Break up the banks? Let the market do it
E. Thomas McClanahanHey, let’s break up the big banks. Yeah! That would show those Wall Street fat cats and solve a lot of problems to boot — especially the risk that taxpayers could be tapped again in a panic under the “too big to fail” doctrine. The banks wouldn’t be too big, right? One reason we had the last crisis was deregulation, namely repeal of the Glass-Steagall law separating commercial and investment banking.
Well, that’s the argument anyway, boiled way, way down. Even Sandy Weill, who built Citigroup into the behemoth it is today, recently jumped on this bandwagon.
I admit the break-up-the-banks idea is attractive on the surface. Years ago, economists Milton Friedman, John Tobin and others pushed a notion called “narrow banking.” Banks that held government-insured deposits would be restricted. They’d operate almost like public utilities. They could make traditional loans, but none of that masters-of-the-universe stuff. No collateralized debt obligations, no credit default swaps, etc.
The rest of the financial world would be largely free to whoop it up, with funding sources limited to high-wealth investors who would penalize reckless brokerages by quickly yanking their money. Everyone would know that no government guys or gals would ride to the rescue.
Former Kansas City Fed President Tom Hoenig, now a director a the Federal Deposit Insurance Corp., has a proposal generally along these lines. But it’s not clear this idea would eliminate bailout risk, and “breaking up the banks” may not be possible, at least in the way advocates seem to envision it. Even if Congress was willing to plunge into this issue again — highly unlikely — anything it coughs up would be full of loopholes.
“Technology has melded stuff together so much that the line between commercial and investment banking is not easy to draw,” said Bert Ely, a Alexandria Va.-based banking consultant.
Even if we went to some version of narrow banking, how could we know the lightly regulated part of the financial universe won’t still pose a threat? After all, the entities that set off the panic, Bear Stearns and Lehman Brothers, had no commercial deposits. The repeal of Glass-Steagall, Ely observed, was “totally irrelevant to the too-big-to-fail issue.”
Which takes us to the real question: Whether a collapsing brokerage’s counterparties would be forced to eat losses, and whether that prospect would trigger the kind of freeze-up we saw in 2008, when banks ceased doing business with each other, paychecks were on the verge of bouncing and suppliers couldn’t be paid. We were truly on the edge of a precipice.
As former Fed Chairman Paul Volcker has said, nobody wants to be the one who triggers a financial collapse. In the face of a potential catastrophe, Treasury and the Fed would probably start bailing.
Maybe one solution is simpler than the debate over bank breakups suggests. The financial author William Cohan argues that to change bankers’ behavior, change how they’re rewarded.
Under his plan a bank’s top people wouldn’t be paid unless the entire firm has pre-tax profits; no more skimming compensation from the revenue an individual banker generates. More: The top 400 people in each bank would have their personal net worth on the line every day, as in the days when Wall Street was run by private partnerships. The firm loses, they lose.
Cohan’s idea would dramatically change how Wall Street views risk.
In any case, the market itself may break up the big banks. They’ve become ungainly blobs with chronically low shareholder returns. Expect hedge funds and vulture capitalists to move in, buy up blocks of shares and start pushing for breakups.
To reach E. Thomas McClanahan, call 816-234-4480 or send email to mcclanahan@kcstar.com.
Mark Hastert
9 months, 2 weeks agoThey don’t so much need to be broken up as have a firewall between their retail banking and the riskier investment division…..sound familiar?
The retail side is pretty orderly. There does need to be adequate oversight of the investment side. Investors need to know that there is a level playing field and that the brokers are not double dealing them. Would you trust your future to a broker that you’re not so sure has your best interest at heart?
The problem with naive trust in the market is that there ain’t no such thing as the textbook free market. There are lobbyists, good ‘ol boys, politicians with a price tag. The Average Joe investor doesn’t stand a chance in a world full of players.
Changing the compensation scheme ought to be a priority. Look after the health and success of the enterprise before the individual.
George Hunsucker
Northland
9 months, 2 weeks agoLibs prefer to keep them together so the “regulation” creates cushy govt. jobs at obscene compensation and it provides a whipping post when things go bad.
And, favors to be bestowed on the lucky ones. Banks need to be treated like anyother business and be allowed to fail to dumb business choices. Libs refuse to let that happen as was recently demonstrated with govt. motors and chrysler.
Libs simply love big govt.!
Mark Hastert
9 months, 1 week ago“Libs simply love big govt.!”
… No, we love good governance.The has to be order in a market for it to function.
Phil Cardarella
9 months, 1 week agoThe actual reason we have government is protect against excessive “free enterprise” — like the strong pillaging the weak.
Capitalism is a great system for generating wealth. However, those who have read at least two books recognize that the profit motive alone will result in monopolization (in one form or another) and/or collapse. That is why we HAD anti-trust laws and bank regulation. Because greed is good — but only to a point.
OH, and we had actual taxation of the rich that forced them to invest in the nation that protected and nurtured them.
Such nasty regulations and tax rates — while protecting the public and the long-term health of the economy — were an imposition on those who wanted to make a lot of money quickly. And like all wealthy folks, their instinct was to buy whatever they needed to — so they bought the government. (Actually, they bought the GOP; it was cheaper just to rent Democrats by the month.)
I do not like big government. But, I want government big enough to defend the rest of us corporeal persons against those corporate persons that the Roberts’ court has created.
Kent Mueller
9 months, 1 week agoPhil, every time you refer to how many books people read, you are being very condescending. That is so unbecoming of you.
You know very little about capitalism if you believe the inevitable end is a monopoly.
There is a place for regulation and taxation. Conservatives believe in government, but the best government is one that is limited, as the founders intended.