For anyone following the debate over the big banks, William Harrison's op-ed in The New York Times is more of the same (see here, here and here). In fact, Harrison's piece is only interesting because he, Jamie Dimon's predecessor at JPMorgan Chase & Co. and the distinguished guy who used to hand out trophies at the U.S. Open, wrote it. There have been remarkably few coherent defenses of the universal banks in public venues, though a flood of them privately, mostly from lobbyists. Harrison's little piece is coherent; it's just not compelling. He doesn't lay out substantive arguments, offer evidence or wrestle with the most serious charges against the big banks; he dismisses them as if they were some simplistic whining of a bunch of cranks. He, a banker, not to say a former CEO, knows better. He opens up by suggesting that the argument against the big banks "is simple and sound-byte ready," thus suspect. He then produces his own sound bytes. The universal banks developed because the market wanted them and they were more "efficient." Universal banks were not "primarily to blame for the crisis." The evidence that big banks are too complex to manage? Smaller firms like Bear Stearns or MF Global blew up. And why don't we need big banks? "America's largest businesses operate around the world and simply have to work with international banks. If they can't with a global bank based in America, then they will work with one overseas." In other words, competitiveness.
This is argument by slogan. Competiveness. Efficiency. Client service. The market. He never states a single statistic, cites a single study or quotes a single soul. Breaking up the big banks, he declares, will hurt customers, clients, the broader economy. There is a kind of muted blackmail here. If bankers are forced to return to specialized lending, "they will need to find new ways to deliver returns to shareholders. That could easily lead to an increase in risky lending." In other words, we could blow everything up if you make it too hard for us to give shareholders what they want. He thus inadvertently raises the question of whether public ownership of banks is the underlying problem.
At times, Harrison actually makes -- well, recites -- valid points. The truth is this isn't a simple question, despite the efforts of both sides to distill it into easy-to-recite talking points. Breaking up the big banks would be messy and economically disruptive (and for those who suggest how straightforward it was in the '30s, consider: the economy, particularly Wall Street, was moribund; many of the major banks were already bailing out of securities; and those that weren't, mainly the old JPMorgan & Co., were relatively small in number. There were no forces of disintermediation at work, not to say viable foreign competition. See an essay by Harvard's Mark Roe at Project Syndicate). The big banks were not the "primary" cause of the crisis -- we could argue until midnight and still disagree about causation -- and none of them collapsed or were nationalized. Of course, all of them received TARP money, and some of them (Bank of America, Citigroup) were for a time effectively nationalized. It is difficult to parse out exactly what role the repeal of Glass-Steagall played. Glass-Steagall is a kind of ideological touchstone to those who want to break up the big banks. But there are a number of solid arguments going back not to its repeal in the late '90s but to its passage under the New Deal in 1933 that raise serious questions about the causative role mixing lending and securities had in the Crash of '29, the Great Depression and the most recent meltdown. Glass-Steagall's responsibility for the half century of bank stability after the '30s may also be overstated. Glass-Steagall was creating its own instabilities in banking as far back as the late '60s.
Still, Harrison barely mentions the dreaded too-big-to-fail, and then puts it in quotation marks as if it doesn't really exist. He never wrestles with complexity, interconnectivity and opacity. But the true slipperiness of his defense of current banking emerges when he tackles several knotty issues: lobbying power, regulation and the so-called market subsidy for TBTF banks. He denies there's any validity to these phenomena. He turns the charge that the big banks have too much power in Washington into a narrow defense of, believe it not, regulatory rectitude. How dare critics question the ability of regulators to make independent judgments? And lobbying is educational for all. "It is perfectly appropriate and indeed necessary for regulators and politicians to engage with experts and industry practitioners to learn more about the issues. Regulators are not cowed, but they generally do need more expertise and better collaboration with one another to carry out their responsibilities successfully." (What's collaborating with one another have to do with this?)
This is grade-school stuff. We're talking about Washington lobbyists here, not the folks on the mortgage-trading desk. (Regulators can presumably talk to anyone they want.) We're talking about the power of campaign contributions on politicians or the funding of think tanks to create a climate conducive to big-bank interests. Moreover, for all his defense of regulatory independence, he is basically admitting that regulators are chronically behind the curve. He is denying all the academic studies going back to George Stigler on regulatory capture, and ignoring as well the subtleties of the capture process, which includes the ideological belief in deregulation. All that doesn't mean that regulators are fated to fail, which too easily becomes an argument for getting rid of regulation altogether or for building rigid, counterproductive stalags of rules. But he is suggesting a kind of benign corporatist alliance, led by paternalistic banks that know what's going on and that have the general welfare in mind. This is creepy.
Lastly, there's the subsidy -- the notion that the big banks receive a lower price for their debt in a market that's convinced they will be bailed out if they fail. Harrison scoffs at this. "The facts don't bear this out," he writes. "An AA-rated bank deemed too big to fail by pundits cannot borrow any more cheaply than an AA-rated industrial company. One can see it every day in their bond spreads." But AA-rated industrial companies are not TBTF -- or the problem. The relevant comparison is with other banks that aren't TBTF. (The pundits aren't the only folks using TBTF, of course. It's now been baked into Dodd-Frank in the form of systemically important institutions.) A number of academic studies suggest that the big banks have clear funding advantages over their smaller peers. You can argue about why, but not the reality of the subsidy.
Certainly big banks should be allowed to lobby, and breaking them up would lead to disruption, dislocation and possibly a competitiveness problem. There are arguments on both sides of this issue, many of them, however, lacking in hard information, which, again, is why it's so difficult a call. But Harrison's defense harkens back to the age before 2008, when banks could simply declare their manifest strengths and their Olympian wisdom. Given what we've been through, you've got to try a little harder now.
Robert Teitelman is editor in chief of The Deal magazine.