How to solve to big to fail

We have been in a conundrum recently because some institutions have been deemed "to big to fail" and hence received government bailout money even though they were some of the very same institutions that created the problems in the first place.

Some have argued that they should have been allowed to fail.

Others have argued that if they had been the economy would have tanked, there would have been massive dislocations and unemployment.

I'm inclined to believe the latter. I'm inclined to believe that there was no choice. And it's water under the bridge anyway.

But what about next time.

An easy solution would be to make sure that no one is to big to fail in the first place. Isn't it a market failure if anyone is to big to fail? In a competitive market someone would be there to step in if another failed. So why didn't they just let Ban of America and Goldman Sachs go down. The reason is that they do not operate in a competitive market. To get technical the market they are in is oligopolical. Which is a market or industry "dominated by a small number of sellers (oligopolists). "

The easy solution is to break them up. And it would be easy. The market here tends toward oligopoly but does not need to be that way.

Goldman Sachs is primarily an investment bank. From Wikipedia:
An investment bank is a financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions. Investment banks profit from companies and governments by raising money through issuing and selling securities in capital markets (both equity, debt) and insuring bonds (e.g. selling credit default swaps), as well as providing advice on transactions such as mergers and acquisitions. A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.

Providing advice, raising money, issuing bonds. Mergers and Acquisitions. None of these things are naturally monopolies. Quite the opposite. We want competition in this space. Competition is multiple competitors, not one giant (Goldman Sachs currently) who dominates.

Goldman gets an enormous social (and monetary!) windfall from having all the key players in their space under their roof. They have the connections to Washington DC. They make the rules. At least that's the perception. Plus if things are about to blow up, Goldman is to big to fail and hence has an implicit government guarantee and that implicit government guarantee is well almost priceless.

The big loser is everybody else. You. Me. Any company that wants to raise money in the capital markets or engage in M&A or anything else like that will have to either a) Go through Goldman and pay through the nose. or b) go with a bit player with no name and no implicit government guarantee of being around.

But what if Goldman was broken up into 10 or 15 different pieces who competed against each other (and against the other current bit players in the space). I think things would be far far better. The energy of the resulting players would be spent on competition instead of on manipulating and controlling Washington DC and on protecting and expanding monopoly profits (which is what they do now).