Breaking Up the Big Banks, and Why Congress Won't Do It
And now there are five -- five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks.
What to do? Two ideas are floating around Washington, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.
The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Steagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)
Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.
But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the 'too big to fail' problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.
There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks' techniques. And the pending failure will already have rocked the entire financial sector.
Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all -- that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall. The four of them -- Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.)
Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.
Needless to say, Wall Street favors the Administration's approach -- which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the president, as well as the long-term financial stability of the system.
Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.
The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.
Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up -- and soon.
Cross-posted from Robert Reich's Blog.
Difficult times need wise men to tell difficult truths. And, for many years, Buffett has done just that. So it was deeply distressing to listen to him last week joining in the economic victory lap the Obama administration is taking.
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Break up the Banks, Abolish the Fed, and then clear out our long-corrupted government of every single self-serving one of them, and then immediately abolish every single anti-Constitutional law . . .
and START OVER.
This mess has gone on long enough and I think we're all tired of talking about it. Let's do something about it. Vote them all out and let's take our government back. Let's take our country back.
"The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table."
Single payer wasn't on the table either. Probably not enough room with all the options that are on the table for bashing Iran.
The solution is obvious.
Get a bigger table!
Leaner is better.
Have you seen any basketball player who got fatter plays better than when he was leaner? Have you seen any supermodel who became more famous after getting fatter?
Why don’t break up big banks into smaller ones, restore the Glass-Steagall Act provisions to separate banks’ deposit-taking activities from their investment and trading businesses (it would not cause the havoc of destroying the half of economy, woud it? it's just restructuring, not destroying; so we would feel safer to deposit money into banks instead of burying them in our backyards), and install anti-trust law on banks ! Oh zeeeeee, there's lobbiests problem again?
Regarding Prof. Reich’s statement, “Winding them down after they get into trouble is no answer. By then the damage will already have been done,” we are talking about “Prevention on health care” to reduce health care costs. Why not similar measures on big banks to prevent future failures?
The hard-fought, maintained credibility of Pres. Obama should not receive a dent because of this. If one industrial sector faces overhaul, other sector should receive fair treatment, too.
I believe that Reich is simply exposing the fact that the Fed has its imprint on the Barney Frank legislation. The Fed allowed off balance sheet ponzi loans in the first place, and the Fed is not willing to let the richest folks, who are its lifeblood, to be hurt by corporate bond defaults by the big banks. The Fed and therefore Barney Frank, want to protect the hedge fund levered bondholders of the big banks who have literally a no risk investment. Make the bondholders vulnerable and this investment is suddenly very risky. This is theft by the Federal Reserve Private Bank upon the taxpayers of this nation. The more things change the more they stay the same: http://hubpages.com/hub/Will-The-US-Declare-Independence-from-the-Federal-Reserve
Good timing by the Bush administration. Now the entire country wants to blame President Obama for what has occurred for the past, at least, 20 to 30 years, to fix it in 10 months! Why? Because this is the administration that's going to try and put an end to all these shenanigans. When folks were making money, there was not complaints. Now that their portfolio is hurting, it's become a problem. The majority of Americans do not have a clue on how financial markets work. Unemployment loss has been in a steady decline, at least in Silicon Valley, for the past ten years. It has just recently spread throughout the country. The private sector, who the Republicans claim create jobs, does just the opposite. Over a period of time, all full time employees were fired and replace by contract/temporary employees. This way the company does not have to pay out any benefits of any kind, thus keeping even more money in their pockets. It was not uncommon for the valley to lose between 5,000 to 15,000 jobs per quarter. Regulations need not only be put on our financial institutions, but the private sector as well. And, yes, they need to pay higher corporate taxes and be limited in off shoring funds.
If only.
(LOCAL) it is a better plan than TARP and it was cooked up walking to work by nobody special.
http://www.facebook.com/group.php?gid=55515797727
if not anything else,
the US has been a lightning rod for the rest of the world.
now they know what NOT to do, at least.
>By the time a truly big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks' techniques. And the pending failure will already have rocked the entire financial sector.
Exactly. All the arguments against doing the right thing in business amount to 'we can't, or else we'll lose out to others that don't do the right thing'. The answer is to make doing the wrong thing illegal. Duh. Sure, there may be some downside to regulation, but can it possibly be worse than having our entire financial system run like a Ponzi scheme? Let's make sure the 'talent' has no place else to go where they can run their con. Then the banks can retain them, and maybe get some useful work out of 'em.
The first step is to figure out what kind of society we actually want. Then organize our laws and regulations so that we stand some chance of getting it. The supply siders have been give their chance to prove that we can have it all and all get rich. It was an obvious lie back in 1980, made all the more so by the obviously spectacular crash and burn of the theory when put into practice. Apparently you can't use logic to disprove Santa Claus in this country, but maybe a near depression will do the
1) Return Glass-Steagall so that Banking is separate from Insurance and Investment Banking.
2) Require a graduated reserve requirement. The bigger the bank (or holding company), the higher percentage needed in reserves. This should create a dis-incentive to growing arbitrarily large.
3) Require banks and other lenders to retain substantial risk for all loans they originate.
The only reason these big banks have shareholders is to pay the SEC fines and legal expenses of the "insider" bonus Cabal and to be wiped out when the exotic investments that produced bonuses for the gang goes awry.
You said it, Robert Reich! Great post, and right to the point. I couldn't have said it any better. I'm saving this post and using it as a template to measure the future regulations proposed by Obama and the Congress (I have faint hope that the recommendations you cite that we NEED will be implemented given the hold Wall St. has over the admin. and Congress via lobyying and campaign contribution funds. Until and unless we have public financing of campaigns or elect uncorruptible officials, we are stuck with this plutocratic, undemocratic, corrupt disaster.
I don't support public option health care, but I sure as heck think this article is right on the money. I detest Geithner. When he talks he just snarls and looks down his nose at everybody in the room. I still say Obama made the choice to hire Turbo Timmy because his mother worked with Timmy's dad at the Ford Foundation. It is that blind allegiance thing IMO.
BTW, Robert is pointing out that many of the financial mistakes were made during the Clinton administration. True with a democrat president and a mostly republican legislation and so both parties were stupidly naive to the long term consequences of their rash decisions. The financial problem was made worse by Bush with more leverage allowed. To put the cherry on top consumers were just as stupid with their money as the government.
What is particularly lousy right now is that the consumer has no idea which bank currently is sick and they never will. However if they are a bondholder or shareholder they will be held responsible for the failure.
I would give Obama the benefit of the doubt in saying that he's not inept in understanding that the situation of Too Big To Fail must be done away with.
Greenspan has so much acknowledged the failure (which he was a part of) of repealing the Glass-Steagall Act by suggesting that big banks should be broken up.
Obama is doing a disservice to americans in listening to his advisors who are much like foxes in the hen house.
If the Dems can't come up with the appropriate solution, then the other party can take this opportunity to 'save the day' by pushing for the restoration of the Glass-Steagall Act which will separate Investment banking to Commercial Banking. I don't care whichever party will make this happen. I just hope that they restore Glass-Steagall.
I think Geithner and Obama could be making a big mistake here. Their strategy for this is to wait for the tumor to appear, then try and excise it as best the govt can. This is in contrast to what Obama is emphasizing in health care, that is doing more preventive medicine than spend more curing disease. The Glass-Steagal act should be reinstated as it is good preventive care the economy so needs.
Well wasn't the reason for getting rid of Glass Stegal to allow our banks to get bigger and more competitive with Foreign banks. Why wouldn't the proposed legislation work? Sounds like it's just extending the process they use now for banks that are not to big to fail to banks and institutions that are to big to fail.
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