The irony of the failure of some of Wall Street’s biggest institutions to manage risk properly is that the consolidation of banks and brokerages–which many cite as exacerbating the crisis–is likely to accelerate. Indeed, it already has, with JP Morgan Chase swallowing Bear Stearns. Increased regulations and government oversight, which increases the overhead costs of compliance, are likely to increase the pressure to consolidate.
But shouldn’t it be the other way around? Shouldn’t the government begin to wonder what can be done so that the failure of a single bank or brokerage doesn’t necessitate extraordinary government intervention? In a new essay in the Washington Independent Jonathan Macey, a professor at Yale Law School, argues that the government should use antitrust laws to break-up “too big to fail” banks.
After the jump, Macey’s plan and why it won’t work.
The government should have noticed prior to the bailout of Bear Stearns that it was too big, or too interconnected to fail, Macey says. It ought to have used its powers to break-up Bear–and similar financial institutions where financial power had become too concentrated-or imposed additional regulations to provide for its safety. Instead, by bailing out Bear and its counterparties, the Fed risks creating severe distortions in the capital markets by implicitly protecting large financial institutions from failure.
“So the government is now in the business of insuring investment banks as well as commercial banks — one it should not be in. If investment banks are really too big, or too “interconnected,” to fail, then the antitrust laws should be deployed to fix the situation by breaking them up,” Macey writes. “Barring that, the government should, at a minimum, organize the same sort of coherent system for dealing with investment bank failures that it has for commercial bank failures.”
Barring that is cute. Of course that option is barred. What major bank or brokerage isn’t too big to fail these days? What Macey doesn’t touch on is that the underlying dynamic of regulation doesn’t give much hope for the kind of decentralizing reform he seems to prefer. Indeed, many of the reforms being considered–licensing mortgage brokers, requiring additional reporting, greater capital reserve requirements–are likely to lead only to further consolidation.
Was Bear Stearns Too Big to Fail? [Washington Independent]
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That is not even close to the correct usage of “acerbating” did you mean exacerbating?
That is not even close to the correct usage of “acerbating” did you mean exacerbating?
Fire the copy editor.
This guy, for someone who you’d think is reasonably intelligent, seriously misses the issue. By his logic, tens, if not hundreds of hedge funds would also have to be liquidated, since their ‘interconnectedness’ could threaten the financial system and require explicit government intervention. Nice work buddy.
Size =/= Interconnectdeness
Better break up Berkshire too, it’s way too big, that means it’s interconnected!
Most importantly, breaking up banks does not solve the issue. This was not a widespread failure across the banks, this was specific groups within the banks taking abnormally large losses. If it had been two companies instead of two groups, the only difference would have been that one company would have shown a profit while the other went bankrupt, liquidated and defaulted on most of its debt.
This isn’t India and the deals here are not microcap deals. What does he suggest, that 500 banks each loan $10mm to finance a $5b deal?
If you want to fix the problem, fix the problem. Rearranging the banks or chopping them into pieces does not fix the issue, it just changes the size and shape of the players.
@ Horse
Wait, are you suggesting we actually acknowledge the underlying problems (lax controls, risk management, etc, etc), and furthermore actually address them? HOGWASH!
Just because something is hard doesn’t mean it should not be done. In the 1990′s, Drexel blew up and no one had to step in and save the day.
The significant concentrations of risk, coupled with the Fed’s actions are creating a dangerous dynamic that needs to be addressed somehow.
If the choice is between tremendous increases in burdensome regulation and splitting banks to disperse the risks, I’ll take splitting of banks.
@1:33
Agreed, what is the danger of carving out retail banking into stand alone entities? I can’t figure out why the ever brought down Glass-Steagall in the first place. Hey, let’s burn down this thing that has worked pretty effectively for 70 years…high five!
breaking up big companies, hmmm. how did that whole AT&T thing work out? next…let the capital markets work their magic. provide capital to managers who are up to the challenge. perhaps some banks weren’t meant to get so big (and spooky) that they are now “unmanageable”.
but why are we focused on the too big to fail situations, it’s the small guys that can cause significant pain (LTCM) which we really need to watch. it’s about risk, not size.
Alternatively, we could get the government out of money entirely and let a free market control the market. The government would not be able to arbitrarily decide who’s “too big” to succumb to its own bad investments nor use its current regulatory iron grip to further fasten the chains binding the financial system in socialist policy. Tether the government and free the markets!
I’m still laughing at the audacity of Gasbagarino (who knows as much about banking and finance as a roach) to refer to Jamie D as a giant among midgets or some such commentary. What a fucking idiot. Maybe we should be breaking up CNBC for engaging in embarrassing public behavior by its on airhead anchor.
I’m still laughing at the audacity of Gasbagarino (who knows as much about banking and finance as a roach) to refer to Jamie D as a giant among midgets or some such commentary. What a fucking idiot. Maybe we should be breaking up CNBC for engaging in embarrassing public behavior by its on airhead anchor.
worth noting that this article was written by a law professor, massive regulation of investment banks would surely create more need for lawyers…
increasing regulation on investment banks would cause more jobs to go overseas
Anal_yst, I’m suggesting we perform heart surgery on people with heart problems instead of amputating the legs and arms. Recent studies have shown that cutting off someone’s foot does not cure a person having a heart attack.
Anal_yst, I’m suggesting we perform heart surgery on people with heart problems instead of amputating the legs and arms. Recent studies have shown that cutting off someone’s foot does not cure a person having a heart attack.
As a taxpayer (lender of last resort) and user of the capital markets, I think the banks that are “too big to fail” probably should be broken up.
The risk you run is that it could effectively prevent US banks from competing with foreign banks (especially the French ones) that still have an implied sovereign guarantor.
@2:25. Do you advocate eliminating the Federal Reserve as well?
Yes, yes, yes. We need to evolve into an environment where institutions can fail without bringing the end of civilization and starting WWIII. Dont the largest 50 banks control close to a quarter of the worlds assets? Bad idea.
If it had been two companies instead of two groups, the only difference would have been that one company would have shown a profit while the other went bankrupt, liquidated and defaulted on most of its debt.
One smaller company goes under and the other smaller company continues on, as opposed to one big company getting bailed out because one group lost a pile of cash. Yeah, that was basically his point.
Huh. “We should use the antitrust statutes for something completely unrelated to the established objectives of antitrust law.” I guess the good professor is too brilliant to worry about whether the actual law fits with his agenda.
Banks that got emergency cash as a part of the government bailout don’t have to follow the same rules as people who have to get short-term loans. They do not have to pay the money back, or even be accountable for it. The banks and other companies that got generous portions of taxpayers’ money are popping up all over the place in reports that they are either unable or unwilling to report just how exactly they have been spending that money. (My guess is the latter.) As the recession began draws on fewer people are willing to lay down $20,000 or more on a vehicle that isn’t a daily driver. The company has also been hurting because of the credit crisis, but after losing large sums on previous loans, the financial wing is still offering loans with much stricter requirements. Tom Bergman, Harley CFO defends the lending, citing that the company is trying to survive. They may need a payday loan in the meantime. However, as the economy shows signs of rebound, it isn’t likely we will see an end to Harley Davidson. To read more check out this articles at http://personalmoneystore.com/moneyblog/2009/03/24/harleydavidson/