The Administration, meaning the Treasury Department, is never wanting for a defense of the big financial services incumbents. From an article in the Wall Street Journal, “Bank Breakups: Not So Fast“:
Few members of the Obama administration have shown interest in restoring Glass-Steagall, the Depression-era law separating investment and commercial banking that was struck down in 1999 following the deal that created Citigroup Inc.
They note that the big banks that got into serious trouble during the financial crisis were less diversified than today’s giant players. Bear Stearns Cos., for example, was a Wall Street firm that nearly failed before getting swallowed by J.P. Morgan Chase JPM -2.24% & Co. Troubled Wachovia Corp., bought by Wells Fargo, was a big mortgage lender without large trading or investment-banking operations.
This is through -the-looking-glass logic. The big diversified players aren’t allowed to fail, remember? In particular, the 16 to 20 firms pre-crisis that were at the core of the global debt markets (which are over the counter and hence highly interconnected) were never never gonna be permitted to fail. Treasury is conveniently omitting all the post crisis subsidies to major banks, in particular the transfer from savers to banks known as ZIRP, and the asset-goosing, balance-sheet-flattering QEs.
And it’s simply untrue that diversified big banks weren’t on the verge of collapse in this crisis. Start with Citi, which is a serial recidivist in the “should have died but is allowed to lumber on” category. It nearly went under in the early 1990s (and frankly was in a lot of trouble in the Latin American sovereign debt crisis of the early 1980s). Shiela Bair wanted CEO Virkram Pandit thrown out and the bank broken up, but she was overruled by Treasury, and had to satisfy herself by forcing a considerable downsizing of the banks instead. UBS required a bailout from the Swiss government. The Swiss made UBS investigate, document, and publish what it had done to get itself in that fix. The Swiss are also imposing 20% equity requirements, is forcing UBS and its Swiss colleague Credit Suisse to considerably downsize their investment banking businesses. And guess what? After saying initially that these requirements would ruin their businesses, they’ve decided they are actually to their advantage.
And let us not forget the case discussed at some length in the very same Wall Street Journal article, Bank of America. Ken Lewis was delighted to buy Merrill during the crisis. But when he discovered it had more warts than he realized, he threatened to abort the acquisition, meaning (among other things) he saw the financial supermarket fantasy as less attractive than when he’d stumped up to pay an over-the-market price for Merrill. Readers no doubt recall that Lewis was browbeaten into sticking with the deal in return for getting $20 billion of additional TARP funds and $118 billion in loan guarantees (one might quibble as to whether Lewis was serious about wanting to exit, in that his prime objective was almost certainly to get more subsidies for the deal, but the flip side was he did seem serious about terminating the deal if he didn’t get his way).
So yes, bigger banks are safer because the officials won’t allow them to get into the state of becoming irrecoverably unsafe. It’s not unlike the way in Lake Woebegon that all children are above average.