big to fail” moment occurred months before the Lehman Brothers failure. The Bear Stearns deal was meant to shore up financial markets and promote stability in a system increasingly recognized as unstable since the middle of 2007. 

In March 2008, the Federal Reserve agreed to lend up to $30 billion to JPMorgan Chase so they could buy Bear Stearns. JPMorgan did so; paying only $10 a share for the ailing investment bank. Rather than stopping the panic, the deal did little to allay fears, and ultimately more bailouts followed.

Seven years later, in 2015, JPMorgan Chase CEO Jamie Dimon said he regretted the decision to buy Bear Stearns, even at the discounted price. “No, we would not do something like Bear Stearns again,” he wrote in a shareholder letter, citing billions in losses and legal bills stemming from crisis-era acquisitions Bear Stearns and Washington Mutual.

JPMorgan Chase isn’t suffering too much, though. It is the largest bank in the U.S. in terms of assets as of March 2024, with just over $3.5 trillion in assets.

AIG: The Biggest Bailout in History

Just after letting Lehman Brothers fail, the government stepped in when it became clear that American International Group (AIG) would fail due to its heavy investments in credit default swaps and potentially bring down the entire financial system. With AIG, the infusions came in multiple stages, including a low-cost loan, preferred share purchases, and mortgage-backed securities. In the end, the government poured more than $180 billion into AIG.

However, because the government took on a stake of nearly 80% of the company, the money spent was recovered by 2012, with a net profit to U.S. taxpayers. 

After a few years of profits, AIG had $730 million in losses related to the COVID-19 pandemic in the first half of 2020. The company used to have a triple-A S&P credit rating but as of 2024 its senior debt has a BBB+ rating. Even before the pandemic, the company was having a tough time. In 2015, investing legends Carl Ichan and John Paulson called for its breakup. Since 2016, its profit margins have been uneven. Its revenues in 2023 were $46.8 billion, a 14% decrease from 2022.

Morgan Stanley and Goldman Sachs: Becoming Commercial Banks

The bailouts of 2008 weren’t just about the government buying shares, but also about changing the face of banking. Investment banks Morgan Stanley and Goldman Sachs couldn’t get involved with commercial consumer banking until the financial crisis. At that point, the Federal Reserve allowed them to become commercial banks so they could access funds by borrowing heavily, using the discount window the Fed offers commercial banks, as well as access to other government guarantee programs extended to these types of banks.

Both Morgan Stanley and Goldman Sachs borrowed billions at these low rates to help stabilize their operations. On top of that, becoming commercial banks has allowed them to tap into the consumer market in a way that they were unable to do before.

Morgan Stanley subsequently offers a variety of banking services in addition to investment banking. For the full year ending 2023, the company had revenues of $54.1 billion with earnings per share of $5.18. Total net income for the year was $9.1 billion, down from $11 billion the previous year, an 18% decrease. Revenues increased 1% from the previous year.

Goldman Sachs remained one of the most powerful banks in the world with an esteemed reputation. In 2023, net revenues were $46.3 billion, down from $47.4 billion the year before. Earnings fell to $8.5 billion from $11.3 billion.

Bank of America: Bailed Out To Buy Failing Financial Institutions

Bank of America also received bailout money from the government, including more than $100 billion in guarantees, so that it could buy failing financial companies Countrywide Financial and Merrill Lynch. Bank of America had to take on losses related to those companies, including shouldering legal fees associated with Countrywide’s questionable mortgage lending practices.

Even with these costs, though, Bank of America is America’s second-largest bank as of 2024. It did struggle during the pandemic, with both revenues and income down in 2020 from 2019. In 2023, which concluded with the 20th consecutive quarter of net account growth, total assets were $3.18 trillion, up 4% from 2022. 

Is “Too Big to Fail” Alive and Well?

More than a decade after the financial crisis, there’s a good chance that facing a similar situation, the government would pledge money to bail out financial institutions. Even though Congress passed a $700 billion bailout package during the global financial crisis, some estimates indicate that the U.S. spent, lent, or guaranteed up to $12.8 trillion to rescue the economy. While that much money might not have been spent directly, the government essentially offered itself as a backstop to dozens of banks considered essential to the U.S. financial system and economy.

Following the financial crisis, “too big to fail” put additional regulatory requirements on banks with more than $50 billion in assets. In 2018, Congress changed the definition of “too big to fail” to banks with at least $250 billion in assets, reducing to 13 the number of banks affected. However, if faced with another meltdown, it’s doubtful that the government would stop at propping up so few financial institutions.

The Bottom Line

The financial crisis threatened to wipe out trillions of assets in the U.S. economy with the expected closure of some of the nation’s largest institutions. The government stepped in with a massive bailout package to prevent these institutions from going under and further damaging the economy. Though a few of these institutions were allowed to fail, such as Lehman and Bear Stearns, the government prevented the collapse of other large banks, all of which continued to thrive.

Read the original article on Investopedia.

Articles You May Like

Small-Cap Superstars: 3 Stocks Packing a Massive Punch for Your Portfolio
The 3 Best Food Stocks to Buy in June 2024
Netflix Stock Analysis: Cash Cow Today, But Uncertain Outlook for Tomorrow
How PayPal Makes Money
3 AI Stocks to Buy Next After the Nvidia Stock Split