Too Big To Fail used to be a joke.

It became an insult hurled by Occupy Wall Street or the Tea Party at the big banks, but that’s all it was.

It was never an expression that had any legitimacy. It was just a nice little way for the media to classify the banking industry in a ready-made slogan.

Guess what? Too Big To Fail isn’t a joke anymore. It’s actual policy towards our nation’s biggest financial institutions.

The Federal Reserve of Dallas has now legitimized my scathing criticisms of the banks in their annual report and it has resonated with with everything I’ve been writing in this blog.

It was a nice early birthday present when I got home yesterday and read the report, written by the head of the Dallas Fed’s research department. Harvey Rosenblum.

When Greg Smith published his critique of Goldman Sachs, the aftershocks rang through the halls of every office on Wall Street.

After reading Rosenblum’s report, which was subtitled “Why We Must End Too Big To Fail — Now”, I can only imagine what will happen now.

It’s about time that someone on the government side validated the anger and anxiety shared by the Occupy and Tea Party movements. Right there in an official Fed paper!!

So what did I find so appealing about his critique? He spells it out, clear as day, what Too Big To Fail really is, and what’s it’s led to.

What It Is: In 1970 the top 5 banks possessed 17% of the nation’s banking assets. In 2010? 52 percent.

What It’s Led To: “An erosion of faith in American Capitalism”, as well as our faith in government, big banks and the Federal Reserve.

Capitalism has been warped into something that is anything but, where there are two sets of rules, one for you and I, and another for the TBTF banks.

As Rosenblum says, capitalism ‘requires the freedom succeed and the freedom to fail’.

By playing ball with the TBTF banks, the government went against everything capitalism is supposed to be!

The bailouts completely eroded the system that I once respected. Just as I said last year, it was “Privatizing gains, socializing losses, all in an effort to stimulate the economy”. And it got us absolutely nowhere. And now the Fed knows it. Too bad they didn’t listen to me back then!

The Emperor is walking down the street, and he has no clothes. He is stark naked. And everyone is looking at him.

There has been so much talk about the risk of ‘moral hazard’ if homeowners get assistance, but Rosenblum rightly points if you want to see the effects of moral hazard, look no further than the TBTF banks.

The 2008 bailouts didn’t revitalize the economy, all they did was take away the bank’s incentive to clean up their act. They got complacent, and no one, not the banks, not the government was willing to admit it.

No one asked tough questions, they just took their easy money and kept on going. Like the penguins in the Madagascar movie, all they did was smile and wave boys, smile and wave.

But Rosenblum realizes what I’ve been saying for years, that it is absolutely the role of government to break up businesses when they get too big and too powerful.

We did it with Ma Bell, we did it with oil companies and with big steel, now it’s time to do it to the banks

For the government to continue to support these TBTF banks would turn what was a tsunami into an all-time catastrophe.

People are constantly asking me how we got into this economic mess, which is a byproduct of so many folks in foreclosure. My answer is simple… but direct … how did we get into Iraq? The answer is who cares? How do we now get out?

But there is a striking difference between these two fiascos: The economy and Iraq is that with the latter we are actually rewarding bad behavior– otherwise known as moral hazards.

The term “Moral Hazard”s is derived from the casualty (fancy term for fire) insurance industry. It seems that whenever the economy is bad and property values dip there is a “strange” phenomenon… more buildings burn down that have an insurance policy that is greater than the value of the property!

So where is the moral hazard in terms of the economy? Its all over the place… it is the Bail out itself!!! Let me briefly explain. Our largest banks and investment banks took on such huge amounts of risk and encouraged such reckless lending practices that they kept telling the small guy….’DON“T WORRY WE ARE TOO BIG TO FAIL!” In other words if we screw up the government (code word for you and me) will have to come to the rescue of these banks! And we are! Each family has already lent in future savings and earnings from our children and grandchildren probably about $20,0000 to these banks!

BUT how are these banks and more importantly the individuals who ran these banks being punished? Oh… pay them exit bonuses of a few billion dollars… while my clients, builders, developers and individual families get foreclosed and have to face financial ruin. Some will say… well your clients didn’t have to borrow the money in the first place? And my response is as follows:

Between a large multibillion dollar institution and a small borrower who has more information about the market? Who as a multi-national enterprise knew how these loans were being packaged, stripped and sold to unsuspecting investors around the globe? Who had a better idea that if this all came crashing down… it would be the small guy who would take the fall?

Bankers have a unique responsibility to their borrower… because they are in a superior position in terms of such enterprise knowledge, They may well have a legal duty as a fiduciary (look it up–lol) not to put their client knowingly or negligently tied down and blind folded in front of an oncoming freight train.

So… do I feel bad keeping my clients in their homes while I defend them against their morally deficient banks who are trying to kick them out of their homes? You answer that!