Systemic risk

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Too-Big-to-Fail Financials Might Pose a Bigger Risk Now Than in 2008

Banks still might be a systemic risk looming large over the global economy, says one financial insider.

And in fact, “too big to fail” might be an even bigger problem than it was before the mortgage meltdown.

John Thain — the former head of Merrill Lynch who resigned in 2009 after a buyout by Bank of America (BAC) — told Bloomberg Television’s Erik Schatzker and Sara Eisen that a crisis like the one in 2008 could “absolutely” happen again.

“If anything, too big to fail is a bigger problem because the biggest financial institutions are more concentrated today than they were,” Thain said on Bloomberg’s Market Makers program this week. “Dodd-Frank did not solve too big to fail.” You can check out the interview here.

Thain has plenty of experience with financials, serving as COO of Goldman Sachs (GS) before working at Merrill and currently running CIT Group (CIT).

Of course, Thain has an agenda — he’s hoping that a big bank will buy out his smaller CIT.

“We, in all our businesses, are able to generate very high-yielding, attractive assets, so the logic of (a buyout by a bigger bank) is obvious,” he told Bloomberg.

Regardless of the motivation behind the sentiment behind Thain’s indictment of our bloated financial sector, the logic is sound. Bigger banks like JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) are actually larger than ever before thanks to gobbling up weaker rivals like Wachovia and Washington Mutual during the crisis. Regulations have been largely toothless, too, and while capital reserves have indeed risen at major financial stocks, it’s undeniable that a small group of banks holds all the power.

That means investors and consumers alike have to have trust that the big banks are not going to take undue risk … because like the London Whale trading crisis showed — or more recently, the reported $7 billion charge facing Citi over currency hedging — there still are very real ways for big banks to lose big money, either by accident or simply because they don’t mind the risk.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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