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Updated Monday, November 16, 2009 10:26 am TWN, By Jamie Dimon, Special to The Washington Post

No more 'too big to fail' firms for the U.S. in financial industry

Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail. As Treasury Secretary Timothy Geithner recently put it, “No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure.” The term “too big to fail” must be excised from our vocabulary.

But ending the era of “too big to fail” does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense.

The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk.

Creating the structures to allow for the orderly failure of a large financial institution starts with giving regulators the authority to facilitate failures when they occur. Under such a system, a failed bank's shareholders should lose their value; unsecured creditors should be at risk and, if necessary, wiped out. A regulator should be able to terminate management and boards and liquidate assets. Those who benefited from mismanaging risks or taking on inappropriate risk should feel the pain. We can learn here from how the Federal Deposit Insurance Corp. closes banks. As with the FDIC process, as long as shareholders and creditors are losing their value, the industry should pay its fair share.

Establishing this resolution authority will require thoughtful legislation that promotes predictability in the resolution process in accordance with recognized priorities, requires sound risk-management practices, and maintains a level playing field among firms with similar business models.

It also requires effective international cooperation, as the implications of a major financial institution's failure are global. This is challenging but worth doing. The alternatives, neither of which is acceptable, are to perpetuate the politically, economically and ethically bankrupt “too big to fail” idea, or to try to impose artificial limits on the size of U.S. financial institutions.

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