Guest Post: 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:

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

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

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.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander… http://www.washingtonsblog.com

33 comments

  1. PJM

    We dont need economists to understand this basic simple fact. When Federal Reserve (or another authotity) save the big banks and let them grow more, jeopardizing the little banks, is the route to insanity. One this days, this big banks aro so big that even USA cant save this gigantics banks.

    Switzerland is a beautiful economy however, some months ago, everyone there (the normal citizen) felt that they could broke because the State isnt big enouph to save their bank-mamouths. This happened in Switzerland and in the future can happen in Germany or even USA.

    There are some studies, especially by BIS, that banks are getting more risky and across several markets and countries. For example, if Santander will broke, the portuguese financial system will suffer because that bank is strong in my cowntry. Of course we cant stop foreign institutions work in my cowntry but we must watch carefully these kind of mamouths.

    In theory, these kind of banks can be more efficient as more big theyre, because they have more assets to manage with the same costs. But this is onlye theory. In fact, the problems of Fortis Bank showed us that, more big the bank, less efective are the management to manage their balance sheets and their assets. Even the management cant estimate the real risk inside their bank.

    As I said before, we dont need economists to know how to stop this crazy inasnity. We should ask a naval engineer how he designs the big tankers to transport crude oil across the oceans. And he explains that big tankers are compartmented to avoid sinking the ship when some thing happens in the ocean.

    In same way, banks must have a limit in his size, in his activities and in their connections through the financial system. The same logic as in oil ship tank.

    Of course the socialists believe that can regulate every activity of one bank. But this isnt tru and only theorics can believe that. The only way to stop this insanity is put and end in this bank-mamouths. Onlye socialists believe that can regulate and use banking system to do the job of the politicians. As I said before, mr. Krugman should understand that his calls are the same as the stockmarket guru. Sometimes they are rigth but often they arent and, worst, they instigate others losses.

    We need stop this insanity. One these days even the print machine of mr. Bernanke cant avoid a great shipwreck of this kind of bankmamouth.

    1. PJM

      I dont think the problem is american alone. This is global.

      But this is a bombe that one day will explode in the world:

      http://jessescrossroadscafe.blogspot.com/2010/04/derivatives-exposure-among-us.html

      We dont need to be a rocket scientist to know that one these days the financial catastrophe will nock our doors. In that day, all countries will be broke. All.

      This is a compltely insane. A few banks carry risky assets that are completely insane. We need to stop this insanity. Its about time that one of this kind of bankmamouth will implode and with him the world.

      Of course that needs nerve from private citizens because banks controls a lot of opinion makers, pays a lot of wages in good positions and can buy politicans using legal means, as the lobbying activity.

      We need a revolution in our way of thinking. Or one day we will be living a nightmare worst than a mere Greast depression. Will be and hell depression.

  2. attempter

    Meanwhile Krugman’s been on the warpath demanding they not be broken up.

    But then, you did say “independent” experts, not party hacks.

    1. i on the ball patriot

      Surprised your drinking the cool aide …

      A cast of scum bag Vanilla Greed ‘losers’ (who are solidly in on the take down of the middle class and the under populations scam — Alan Greenspan gag me with a fucking spoon,and bye bye your credibility), are positioned against their Pernicious Greed big bank compatriots.

      Duh!

      Good cop vs bad cop bullshit scam post!

      • Break up big credit and give it to the people.

      • Break up the scam non responsive government that provides no more than this duopoly theater that if you had a working brain cell you would totally ignore. What a fucking waste this post is!

      • Get rid of all of these terrorist parasitic banking scum bag losers of both stripes.

      • Give us interest free Islamic banking! Oh, is that why we are invading and droning the shit out of Pakistan and Afghanistan?

      Deception is the strongest political force on the planet.

      1. attempter

        Exactly what “cool aide” (sic) would that be?

        I reckon you know my position.

        Obviously, the point of my comment is to try to discredit Krugman, not “agree” with the post. Did I say anything about the post?

        If you have coherent objections to my tactics, state them.

        I’m pretty sure no one will ever organize a movement out of undisciplined internet cranks. Piece by piece I’m trying to figure out the right message discipline, which obviously won’t be philosophically perfect, but can hopefully have some practical effect.

        One thing that will always be useless are those who do nothing but indulge their finicky idiosyncrasies about how each and every detail needs to be expressed in every single communication.

        1. i on the ball patriot

          The “cool aide” is the decoy debate itself! The big bank vs. little bank argument is just another variation of the oh so politically correct philosophical Ayn Rand ‘free market’ decoy that was used to facilitate deregulation and set debt traps all over the planet. This particular variation is just another time wasting diversionary decoy that gets all of the marks energies and comments focused on the size of the institutions as the problem and not the real problems, control of the masses through credit, outright fraud, and the corruption in government. Its not about ‘free markets’ or ‘big bank vs little bank’. It doesn’t matter whether you are fucked by a midget or fucked by a giant. You are still fucked.

          Yes you slammed Krugman as a “party hack”, but I thought you agreed with the gist of the post by contrasting him with the “independent” experts presented in the post.

          My bad, now obviously, apologies to you and for the record I most always enjoy your comments.

          I think the right message discipline will be a combination of all forms of resistance; undisciplined internet cranks, people trying to figure out the right message discipline, those indulging their finicky idiosyncrasies, those who give uncivil and disrespectful dialogue in kind to those who pose as civil and respectful people and even those who are dropping seemingly incoherent inflammatory comments once in a while.

          Deception is the strongest political force on the planet.

          1. Skippy

            Ambidextrous arm!!!

            Skippy…to kill a leach one must use chemicals, heat or starve it to death…I prefer starvation…apropo to the effect they use.

          2. attempter

            Thanks. I appreciate your comments too. I think the distinction between what you call vanilla and pernicious greed is an important one far too many people miss. (And thus we get the old, “Yeah, it sucks, but it was always like this, so why are people whining about it now?”)

            As far as entering these policy debates I think the right course is to demand what would be the right policy (breaking up the bank rackets, for starters), even though we know it’ll never be done under this system, and then condemn whatever fraud they try to pass.

            The idea is, we are not nihilists, we have a solution, the right solution, which they simply refuse to undertake. So when the next big crash comes within the next few years, those who attacked the system across the board while offering the real solution will have the credibility to make a redoubled call to eradicate the rackets completely.

            I do also agree with incivility where called for, which I agree is often nowadays.

  3. rootless_e

    So when the US is a nation of smaller banks and the giant HSBC and Deustches Bank and others are dominating world finance, what then?

    Obviously, we need huge banks. The problem is not size, it is management and structure. They should be public entities managed by civil servants. And then we’re set.

    1. PJM

      Dear Rootless_e, I disagree with you.

      Huge banks are very difficult to manage and assessing risk. Everyone who works in the risk business, especially financial risks, as markets, knows that cant control and assess the risk acurately. Only in dreams. Who believes that can assess, control and manage risks in perfect way has lack of real world experience or is a fool. Fools tend to blow up before he can understands his foolness.

      Huge banks only have a destiny: fail. Is about time. Until today they managed to fill their lack of sanity thorugh a lot of fools. Like politicians and, of course, the government money. But one day even a big State cant avoid the meltdown.

      If one cowntry is afraid of foreign big banks, close the door. Later will feel the same effect at outside borders.

      But even that silly sentiment exists, these kind of legislation should be agreed by international treaties. Like Basel I and II.

      What is silly is this. Almost all companies and organizations have a cycle of life. They born, live and dye. natureally, every bak will dye one day. Until his death the bank can grow when his competition dies. But in that day these baks will so big that is impossible a government save the bank. The bank will dye as the State who has more dependedncy of that bank. is silly dont understand this baisc ruleof life.

      Of course you can believe that public servants can be good managers. However never in History that happened before. Even they lack of skills to manage public finances and money, how can manage a bank? Are you seeing your flaw?

      As I said, only in dreams somone believe that State or politicians can manage baks better that the private agents.

      1. rootless_e

        actually, public managers can be pretty damn decent. interesting how ideological all this discussion remains.

        1. psychohistorian

          So if we are going to be idealogical then lets talk about the multi-national corporations that are in some cases bigger than the banks and gives the squid analogy new meaning.

          Do we want a world run by corporations or governments? Can we assume in this case (shits and giggles) that the governments operate in the interest of the masses.

    2. attempter

      Obviously, we need huge banks.

      Both the uselessness and the destructiveness of big banks has been so overwhelmingly proven by now that to still say this can no longer be called ignorance, but is simply a lie.

      So when the US is a nation of smaller banks and the giant HSBC and Deustches Bank and others are dominating world finance, what then?

      The rest of the world would still be slaves, while we’d be free.

      That’s all.

      1. rootless_e

        Really? As free as Ecuadorans who don’t have any serious banks and must beg for access to credit?

        1. attempter

          You’re being non-responsive. I said free.

          Including free of being a slave to globalized “credit”.

          But your mindset speaks for itself, as far as comprehending freedom.

          1. rootless_e

            that’s exactly my point. If there are giant banks in the world, nations without some method of aggregating and distributing credit on that scale are at the mercy of those banks.

          2. attempter

            I’ll grant that Ecuador trying to go it alone probably couldn’t attain anything near autarchy while globalization exists.

            America certainly could. It could eradicate financialization completely within its domain.

  4. alex

    You list a bunch of nobody’s and expect us to take it seriously? The only question is what do Lloyd Blankfein and Jamie Dimon think.

  5. Gary Anderson

    Since when do US politicians have the power to excercise sovereignty over the international bankster cartel? I will believe a breakup when I see it. And I will laugh if, say, Citibank is broken up and the deposits are left with a JPM or BAC because that will SOLVE NOTHING.

  6. Charlie Broadway

    The one bank that desperately needs to be broken up is not Citigroup, Bank of America, or Goldman Sachs but the FEDERAL RESERVE. Knowing the government, they will break up every bank but Goldman.

  7. Gary Anderson

    Actually, the Bank of International Settlements may say they are upset, but they are in on the whole thing. The BIS answers to no one. They have their own government. They exist in the “Tower of Basel”. And most importantly, they allowed shadow off balance sheet banking at Basel 2 in 1998. They knew exactly what is going on. They are the bank of the central banks.

  8. rootless_e

    A prudent person would think that any argument made by Scwartz, Prescott, Greenspan, and Hubbard was, at best, in need of some skepticism.

  9. charles

    A view from Europe: There has been of late a rise in nationalism, which represents a serious headwind towards the
    proposals to come out of the work of the Financial Stability Board and the IMF, tasked by the ‘G-20’ on the matter, draft proposales were due out April..The Germans are busy crafting their own bank legislation, ahead of the international reform, for instance

    As for the BIS, his ever discreet chairman, Jaume Caruana, in a rare public appearance in Mexico, stated that ‘capital requirements are likely to hinder credit’, go figure that one out when credit has dried up across Europe.

    As a regular reader of this blog, of Simon Johnson’s proposals and the thoughts of G.Washington, I am only afraid
    that if the popular consensus is there, the financial reform
    will have to overcome the hitting of two icebergs: the financial lobbyists, and the Federal Reserve ( or Treserve with the inside lobbying by Turbo Tax Timmie inside the White House ), to be fighting for the regulation of the big banks. We know the result of that and are still bleeding..

    Hearing Alan Greenspan yesterday only confirmed how far removed the Federal Reserve is removed from reality, save for maybe Tom Hoenig and Mrs Yellen, with Greenspan himself admitting that the system cannot be regulated as it is, so break it up !

  10. Anon

    You asked: “So what do the majority of bankers have to fear from a break up?” My answer is: Power, due to the fact that they are too big to fail and so they can exert a strong influence on political Agenda.

    No politician can allow them to fail…

  11. Paul Tioxon

    The trend towards behemoth banks, retailers, oil companies, telecoms, etc. will consolidate production and distribution into the hands of an easily nationalized entity, because all of the heavy lifting has been done and efficiencies realized. All except for the the lopping off the overhead of ridiculous payroll costs for fat cat C level types. Oh, and dividends to share holders and interest to bond holders, can’t forget them in the nationalization. Can’t wait.

  12. Jamie

    This post grossly distorts several officials’ positions on breaking up large banks — so much so that it’s difficult to believe that the author isn’t deliberately misrepresenting people’s statements.

    For example, Paul Volcker has never endorsed breaking up large banks to deal with TBTF, and in fact has specifically rejected that idea. In his NYT op-ed, Volcker wrote:

    Combining … essential [banking] functions unavoidably entails risk, sometimes substantial risk. That is why Adam Smith more than 200 years ago advocated keeping banks small. Then an individual failure would not be so destructive for the economy. That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.

    So claiming that Volcker “say[s] that we need to break up the too big to fails” is just false.

    Sheila Bair has also never endorsed breaking up large banks, and the link the author provides doesn’t show Bair saying anything about breaking up banks. To the contrary, it shows Bair advocating for a resolution authority + more stringent prudential regulations in order to address TBTF.

    And Greenspan never said that we need to break up the large banks either — he said that it’s an approach we should maybe consider (which isn’t even close to the same as saying that it’s the approach we should take), but that he has no idea how to address TBTF (“this one has got me”). Arguing that Greenspan is an advocate of breaking up the large banks is a blatant lie.

    Total hackery.

  13. Dave Lewis

    I agree. Let’s have the Supreme Court declare that TBTF is a “restraint of trade” and bust ’em up- as I argue in more detail on my blog.

  14. John Wright

    WHERE IS MY LOAN MODIFICATION BANK OF AMERICA?

    If it walks like a piggy, talks like a piggy, by golly it’s a PIGGY!

    BofA and it’s CEO Brian Moynihan reminds me of that song by John Lennon and George Harrison titled “Piggies” I invite you to listen to this song on youtube and see if it appropriately fits.

    http://www.youtube.com/watch?v=NTmeHM-Hojg&feature=related

    Have you seen the little piggies
    Crawling in the dirt
    And for all the little piggies
    Life is getting worse
    Always having dirt to play around in.

    Have you seen the bigger piggies
    In their starched white shirts
    You will find the bigger piggies
    Stirring up the dirt
    Always have clean shirts to play around in.

    In their ties with all their backing
    They don’t care what goes on around
    In their eyes there’s something lacking
    What they need’s a damn good whacking.

    Everywhere there’s lots of piggies
    Living piggy lives
    You can see them out for dinner
    With their piggy wives
    Clutching forks and knives to eat their bacon.

    John Wright vs. Bank of America Lawsuit at:

    http://www.topix.com/content/prweb/2010/03/united-law-group-files-suit-against-bank-of-america-on-behalf-of-john-wright

    When I filed my lawsuit against Bank of America, myself and United Law Group thought of the many others out there in the same situation. It was then that we decided to educate the public on what these piggy banks are doing, as well as unite us all together as one voice. Please help me turn this David vs. Goliath modification process, into a Goliath vs. Goliath.

    Please stand with me and United Law Group and send an email to Bank of America that states that we will no longer tolerate their potentially illegal, fraudulent, irregular and abusive business methods.

    Divided we might have fell America, but united we must stand!

    Please send your email directly to Bank of America and include the following:

    1. Your name
    2. Your complaint concerning your experience with Bank of America.
    3. Please end your email “I support John Wright vs. BofA Lawsuit!”
    4. Please send a copy of your email to johns-wright@hotmail.com
    5. Please send your email to both BofA link below and the CEO email

    CEO Brian Moynihan:
    brian.t.moynihan@bankofamerica.com

    BofA Linked Email:
    https://www3.bankofamerica.com/contact/?lob=general&contact_returnto=&state=VA

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