Banking Industry Insiders Call for Breaking Up Giant Banks

→ Washington’s Blog

Virtually all independent financial experts are demanding that the too big to fail banks be broken up, including:

• Nobel prize-winning economist, Joseph Stiglitz

• Nobel prize-winning economist, Ed Prescott

• Former Secretary of Labor, Robert Reich

• Chairman of the Council of Economic Advisers under President George
  W. Bush, and Dean and professor of finance and economics at Columbia
  Business School, R. Glenn Hubbard

• Former IMF chief economist, and MIT professor, Simon Johnson

• Deputy Treasury Secretary, Neal S. Wolin

• The Congressional panel overseeing the bailout (and see this)

• The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

• Economics professor and senior regulator during the S & L crisis, William K. Black

• Economics professor, Nouriel Roubini

• Economist, Marc Faber

• Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

• Economics professor, Thomas F. Cooley

• Economist Dean Baker

In addition, many bank regulators say that we need to break up the too big to fails, including:

• Former chairman of the Federal Reserve, Alan Greenspan

• Former chairman of the Federal Reserve, Paul Volcker

• President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

• President of the Federal Reserve Bank of Dallas, Richard Fisher

• The head of the FDIC, Sheila Bair

• The head of the Bank of England, Mervyn King

Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:

The report was particularly scathing in its assessment
of governments’ attempts to clean up their banks. “The reluctance of
officials to quickly clean up the banks, many of which are now owned in
large part by governments, may well delay recovery,” it said, adding
that government interventions had ingrained the belief that some banks
were too big or too interconnected to fail.

This was dangerous because it reinforced the risks of moral hazard
which might lead to an even bigger financial crisis in future.

And many bankers are for breaking up the giants as well.

For example, the President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, is calling for the break up of the TBTFs.

As is former investment banker, Philip Augar.

But as a great new blog shows, even bankers within the mega-banks are themselves calling for them to be broken up.

On April 2nd, The Fourteenth Banker – a blog run by bankers within the big banks for bankers within the big banks – called for a campaign by bankers to demand that the mega-banks be broken up:

If you work for a big bank, … what would happen if the
bank is broken up? Well, that would be very complicated financially,
but the result is probably not that hard to predict. Most obviously,
deposits would need to stay in the core bank. What would this mean for
the way the core bank works to succeed, the non core products it
distributes, and the way its deposits fund investments compared to the
way things are now? I suspect less net deposits taken out of the
community and more loans made in the community.

The different businesses would be spun off to shareholders or sold.
Watch the ball here. The Investment Bank is going to want and need a
disproportionate share of the capital if they want to maintain their
lifestyles. Absent the cloak of respectability the bank provides, they
are going to want to be the next Goldman. Watch the ball. Capital is
critical. In fact, as a sort of mind game, I wonder how much capital
regulators or the SEC or Moody’s would require? What would that leave
for the bank?

***

What would the core banks funding cost be if it did not have to
worry about the high leverage, senior unsecured bonds and the CDS
spreads needed to support those? Maybe the core bank could both make
more money and provide better deposit rates to savers. I don’t know.
Where is the Congress on this? Why not look at the upside instead of
just the fear of systemic risk, important as that is?

Studies consistently cite that the efficiencies (economies) of scale
end and $100B or so. If that is the case, does that not make the multi
million dollar men at the top of the pyramid the actual problem? Money
is diverted from the branch to the Executive ranks, Private Wealth, and
the Investment Bank. It is reverse Robin Hood.

So what do the majority of bankers have to fear from a break up? Nothing.
It would bring management closer to the customer and the employee,
create a better customer experience, more equitable pay, better
teamwork, and a return to values oriented banking.

Given this common sense, all branch
based folks at the thousand and thousands of branches should write
their congressmen and women and Senators and ask for the passage of
strong TBTF legislation that would restore dignity to their profession.
Let Private Wealth and the I-Bank float on their own. If you
are a shareholder in your 401K or otherwise, you will still get a piece
of that action. The value of the parts is generally greater than the
value of the whole anyway. It is a win-win-win except in the Executive wing and on Wall Street, which is out of touch with Main Street anyway.

Maybe we should organize a million banker March in DC for financial reform. Too bold?

No, not too bold … much needed.

Comments

[DOT]

When banks get too big they can not be effectively managed. Just ask Rubin. Time to get out the hatchets and chop up the TBTF.

[anony]

The world is broken up into two parts. It is divided among:

A) those who think, know and advocate for correcting the fraud, deceit, and theft in the financial system, and

B) Those who have the real power to keep things exactly as they are and the only changes they would advocate are those that provide them even more power, such as the latest FED ideas to gather to themselves even more of the raped proceeds from the proletariat. 

It's enough that most everyone who cares  deals intellectually with the corruption, but the time is long past for some top honchos to die, be assassinated, or otherwise meet their demise. It's time for bombs at 85 Broad, Congress, and the homes of the guilty. It's time for revolution because nothing will focus their minds or focus it better on the damage they have caused billions of people with their avarice, their appetite for more, more, more, and their cancerous growth on our production.

Sic Semper Tyrannis. 

If I contract a terminal illness I will attempt to take some of them out.

"As long as they can speak of liberty, they will not act". 

[Sudden Debt]

If you fight the money, you'll always lose.

Like a famous Roman emperor once put it (famous but I forgot his name :) )

"Winning a war is not as much as dependent of manpower but it is of gold."

[chime]

Let me preface this by saying I agree the big banks should be broken up in some form. I'd like to see their size limited in addition to being forced to divest certain functions - though the second is a bit tricky in practice. I work for a community bank so if that helps give perspective...

That is a nice list of people, but to say they encompass "virtually all independent experts" is going a bit overboard. A lot of the experts in the first group are extremely contrarian - not that their views are less valid for that fact (though I would be very careful before I did anything because Robert Reich thinks it is a good idea). For example Bill Black is fantastic, everyone ought to check out his recent interview with RealNews, he doesn't hold back. But you should also keep in mind he's a former regulator and attorney, and has a bit of a crusading mindset, at all times.

I guess without going through them one-by-one, a lot of the people on that list are predisposed to say "break up the big banks", whether it is convenient for political, ideological, professional, or reputational reasons. Again, not that they are wrong.

Just to throw this out there - I think if we only got one thing out of this whole "we're gonna regulate the banks now, probably, we swear" halfhearted effort, it might be best for everyone if we got a central clearinghouse for all derivative contracts (and I do mean ALL - CDS, CLO, CDO et al), with standardized contracts wherever possible (and transparency where standardization is not possible), and daily collateral posting requirements.

The rest of it is just a short-term fix to a long-term problem. Of course you could make that argument about the clearinghouse too, but at least that addresses something more concrete and enforceable in the short-term. Who here believes "breaking up" the big banks won't be phased in over an interminable period of time in the best case scenario, if it even amounts to anything? Big banks are probably here to stay, unfortunately (I dare Congress and the Fed/FDIC/OCC to prove me wrong - notice I didn't say OTS or SEC? that's on purpose...)

[DaddyWarbucks]

The best thing that ever happened to John Rockefeller was the "break up" of Standard Oil.

It's all in how the break up is done and I'm sure the golden boys will benefit from it if it becomes a political necessity.

[jeff montanye]

so true.  ditto at&t

[anarkst]

The real shame here, and this applies to the entire economy, is the complete sell-out of the professional class in this country.  All of these people have known the entire time that things have been going on.  God forbid they endanger their well-being for future generations.  No professional leadership what-so-ever, only groveling mental midgets.

Soon, it will be all the rage to go public with all the horrible things that they've known about for decades.  How pathetic.

[CookieMonster]

Where have you been? (actually a really great point).

"Professional" now means "Mercenary"......

Culture has changed. We cannot count on current culture to fix the problems. We need a new culture!!!

[Mercury]

"Professional" now means "Mercenary"......

Seriously.

Are they selflessly standing up for what's right for the industry/country or are they just saying:

"I'm rich, I'm bored...what's next?"

[Hephasteus]

They are trying to plot ahead. I mean plan ahead so they can pick who goes to the slaughter house.

[Privatus]

Forget about the branches. Strike the root. End the Fed.

[Mercury]

I'm no horror movie buff but surely someone can dig up a clip of some staggering zombie yelling "kill me, please kill me!!"

At this point can we finally admit that the Sandy Weill/Citicorp megabank "financial supermarket" model created no value for anyone outside the friends & family offering circle?  Ditto most, if not all of the Wall St. partnerships that went public too.  The only thing worse than a giant bank is a giant government bank.

What the hell ever happened to deposit market share limits anyway?

TBTF should be TBTExist.

[williambanzai7]

HERE IS THE CLIP YOU ARE LOOKING FOR:

http://www.youtube.com/watch?v=9MDFan__QXg&feature=related

2Big2Fly

[Mercury]

Awesome!

Although those toxic acid/assets he was barfing up looked a bit too liquid for this metaphor.

[Kitler]

If I were a banker I would love to break my bank up along the lines of GoodBank/BadBank.

The unimpaired profitable assets and operations into the GoodBank retained by current shareholders and the remaining toxic crap and the shakey IR and credit swaps I sold into the BadBank, which will be unloaded on my capable servants Tim and Ben. 

[Kitler]

Now that I think about it, I think that's already been done!

[jeff montanye]

see john hussman's comment for 1-25-10 on his website.  the current stockholders' and some/all of the bondholders' investment is wiped out.  the government holds the good bank and sells it to the public, repaying taxpayer costs and recapitalizing the bank.  like what the fdic does to small enough to fail banks. 

[umop episdn]

But it won't help in the long run. Any fractional reserve banking system will founder when the economy stops growing. This is why most religions have 'laws' against usury.

However, if my failing memory serves, the Babylonians had fractional reserve banking for several hundred years. The king was also their banker, and the system involved borrowing to pay taxes. The system was more or less stable because every time a new king acended to the throne, all the old debts were forgiven. Somehow, I don't see any sort of debt jubilee happening these days...at least for Joe and Jane Four-Pack.

[anarkst]

The laws against usury had nothing to do with frl.  Any thinking person should come to the conclusion that the endgame in any system of credit, no matter how rudimentary, is not so good.

If you study history, you will find out that, literally, there is nothing new under the sun.