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 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
- Economist Arnold Kling
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 St. Louis, Thomas Bullard
- The head of the FDIC, Sheila Bair
- The head of the Bank of England, Mervyn King
(And 5 former Secretaries of the Treasury agree with Volcker.)
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.
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.