The Inventor of TBTF

25 11 2013

The Inventor of Too Big to Fail?

In his wonderful environmental history of the twentieth century, J.R. McNeill described an obscure General Motors research scientist named Thomas Midgley as having “more impact on the atmosphere than any other single organism in Earth’s history.” Midgley invented both leaded gasoline and CFCs. He did not know it at the time, but both of these inventions had massive and negative environmental consequences. Midgley is perhaps the most important inventor you’ve never heard of. Midgley has also been described as the world’s worst inventor, which seems unfair, as he was paving the roads with good intentions. Midgley  died in 1944 after a freak accident involving the complicated system of pulleys he had developed to lift himself out of bed.

There’s another innovator we should know more about.  That’s C.Todd Conover, who was the Comptroller of the Currency from 1981 to 1985, during Ronald Reagan’s first term in office. The Office of the Comptroller of the Currency was established in 1863 to regulate the banking system in the United States. It’s a powerful yet obscure office.

Conover could be described as the inventor of “too big to fail.”  Since the Global Financial Crisis, there’s been a lot of discussion of the principle of TBTF financial institutions. Bloggingheads recently did a great little dialogue on this subject.  There are some financial institutions that are so massive that no government can allow them to go bankrupt, even if they make a series of spectacularly bad bets. That’s why we bailed out so many banks during the crisis. The problem is moral hazard: if the managers of these banks know  that they will be bailed out even if they screw up, this knowledge will cause them to take behave in an unduly risky fashion. Moreover, if investors know that there is a class of companies that enjoys this implicit subsidy from the state, they will park their money in these companies rather than in firms that might go bankrupt. The result is that the financial services sector will swell in size at the expense of the rest of the economy, creating a perverse set of incentives. Moreover, the too-big-to-fail creates a vicious cycle: the existence of an implicit subsidy for really big institutions increases the returns to scale for financial institutions, encouraging more mergers and more megabanks.

Is it possible to identify one single individual as responsible for the emergence of this “too big to fail” system?  Probably not, since the system is ultimately subject to the oversight of lawmakers. However, the authors of a prophetic 2004 book on the TBTF problem suggest that this problem can be traced back to the first half of the 1980s (i.e., to the period in which C. Todd Conover rescued Continental Illinois’s creditors on the grounds it was TBTF). [1] I’ve been doing some more reading on this issue for a lecture I’m going to be giving next year and I’ve discovered something interesting. There are many stray references to Conover and the precedents he set.[2] However, I can find out almost nothing about the man aside from the very short biography that appears on the website of the Comptroller of the Currency.  Here we learn that

Todd C. Conover, a California banking and management consultant, was named Comptroller by President Reagan. He presided over the agency during a period of dramatic change in financial services as deregulation increased competition and the services offered by banks. Under his guidance, national banks began to offer discount brokerage services and investment advice and underwrite certain kinds of insurance. Conover reduced the number of regional offices to six, increasing their staffs and authority. After his resignation, he returned to his bank consulting practice.



Speaking in 2009, Gary Stern, the former president of the Minneapolis Federal Reserve Bank, recalled that at one point the Comptroller of the Currency announced to the world that there were 11 banks in the United States that he considered to be Too Big to Fail, which was clearly a foolish thing to have said. (Stern was vague about the date of the announcement, but it wouldn’t be that difficult to track down the date of these remarks and see if they have an impact on share prices).

In early 1985, Conover resigned his position and returned to private life.

In 1998, a C. Todd Conover published a how-to manual for mutual fund investors.  You can still buy it on Amazon. However, I can’t find out anything else about Conover’s current whereabouts.

I’m not planning to actually research this topic myself, at least not any time soon. However, if someone else has done some research into Conover, I would definitely be interested in reading it. I would also be interested in talking to Conover, if he is still alive.

[1] Stern, Gary H., and Ron J. Feldman. Too Big to Fail: The Hazards of Bank Bailouts. Washington, D.C.: Brookings Institution Press, 2004.

[2] Eugene Nelson White, The Comptroller and the Transformation of American Banking, 1960-1990. (Washington, D.C.: Comptroller of the Currency, 1992), 60.