by Calculated Risk on 10/23/2009 05:35:00 PM

An apropos name
American United
We are all failed now.
by Soylent Green is People
From the FDIC:

American United Bank, Lawrenceville, Georgia, was closed today by the Georgia Department of Banking & Finance, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of August 11, 2009, American United Bank had total assets of $111 million and total deposits of approximately $101 million. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $44 million. ... American United Bank is the 101st FDIC-insured institution to fail in the Nation this year, and the twentieth in Georgia. The last FDIC-insured institution closed in the state was Georgian Bank, Atlanta, on September 25, 2009.

The banks are small, but the loss ratios are high! Two down already ...

by Calculated Risk on 10/23/2009 05:07:00 PM

One Hundred, so far....
The pig still in the python
Working its way through.
by Soylent Green is People
FDIC Press Release:

Partners Bank, Naples, Florida, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. ...

As of September 30, 2009, Partners Bank had total assets of $65.5 million and total deposits of approximately $64.9 million. ...

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $28.6 million. ... Partners Bank is the 100th FDIC-insured institution to fail in the Nation this year, and the seventh in Florida. The last FDIC-insured institution closed in the state was Community National Bank of Sarasota County, Venice, on August 7, 2009.

Just a minnow, but it counts.

by Calculated Risk on 10/23/2009 04:00:00 PM

While we wait for the 100th bank failure of 2009 ...

Click on graph for larger image in new window.

From Doug Short of dshort.com (financial planner).

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

The S&P was off 1.2% today. The index is up about 60% from the bottom (and off 31% from the peak).

Two different views on CIT:

From Bloomberg: CIT Sees Recovery as Low as 6 Cents in Bankruptcy

CIT said in a regulatory filing today that if its reorganization plan fails, it “will likely face bankruptcy” and that those claims would fetch recoveries between 6 cents and 37 cents a dollar.

And from MarketWatch: Icahn urges bondholders not to accept CIT plan

Icahn said if assets on the comapny's balance sheet are "run off" in a controlled way, CIT bonds will be worth at least 80 cents to 85 cents on the dollar.

A few CRE stories:

Yesterday from the NY Times: Court Deals Blow to Owners of Apartment Complex

And more Tishman troubles, from Bloomberg: Tishman Speyer Office Park in L.A. Faces Foreclosure (ht Brian)

A Tishman Speyer Properties LP office park in California ... is the subject of a foreclosure lawsuit saying the owners failed to repay $154 million in debt due in July.

Tishman Speyer and Walton Street Capital LLC bought the Campus at Playa Vista at the top of the U.S. real estate boom in 2007. KeyBank National Association sued to foreclose against limited partnerships controlling the Los Angeles property ... The Los Angeles Business Journal reported Oct. 19 that a mortgage on the property was up for sale for $50 million.

If that LA Business Journal story is correct, the lenders were trying to sell the $150 million note for $50 million. Ouch.

And from Bloomberg: NYC Tower Buyers Wrestle Towering Vacancy Dilemma (ht Mike In Long Island, others!)

... Worldwide Plaza [is 40% vacant]. It’s one ... George Comfort & Sons Inc., was able to buy the ... in July for $590 million, two years after it sold for almost three times as much.

The purchase price may allow Duncan to undercut the rents competitors charge as he leases his 709,000 square feet. Manhattan has 59 million feet of available offices, according to brokerage Colliers ABR, the most since June 1996, and rents for the best space are down more than 30 percent from their peak last year.

by Calculated Risk on 10/23/2009 01:48:00 PM

"Never mistake activity for achievement."
Coach John Wooden
Normally a decline in inventory and the months-of-supply would be considered a positive for the existing home market, however much of the apparent recent improvement is related to an artificial - and likely short lived - boost in activity.

The following graph is a turnover ratio for existing home sales. This is annual sales and year end inventory divided by the total number of owner occupied units. For 2009, sales are estimated at 5.0 million units, and inventory at the September level.

Click on graph for larger image in new window.

Although the turnover ratio has fallen from the bubble years, the level is still above the median for the last 40 years. This suggests activity in 2009 is slightly above a normal year for existing homes.

The reason turnover hasn't fallen further is because of all the distressed sales (foreclosures and short sales) primarily in the low priced areas, and because of the "first-time" home buyer tax credit.

The distressed sales activity is a necessary step towards a healthy market, but the burst in activity associated with the "first-time" home buyer tax credit is "mistaking activity for achievement".

NAR chief economist Lawrence Yun argued this morning: "[W]e need a steady supply of qualified buyers to meaningfully bring inventories down ..."

Mr. Yun is making two obvious mistakes. First he is narrowly defining "inventories" as just inventories of existing homes. The total housing inventory includes existing homes, new homes, and rental properties.

If we think of a balloon that contains existing home inventory and vacant apartment units, the tax credit is like pushing a finger on the balloon - the indent makes the balloon look smaller, but the volume of the balloon remains the same (the decline in existing home inventory is offset by an increase in vacant apartments).

Note: there is some reduction in overall inventory as new households are formed, but not from incentivizing renters to become owners.

The higher rental vacancy rate is leading to lower rents, so the buy-or-rent decision will favor renting once Congress removes their finger from the balloon.

Yun also appears to be suggesting that the first-time home buyer tax credit is providing a "supply of qualified buyers". This is bubble type thinking. Did all the exotic loans during the housing bubble provide a "supply of qualified buyers"? Those buyers qualified for the loans, but they were not really ready for homeownership.

The same is true for buyers today obtaining FHA insured loans and using the $8,000 tax credit as their downpayment. Imagine a $200,000 purchase with no money down (except the tax credit). What happens in three or four years when the homeowner wants to sell? The transaction costs will be around $15,000 (about 7.5%) if they sell for the same price.

So a homeowner, who has been unable to save a down payment so far, will be expected to make a $15,000 down payment in arrears? I don't think so.

Oh wait. Haven't prices fallen significantly? Shouldn't prices just go up from here? Yun says we are returning "to a period of normal, steady price growth". So the homeowner can use their appreciation to pay the transaction costs? That is more bubble type thinking. Prices may go up. Prices may fall further. Loans should not be predicated on asset prices increasing.

“The next mistake will be a new way to make a loan that will not be repaid.”
William Seidman, "Full Faith and Credit", 1993.

Allowing buyers to use the first-time home buyer tax credit as a downpayment is "the next mistake".

Earlier post: Existing Home Sales Increase in September

by Calculated Risk on 10/23/2009 11:59:00 AM

NOTE: I'll have some more thoughts on existing home sales soon.

Click on graph for large image.

This graph shows the Freddie Mac single family delinquency rate since January 2005.

Here is the Freddie Mac portfolio data.


From Reuters: Freddie Mac Sept portfolio up, delinquencies jump (ht Ron at WallStreetPit)

Delinquencies ... jumped to 3.33 percent of its book of business in September from 3.13 percent in August and 1.22 percent in September 2008.

The multifamily delinquency rate accelerated slightly in September to 0.11 percent from 0.10 percent in August. A year earlier it was 0.01 percent..

by Calculated Risk on 10/23/2009 11:00:00 AM

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Forty one states are showing declining three month activity. The index increased in 7 states, and was unchanged in 2.

Here is the Philadelphia Fed state coincident index release for September.

In the past month, the indexes increased in nine states (Idaho, Indiana, Louisiana, Montana, North Dakota, Ohio, South Dakota, Tennessee, and Vermont), decreased in 39, and remained unchanged in two (North Carolina and Nebraska) for a one-month diffusion index of -60. Over the past three months, the indexes increased in seven states (Indiana, Montana, North Dakota, Ohio, South Dakota, Tennessee, and Vermont), decreased in 41, and remained unchanged in two (Nebraska and South Carolina) for a three-month diffusion index of -68.

The second graph is of the monthly Philly Fed data of the number of states with one month increasing activity. Most of the U.S. was has been in recession since December 2007 based on this indicator.

Note: this graph includes states with minor increases (the Philly Fed lists as unchanged).

A large percentage of states still showed declining activity in September.

by Calculated Risk on 10/23/2009 10:00:00 AM

The NAR reports: Big Rebound in Existing-Home Sales Shows First-Time Buyer Momentum

Existing-home sales – including single-family, townhomes, condominiums and co-ops – jumped 9.4 percent to a seasonally adjusted annual rate of 5.57 million units in September from a level of 5.10 million in August, and are 9.2 percent higher than the 5.10 million-unit pace in September 2008.
...
Total housing inventory at the end of September fell 7.5 percent to 3.63 million existing homes available for sale, which represents an 7.8-month supply2 at the current sales pace, down from an 9.3-month supply in August.

Click on graph for larger image in new window.

The first graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in Sept 2009 (5.57 million SAAR) were 9.4% higher than last month, and were 9.2% higher than Sept 2008 (5.1 million SAAR).

Here is another way to look at existing homes sales: Monthly, Not Seasonally Adjusted (NSA):

This graph shows NSA monthly existing home sales for 2005 through 2009. For the fourth consecutive month, sales were higher in 2009 than in 2008.

It's important to note that many of these transactions are either investors or first-time homebuyers. Also many of the sales are distressed sales (short sales or REOs).

Early information from a large annual consumer study to be released November 13, the 2009 National Association of Realtors® Profile of Home Buyers and Sellers, shows that first-time home buyers accounted for more than 45 percent of home sales during the past year. A separate practitioner survey shows that distressed homes accounted for 29 percent of transactions in September.

The third graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.63 million in September (August inventory was revised upwards significantly). The all time record was 4.57 million homes for sale in July 2008. This is not seasonally adjusted.

Typically inventory peaks in July or August, so some of this decline is seasonal.

The fourth graph shows the 'months of supply' metric for the last six years.

Months of supply was decline to 7.8 months.

Sales increased, and inventory decreased, so "months of supply" declined. A normal market has under 6 months of supply, so this is still high.

It is important to note that sales in September were distorted by the first time home buyer tax credit, and this activity will fade - whether or not the credit is extended.

by Calculated Risk on 10/23/2009 08:30:00 AM

From Bloomberg: U.K. Economy Unexpectedly Shrinks in Longest Slump

GDP fell 0.4 percent from the previous three months, the Office for National Statistics said today in London. ... The economy has now shrunk over six quarters, the most since records began in 1955.
...
“The fact that the economy is still contracting despite the huge amount of policy stimulus supports our view that the recovery will be a long, slow process,” said Vicky Redwood, U.K. economist at Capital Economics Ltd in London and a former central bank official.
...
“This is desperately disappointing news, especially given that it was hoped that a modest recovery had begun,” said John Philpott, chief economist at the Chartered Institute of Personnel and Development. “The U.K. economy is continuing to shrink, with six quarters of contraction in output making this recession look more like a depression.”

This graph is from the Office for National Statistics: UK output decreases by 0.4 per cent

This is the sixth straight quarter of contraction.

Note that the U.K. reports GDP change per quarter, whereas the U.S. reports the annual rate of change. The 0.4% decline reported in the U.K. would be similar to a 1.6% decline reported in the U.S.

by Calculated Risk on 10/22/2009 10:20:00 PM

Tomorrow: Existing Home Sales and bank failure #100 for 2009 (probably) ...

From Jim the Realtor: Nothing Price Won't Fix

by Calculated Risk on 10/22/2009 07:02:00 PM

From Diana Olick at CNBC: Could HVCC Be History??

The House Financial Services Committee has just passed an amendment to the Consumer Financial Protection Agency Act to sunset the HVCC [Home Valuation Code of Conduct].
...
Now before all you realtors and mortgage brokers get all excited, remember this is just a committee vote. ... The bill will be voted out of committee later today and then have to go to the House floor in some form and then of course there's the Senate, etc.

I can understand fixing problems with the HVCC, but I can't understand going back to agents ordering appraisals. That was part of the systemic problem - some agents and appraisers abused the system.

From David Streitfeld at the NY Times in August: In Appraisal Shift, Lenders Gain Power and Critics

Mike Kennedy, a real estate appraiser in Monroe, N.Y., was examining a suburban house a few years ago when he discovered five feet of water in the basement. The mortgage broker arranging the owner’s refinancing asked him to pretend it was not there.

Brokers, real estate agents and banks asked appraisers to do a lot of pretending during the housing boom, pumping up values while ignoring defects. While Mr. Kennedy says he never complied, many appraisers did, some of them thinking they had no choice if they wanted work. A profession that should have been a brake on the spiral in home prices instead became a big contributor.

by Calculated Risk on 10/22/2009 04:00:00 PM

Just an update on the status of the Fed's Treasury and MBS purchase programs.

From the Atlanta Fed weekly Financial Highlights:

From the Atlanta Fed:

The Fed has purchased a total of $297 billion of Treasury securities through October 21, bringing it about 99% toward its goal. Of these purchases, $4.5 billion have been TIPS.

Last week, the Fed made a purchase on October 13 for $2.95 billion in the seven-to-10-year sector.

The NY Fed purchased $1.05 billion more yesterday, so there is just $2 billion more to come over the next week.

And from the Atlanta Fed:

The Fed purchased a net total of $16.1 billion of agency-backed MBS between October 8 and 14, bringing its total purchases up to about $945 billion, and by year-end [CR Note: by the end of Q1] the Fed will purchase up to $1.25 trillion.

The Fed purchased an additional $18.1 billion net in MBS over the last week, bringing the total to $963 billion.

The Treasury purchases will end next week - and will probably make the news. The MBS purchases are ongoing.

Market update:

The third graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 10/22/2009 02:52:00 PM

A key point on the impact of the stimulus on GDP ...

From Christina Romer, Chair, Council of Economic Advisers in Testimony before the Joint Economic Committee: From Recession to Recovery

In a report issued on September 10, the Council of Economic Advisers (CEA) provided estimates of the impact of the ARRA on GDP and employment. ...

These estimates suggest that the ARRA added two to three percentage points to real GDP growth in the second quarter and three to four percentage points to growth in the third quarter. This implies that much of the moderation of the decline in GDP growth in the second quarter and the anticipated rise in the third quarter is directly attributable to the ARRA.

Fiscal stimulus has its greatest impact on growth around the quarters when it is increasing most strongly. When spending and tax cuts reach their maximum and level off, the contribution to growth returns to roughly zero. This does not mean that stimulus is no longer having an effect. Rather, it means that the effect is to keep GDP above the level it would be at in the absence of stimulus, not to raise growth further. Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009. By mid-2010, fiscal stimulus will likely be contributing little to growth.
emphasis added

The impact on GDP will be smaller going forward, and according to Dr. Romer, the impact will be around zero by mid next year, and will be a drag later in 2010 (as stimulus is reduced).

by Calculated Risk on 10/22/2009 12:14:00 PM

From HotelNewsNow.com: Houston leads losses in STR weekly numbers

Overall, in year-over-year measurements, the industry’s occupancy fell 8.1 percent to end the week at 58.9 percent. ADR dropped 8.5 percent to finish the week at US$99.14. RevPAR for the week decreased 16.0 percent to finish at US$58.42.

Click on graph for larger image in new window.

This graph shows the occupancy rate by week for each of the last four years (2006 through 2009 labeled by start of month).

Notes: the scale doesn't start at zero to better show the change. Thanksgiving was late in 2008, so the dip doesn't line up with the previous years.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

The above graph shows the distinct seasonal pattern for occupancy.

The occupancy rate is higher in the summer (because of leisure travel), and lower on certain holidays. This also shows that hotels are in two year occupancy slump. The year-over-year comparisons are easier now since business travel fell off a cliff last October. Comparing to the same week two years ago, occupancy rates are off 15%.

The HotelNewsNow press release has three graphs on daily occupancy, room rates, and RevPAR variance with 2008.

This graph shows the RevPAR variance by day, and indicates that business travel (weekdays) is off more than leisure travel (weekends). This has been an ongoing story ...

So far there is little evidence of an increase in business travel this Fall.

by Calculated Risk on 10/22/2009 10:59:00 AM

From Tami Luhby at CNNMoney: 7,000 unemployed Americans lose their lifeline every day (ht Dirk)

Another day, another 7,000 people run out of unemployment benefits.

One month after the House passed a bill extending unemployment benefits, the issue is still being debated in the Senate.

...1.3 million people [are] set to lose their benefits before year's end if Congress doesn't act, according to the National Employment Law Project, an advocacy group. In October alone, more than 200,000 people will fall off the rolls.

This will probably hit 10,000 people per day soon. An extension of this safety net has widespread support ... and is still being held up in the Senate.

by Calculated Risk on 10/22/2009 08:30:00 AM

The DOL reports weekly unemployment insurance claims increased to 531,000:

In the week ending Oct. 17, the advance figure for seasonally adjusted initial claims was 531,000, an increase of 11,000 from the previous week's revised figure of 520,000. The 4-week moving average was 532,250, a decrease of 750 from the previous week's revised average of 533,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending Oct. 10 was 5,923,000, a decrease of 98,000 from the preceding week's revised level of 6,021,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 750 to 532,250, and is now 126,500 below the peak in April.

Initial weekly claims have peaked for this cycle. The key question is: Will claims continue to decline sharply, like following the recessions in the '70s and '80s, or will claims plateau for some time at an elevated level, as happened during the jobless recoveries in the early '90s and '00s?

The level is still very high suggesting continuing job losses ...

by Calculated Risk on 10/22/2009 12:08:00 AM

From the Mercury News: Santa Clara County apartment rents plunge

Apartment rents plunged 10 percent in Santa Clara County in the third quarter compared with a year earlier, the biggest decline in any metro area in the Western United States ...

From the Las Vegas Sun: LV apartment rental rates decline in third quarter

RealFacts ... said the average asking price for apartments in the Las Vegas area in the quarter was $837, down 2.1 percent from $855 in the second quarter and down 5.7 percent from $887 one year ago.

From Bloomberg: Apartment Rents Decline in U.S. West as Unemployment Increases

Apartment rents declined throughout the U.S. West and South in the third quarter as rising unemployment made it harder for landlords to raise their rates.

The average asking rent fell to $965 from $1,002 a year earlier, said Novato, California-based RealFacts, which surveyed owners of more than 12,600 complexes. The occupancy rate dipped below 92 percent from almost 93 percent a year earlier.
...
In California’s Oxnard-Thousand Oaks-Ventura region, rents fell 7.4 percent to $1,429, and in the Seattle area they dropped 7.3 percent to $1,036.

Falling rents is great for renters, but it means falling apartment values, more losses for lenders and CMBS investors, more pressure on home prices, and possibly a declining CPI (rent is the largest component).

by Calculated Risk on 10/21/2009 08:22:00 PM

From the Financial Times: Top China banker warns on asset bubbles

The Financial Times quotes Qin Xiao, chairman of China Merchants Bank, arguing that "it is urgent" for China to shift to a neutral monetary policy because of asset price increases.

The stimulus package in China is huge:

... China’s stimulus measures could amount to 15-17 per cent of GDP this year if government-induced bank lending is taken into account – by far the largest among major economies.
excerpted with permission

And from the WSJ: China Gains Confidence in Recovery

China's recovery is becoming broader and potentially more sustainable, a shift that could provide better support for a still-fragile global economy. ... Economic data for the third quarter ... are expected to show that gross domestic product grew by around 9% from a year earlier.
...
As the fastest-growing major economy, China has a key role to play in pulling the world out of the deep slump it fell into last year. But its rebound this year has been so quick, and driven by such a huge flood of money from the state-controlled banking system, that many investors have questioned whether the expansion can continue for much longer.

This is a key point for China and the global economy. If China slows down too quickly, the global recovery could stall.

by Calculated Risk on 10/21/2009 05:13:00 PM

Dave Altig writes at Macroblog: The growing case for a jobless recovery

Dr. Altig reviews several recent Macroblog posts, and adds:

The percentage of employee separations labeled permanent is at a recorded high.

Underneath the usual total unemployment numbers are the reasons an individual is unemployed: You are on temporary layoff; you quit your job; you have reentered the labor market and have yet to find a job; or you are entering the job market for the first time and have yet to find a job. Or, finally, you have been permanently separated from your previous employer, who has no expectation of hiring you back.

The last category is the dominant reason for unemployment at this time. That might not seem surprising, but it actually is. Never, in the six recessions preceding the latest one, did permanent separations account for more than 45 percent of the unemployed. The current percentage stands at 56 percent as of September and appears to be still climbing:


Of course, none of this is proof positive that we are in for a "jobless recovery," but, to me, the odds appear to be increasing.

So far the current recovery is even worse than "jobless"; it is a "job-loss" recovery.

by Calculated Risk on 10/21/2009 03:02:00 PM

From the Fed: Beige Book

Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed. Commercial real estate was reported to be one of the weakest sectors, although reports of weakness or moderate decline were frequently noted in other sectors.

On real estate:

Most Districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses. Contacts reported that sales were boosted by the government's tax credit for first-time homebuyers. Resale activity also edged up in parts of the New York District, although prices continued to be depressed due to a substantial volume of foreclosures and short sales. New and existing home sales remained flat in the Philadelphia District, and home sales continued to decline throughout the St. Louis District. Sales of higher-priced homes were very slow, according to Philadelphia, Cleveland, and Kansas City. Moreover, real estate agents in the Boston and Cleveland Districts were uncertain about the future of home sales once the tax credit expires. Availability of financing continued to be a concern for potential buyers in the Cleveland and Chicago Districts.
...
Commercial real estate continued to weaken across the 12 Districts, although even this sector had scattered bright spots. Each District indicated that demand for private commercial real estate was weak, with New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and San Francisco all characterizing activity as declining further since the last report. An inability to obtain credit was often cited as a problem for businesses that wanted to purchase or build space. High vacancy rates were noted as a key concern especially for landlords who were not offering concessions. And, while industrial real estate in the Richmond District was generally weak, renewed interest by retailers to revisit postponed expansion plans was also noted. Finally, public nonresidential construction activity funded by federal stimulus projects was a source of strength in the Cleveland, Chicago, Minneapolis, and Dallas Districts, but gains were often offset by state and local government cutbacks.

by Calculated Risk on 10/21/2009 01:30:00 PM

Yesterday both former Fed Chairman Paul Volcker and BofE Governor Mervyn King argued to break up the big banks. Fed Governor Tarullo disagrees.

From Fed Governor Daniel Tarullo: Confronting Too Big to Fail

One approach suggested by a number of commentators is to reverse the 30-year trend that allowed progressively more financial activities within commercial banks and more affiliations with non-bank financial firms. The idea is presumably to insulate insured depository institutions from trading or other capital market activities that are thought riskier than traditional lending functions. There are, however, at least two reasons why this strategy seems unlikely to limit the too-big-to-fail problem to a significant degree. One is that, historically at least, some very large institutions got themselves into a good deal of trouble through risky lending alone. Moreover, as we have already seen in the experience with Bear Stearns and Lehman, firms without commercial banking operations can now also pose a too-big-to-fail threat.

Another approach would be to attack the bigness problem head-on by limiting the size or interconnectedness of financial institutions. Some observers have even suggested that existing large firms should be split up into smaller, not-too-big-to-fail entities, in a manner a bit reminiscent of the break-up of AT&T in the early 1980s. Of course, the conceptual and practical challenges in breaking up the nation’s largest financial institutions would be considerably more daunting than those faced by Judge Greene in creating four regional operating companies and a long distance carrier out of the old AT&T. Indeed, to my knowledge, no one has offered anything like standards for undertaking this task, much less a blueprint for how it would be accomplished. This is, in other words, more a provocative idea than a proposal. Like many a provocative idea, though, even in an unelaborated form it can focus attention on the relative effectiveness of alternative policy proposals.

The fact that the largest financial firms will account for a significantly larger share of total industry assets after the crisis than they did before can only add to the uneasiness of those worried about the too-big-to-fail phenomenon. It is notable that current law provides very little in the way of structural means to limit systemic risk and the too-big-to-fail problem. The statutory prohibition on interstate acquisitions that would result in a commercial bank and its affiliates holding more than 10 percent of insured deposits nationwide is the closest thing to such an instrument. Policymakers and policy commentators alike might usefully attempt to develop similarly discrete mechanisms that could be beneficial in containing the too-big-to-fail problem. As must be apparent from my remarks today, my strong suspicion is that an effective response to the problem will likely require multiple, mutually reinforcing instruments.
emphasis added

Tarullo suggests:

A regulatory response for the too-big-to-fail problem would enhance the safety and soundness of large financial institutions and thereby reduce the likelihood of severe financial distress that could raise the prospect of systemic effects. Such a response consists of three elements.

First, the shortcomings of the regulations that failed to protect the stability of the firms and the financial system need to be rectified. Regulatory capital requirements can balance the incentive to excessive risk-taking that may arise when there is believed to be government support for a firm, or at least some of its liabilities. There is little doubt that capital levels prior to the crisis were insufficient to serve their functions as an adequate constraint on leverage and a buffer against loss. The Federal Reserve has worked with other U.S. and foreign supervisors to strengthen capital, liquidity, and risk-management requirements for banking organizations. In particular, higher capital requirements for trading activities and securitization exposures have already been agreed. Work continues on improving the quality of capital and counteracting the procyclical tendencies of important areas of financial regulation, such as capital and accounting standards.

These regulatory changes are surely a necessary part of a response to the too-big-to-fail problem, but there is good reason to doubt that they are sufficient. Generally applicable capital and other regulatory requirements do not take account of the specifically systemic consequences of the failure of a large institution. It is for this reason that many have proposed a second kind of regulatory response--a special charge, possibly a special capital requirement, based on the systemic importance of a firm. Ideally, this requirement would be calibrated so as to begin to bite gradually as a firm’s systemic importance increased, so as to avoid the need for identifying which firms are considered too-big-to-fail and, thereby, perhaps increasing moral hazard.
...
A third regulatory change is in some respects the most obvious and straightforward: Any firm whose failure could have serious systemic consequences ought to be subject to regulatory requirements such as those I have just described.