A growing chorus of economists, analysts and other observers are calling for the mega-banks to be broken into smaller pieces.
Whatever the cause of the finanical crisis of 2007-2008, the first step toward a solution is to get rid of the international giants that defy regulation, these observers believe.
They note that a similar break-up was accomplished in the 1930s, when Congress passed the Banking Act of 1933, better know as the Glass-Steagall Act.
RepoWatch is soliciting the names of people who say Too Big To Fail is Too Big To Exist. They will be added to this list as they are submitted and confirmed.
Although the list will be alphabetical, it must begin with MIT professor Simon Johnson and Yale student James Kwak, who blog together at Baseline Scenario and co-authored “13 Bankers: The Wall Street takeover and the next financial meltdown.” They have been the leading voices on this issue since the crisis.
Phil Angelides, chairman, Financial Crisis Inquiry Commission: “Their fierce resistance to any kind of reasonable change, the unrestrained use of their enormous political power and their willingness to use whatever means necessary to bend the political system to their self-interest without respect to the public interest, have provided in my mind the conclusive evidence that a modern era of trust-busting is now essential.” — Speech at the Center for National Policy, May 31, 2012.
Sheila Bair, former Federal Deposit Insurance Corporation chairman: “It would surely be in the government’s interest to downsize megabanks… The public-policy benefits of smaller, simpler banks are clear. It may be in the enlightened self-interest of shareholders as well.” – Summary, The Safe, Accountable, Fair & Efficient (SAFE) Banking Act of 2012, May 9, 2012.
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC: “There is no reason to allow banks to reach the size of the TBTF institutions. Research on size and efficiency in the banking sector usually shows that all economies of scale can be fully realized at around $50 billion in assets—Bank of America and J.P. Morgan Chase have more than $2 trillion.” Boston Review, January/February 2010.
Lawrence Baxter, professor, Duke Law School: “Is it not likely that many of the institutions requiring massive injections of public capital and other forms of subsidization and public assistance are, and have been for some time, simply too big to manage? …At the very least, we ought to re-examine our assumptions about letting banks, or any financial institution the actions of which generate systemic concerns, grow to whatever size they desire.” Baseline Scenario, May 4, 2009.
Sherrod Brown, U.S. Senator from Ohio
James Bullard, president, Federal Reserve Bank of St. Louis: “We do not need these companies to be as big as they are. … We should say we want smaller institutions so that they can safely fail if they need to fail.” Wall Street Journal, May 17, 2012.
James Coffman, self-described as retired two years earlier from a management position in the enforcement division at the SEC after 27 years: “No institution should be allowed to become too big to fail. Those that have already achieved that status should be broken up.” Baseline Scenario, August 14, 2009.
Peter Cohen, chief executive officer of Cowen Group Inc. and former chairman of Shearson Lehman Hutton Inc.: “Are the big banks too big? … I think they are. There are too many people, there’s too much going on and you can’t possible know about it.” Bloomberg News, February 1, 2013.
Laurence Copeland, professor of finance at Cardiff University Business School (Cardiff, Wales, UK) and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs: “The only type of intervention which has a hope in hell of success is one based on size. As Mervyn King has said, when a bank is TBTF (Too Big To Fail), it is just too big. What is needed is breakup along functional (and, where necessary, geographic) lines, separating the boring but essential utility business of deposit-taking and payment-transfer from the exciting risk-taking of investment banking.” Business Daily, September 24, 2009.
Cam Fine, President and CEO, Independent Community Bankers of America: “Downsizing too-big-to-fail institutions and the risks they pose to the financial system could not be worse than taxpayers spending trillions of dollars propping up these firms and federal officials, not the free market, picking winners and losers.” – Summary, The Safe, Accountable, Fair & Efficient (SAFE) Banking Act of 2012, May 9, 2012.
Richard Fisher, president, Federal Reserve Bank of Dallas: “A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system’s stability—the so-called too-big-to-fail, or TBTF, banks…. The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks. … The dangers posed by TBTF banks are too great. … I think the disagreeable but sound thing to do regarding institutions that are TBTF is to dismantle them over time into institutions that can be prudently managed and regulated across borders. ” Remarks before the Council on Foreign Relations, March 3, 2010.
Francis Fukuyama, Stanford University political science professor: “I’ve got this very simple view, which is that I don’t think regulation of the Dodd-Frank sort is going to work. The investment banks have got way too much talent, are way too creative and way too nimble for regulators ever to keep up. Therefore the real solution all along should have been to break these big banks up into smaller pieces, which is essentially what Glass-Steagall and the interstate banking regulations of the 1930s did. Once the banks are no longer too big to fail, then you can just let the market work the way it’s supposed to. If people take outsized risks and they get into trouble, then they just go bankrupt, and that is essentially what happened to MF Global. It hurts people, but it’s not a systemic crisis.” Interview, The Browser, January 27, 2012.
Esther L. George, President of the Federal Reserve Bank of Kansas City: “What we must remember, though, is that ending TBTF is the only sure way to curtail the expansion of public safety nets and break the pattern of repeated and ever-escalating financial crises” — Hyman P. Minsky Conference, April 11 2012.
Alan Greenspan, former chairman, Federal Reserve Board: “If they’re too big to fail, they’re too big,” Mr. Greenspan said. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.” Speech before Council on Foreign Relations, October 15, 2009.
Thomas Hoenig, president, Federal Reserve Bank of Kansas City: “What can be done to remedy the situation? After the Great Depression and the passage of Glass-Steagall, the largest banks had to spin off certain risky activities, and this created smaller, safer banks. Taking similar actions today to reduce the scope and size of banks, combined with legislatively mandated debt-to-equity requirements, would restore the integrity of the financial system and enhance equity of access to credit for consumers and businesses. Studies show that most operational efficiencies are captured when financial firms are substantially smaller than the largest ones are today.” New York Times, December 1, 2010.
Jon Huntsman, former governor of Utah
Roberta Karmel, former Securities and Exchange Commissioner: “Besides a few minor reforms, there has been no political will to radically change the regulatory system or the composition of the banking industry.” She suggested using the Public Utility Holding Company Act of 1935 as a model for breaking up too-big-to-fail banks. Barron’s, February 4, 2012.
Henry Kaufman, president Henry Kaufman & Co.: “A much better approach would be to prohibit any financial institution from remaining or becoming too big to fail. This would require that regulators downsize large financial conglomerates. In this process the prime targets for divestiture should be financial activities that pose risk to the stability of the deposit function as well as operations that pose conflicts of interest.” Wall Street Journal, November 10, 2009.
Ted Kaufman, senator from Delaware: “We need to break up these institutions before they fail, not stand by with a plan waiting to catch them when they do fail.” Huffington Post, March 18, 2010.
Mervyn King, governor of the Bank of England
Arnold Kling, member, Mercatus Center’s Financial Markets Working Group. “I agree with those who would like somehow to have banks broken into smaller units and subject to market discipline (through subordinated debt, for example), so that regulators are under less pressure to get regulations right or to engage in bailouts when banks fail.” Washington Post, June 15, 2009.
David H. Komansky, former CEO of Merrill Lynch
Jonathan GS Koppell
Michael Lewis, author of The Big Short. “Along with the other too-big-to-fail firms, Goldman needs to be busted up into smaller pieces. The ultimate goal should be to create institutions so dull and easy to understand that, when a young man who works for one of them walks into a publisher’s office and offers to write up his experiences, the publisher looks at him blankly and asks, ‘Why would anyone want to read that?’ The New Republic, February 4, 2013.
Allan H. Meltzer
New York Times editorial page
Gerald P. O’Driscoll Jr.
Philip Purcell, former CEO of Morgan Stanley
John Reed, former co-CEO of Citigroup
Harvey Rosenblum, chief of Dallas Fed’s Research Department: “TBTF institutions were at the center of the financial crisis and the sluggish recovery that followed. If allowed to remain unchecked, these entities will continue posing a clear and present danger to the U.S. economy. As a nation, we face a distinct choice. We can perpetuate TBTF, with its inequities and dangers, or we can end it. Eliminating TBTF won’t be easy, but the vitality of our capitalist system and the long-term prosperity it produces hang in the balance.” — “Choosing the Road to Prosperity, Why We Must End Too Big to Fail—Now,” Federal Reserve Bank of Dallas 2011 annual report, March 21, 2012.
Bernie Sanders, U.S. Senator from Vermont
Warren A. Stephens, head of Stephens Inc. in Little Rock, Ark.: “It is time we rid ourselves of banks that are too big to fail. The threat that these mammoth financial institutions represent to our economy is too great. Size and scale are not the advantages they were thought to be. In fact, they are the problem. Until real reform occurs, we face the danger of another crippling banking crisis.” –”How big banks threaten our economy,” Wall Street Journal, April 30, 2012.
United Nations Commission of Experts on Reforms of the International Monetary and Financial System
Paul Volcker, former chairman of the Federal Reserve: “The risk of failure of ‘large, interconnected firms’ must be reduced, whether by reducing their size, curtailing their interconnections, or limiting their activities.” – Statement to the Senate Banking Committee Subcommittee on Consumer Protection, May 9, 2012.
Wall Street Journal editorial page
Sanford I. Weill, former CEO of Citigroup: “What we should probably do is go and split up investment banking from banking. Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.” — CNBC, July 25, 2012.
George Will, Washington Post conservative columnist: “It is inexplicable politics and regrettable policy that Romney has, so far, flinched from a forthright endorsement of breaking up the biggest banks.” –Washington Post, October 12, 2012.
Luigi Zingales, professor at the University of Chicago Booth School of Business: “I have to admit that I was not a big fan of the forced separation between investment banking and commercial banking along the lines of the Glass-Steagall Act in the US…. Over the last couple of years, however, I have revised my views and I have become convinced of the case for a mandatory separation.” — “Why I was won over by Glass-Steagall,” Financial Times, June 10, 2012.