BUSINESS

Sheila Bair: JPMorgan Debacle Signals That Big Banks 'Too Big To Manage'

05/14/2012 05:21 pm 17:21:00

JPMorgan's $2 billion trading loss is proof that the big banks need to be broken up, former financial regulator Sheila Bair said on CNN on Monday.

"I think it does underscore that even with very good management these institutions are just too big to manage," Bair told CNN.

Bair, who served as chair of the Federal Deposit Insurance Corporation until last July, also told Bloomberg TV on Monday that the Federal Reserve's efforts to keep interest rates low are leading to more risk-taking by financial institutions, pointing to JPMorgan's disastrous bet as a glaring example.

Bair explained that banks are taking more risks to get the same return that they would have gotten on safer investments if interest rates were higher.

"With interest rates so low now on the really safe investments, they’re going to higher-risk securities to maximize the spread, the return they’re getting," Bair told Bloomberg. "The regulators should be very, very focused on [this].... It can have unintended consequences of the type that I think may have played a role here with the JPMorgan trading losses."

"It's not just banks that are feeling pressure to search for yield; it's pension funds, it's others that are traditionally risk-averse and perhaps should be, are looking for higher-risk, higher-yield assets to deploy all this money that has been pumped into this system," Bair added.

Bair wrote in Fortune Magazine on Friday that it is time for the Federal Reserve to raise interest rates, since low interest rates are encouraging irresponsible risk-taking.

"Near zero interest rates...encourage highly leveraged speculative investments based on short-term price fluctuations, not long term economic fundamentals," Bair wrote in Fortune.

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