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Banks Were Too Big To Fail 200 Years Ago, Too: Study

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Banks were too big to fail 200 years ago, too.
Banks were too big to fail 200 years ago, too.

If you think American banks are too big to fail now, you should have seen them 200 years ago.

Banks dominated the American corporate landscape in 1812, according to a study by professors Richard Sylla of New York University and Robert Wright, of Augustana College in South Dakota, for Bloomberg View. The professors reconstructed what the Fortune 500 would have looked like 200 years ago and found that banking and insurance dominated Corporate America in its infancy.

According to their list, 130 of top 500 U.S. companies back then were banks, making it the most-represented sector in Ye Olde Fortune 500. Second on the list were turnpike companies -- an industry no longer in existence -- with 110 representatives. There were also 89 insurance companies on the list.

Nine of the top 10 and 19 of the 20 biggest companies back then were banks, including City Bank of New York, at No. 5, known today as Citigroup; and Manhattan Co., at No. 8, known today as JPMorgan Chase. There's a Bank of America at No. 2 on the list, but it's no relation to today's Bank of America, which is the No. 9 company in the modern Fortune 500. (Today's Fortune 500 are ranked according to revenue, not capital. Based on market value, the modern Bank of America doesn't even make the top 20 biggest companies.)

Beyond sheer numbers, the banks in the Ancient 500 had a lopsided share of the total capital held by the nation's biggest companies. The 130 biggest banks back then were allowed a total of $88.4 million in equity capital -- the government regulated such stuff in those days. That represents 54 percent of the total capital allowed to the top 500 companies. No other sector even came close -- insurance was second on the list, with less than 18 percent of the total capital allowed.

Today, the market value of all the financials in the S&P 500-stock index, including both banks and insurance companies, is less than 15 percent. Using capital to rank companies as the professors did, there's only one financial in the top 10 biggest companies by market cap today -- insurance giant Berkshire Hathaway.

So does this relative shrinkage mean the banking sector is small enough that we don't have to worry about it wrecking the economy again?

Not by a long shot.

It's all fun and games to measure simple stuff like market cap and revenue, but those are meaningless measures of how important banks are to the economy. Banks had less than 20 percent of the total market cap in the S&P 500 when they brought down the global economy in 2008.

The important thing is how much debt these banks are carrying, and by that measure, they are still way, way too big to be safe.

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