Tim Fernholz on why size doesn’t matter:
Amid last fall’s financial chaos, executives from Wachovia, at the time the fourth-largest commercial bank in the country, had bad news for their regulators: They were broke. Federal officials deliberated and decided Wachovia was so important to the economy that the government had to save it.
It was only the latest in a series of financial institutions that regulators had deemed “too big to fail.” In the preceding months, the government had bailed out Fannie Mae, Freddie Mac, and Bear Stearns, and Congress had passed the controversial $700 billion bill to fund yet more financial-sector rescues. Some of the institutions, like the insurance company American International Group (AIG), weren’t even banks.