While Jamie Dimon made headlines with the warning that “something is wrong
 with America, to which he dedicated a substantial portion of his latest annual letter to shareholders, a less discussed declaration by the JPM CEO was that the too-big-to-fail problem, one which clearly impacts his own bank, JP Morgan, has been solved. It was this that Neel Kashkari took offense with, and in a post on Medium, today the Minneapolis Fed president who has long waged a crusade to warn Americans that US banks remain very risky, he said that Dimon’s claims about the too-big-to-fail banking problem being solved and banks being over-capitalized are “demonstrably false.” To wit:

At 46 pages, Mr. Dimon’s letter includes a lot of interesting commentary. In this essay, I am going to respond to two of his main points because I strongly disagree with them. First, Mr. Dimon asserts that “essentially, Too Big to Fail has been solved?—?taxpayers will not pay if a bank fails.” Second, Mr. Dimon asserts that “it is clear that the banks have too much capital.” Both of these assertions are demonstrably false.

Addressing the first part of Dimon’s argument, the “solution” of the too big to fail problem, Kashkari says that “Mr. Dimon repeatedly points to various regulatory schemes that all have the same unrealistic feature: In a crisis, bondholders will take losses rather than taxpayers. It sounds like an ideal solution. The problem is that it almost never actually works in real life.”

We learned from past financial crises, including the 2008 financial crisis, that nothing beats equity for absorbing losses. Equity holders have long taken losses in the United States and thus expect that outcome. Moreover, equity holders cannot run during a crisis. In contrast, debt holders of the most systemically important banks in the United States and around the world have repeatedly experienced bailouts and likely will expect such an outcome during the next financial crisis. Indeed, the most recent crisis showed that even some debt holders who had been explicitly told that they would take losses during a crisis got bailed out.

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