AIG, Citibank (C), and other large financial institutions were supposed to be too big to fail. However, we now know that no financial institution is too big to fail. May be some of them are just too big to let them fail. If the situation warrants that it is too costly to let them survive as big entities, it may be worthwhile to dismantle those big companies into smaller companies as currently AIG is doing or as was done earlier by AT&T (T) and other companies in non-financial sector.

Now in Democratic Representative Paul Kanjorski of Pennsylvania we find a sane legislator who is willing to question the too big to fail theory seriously. He suggested this week that the federal government should be able to dismantle financial firms that are big or interconnected enough to pose systemic risk.

Kanjorski suggestions propose amendments to the Financial Stability Improvement Act, which will allow the government to have authority over "too big to fail" banks to determine their future course of survival. His amendment would set objective standards for determining if companies present systemic risk and would allow the Financial Services Oversight Council to take "mitigatory action."

I just looked at the top 50 bank holding companies (BHC) in the US as of end Sep 2009 to see how these institutions have evolved over the years into the current size.

*reporter identification number

When you look at the table, it is very obvious that these 25 BHCs have done more acquisitions than divestitures. If you consider the top 5 BHCs then put together they have done 1,447 acquisitions when compared to 1,293 divestitures. So it is very obvious that these BHCs have grown to the current size mainly on the back of acquisitions. Some companies have done more divestitures than acquisitions but still managed to remain big. That is because these companies have done smaller divestitures while making larger acquisitions during the period under consideration. However, what is not obvious is the fact that some of them are non-US domiciled, so the US regulatory authorities may not have much say in breaking up these companies except under anti-trust case.

Kanjorski notes that size is not the only metric that his amendment would consider. "Scope, scale, exposure, leverage and interconnectedness of financial activities" are factors in a firm's riskiness, he said. And breaking up companies would only be pursued in the most extreme cases. "Financial firms would need to demonstrate to regulators that their failure would not undermine the financial stability of the American economy," Kanjorski suggested. The council that the FSIA creates would submit an annual report to Congress detailing the activities of the 50 largest banks. May be the Congress, and financial regulatory authorities would do world of good to US financial stability by taking his suggestions seriously.