Breaking Up The Banks
Hey everyone,
So I wanted to post and see what you all thought about the increasingly popular notion that we should break up the largest banks. At first, I was largely against the idea but now that I think about it I really think everyone would benefit from a competitive pool of smaller (yet still significant) sized banks. I'd like to reference when the Gov. broke up AT&T as an example. When they were forced to split into other companies I bet we can all agree we are all better off for that. I also believe from our point of view that comp would actually raise for lower to mid level employees.
What do you guys think? Obviously shareholders and upper upper level executives wouldn't be thrilled but I think it would actually benefit the nation in the long run.
Do you mind elaborating on what you mean by break up the banks? You are aware that prior to the passing of Gramm-Leach-Bliley Act, which repealed parts of Glass-Steagall, banks were actually forced to take on one of three roles - Investment Bank, Commercial and Retail Bank or Insurance Company - and be forced to stand by that role. So here's the question then... are you in favor in returning to Glass-Steagall? Or are you proposing something entirely different than had been in place through the passing of the GLBA.
As usual, the Left identifies the correct disease but prescribes the wrong cure.
The solution is to not break up the big banks. The solution is to make it easier for small banks to form. Since 2008, only 1 bank has formed in the United States (that's unprecedented in American history). The reason small banks aren't forming is because banking regulation is so onerous that it has become nearly impossible for small banks to deal with compliance. As a result, no new banks have formed. Then you've got Dodd-Frank, which has institutionalized "too big to fail", essentially agreeing to bailout any bank in the future if it is considered "systemically important". This incentivizes banks to get bigger and bigger--the federal government has promised to bailout any bank that fails that is big.
Our banking regulations have completely failed. This is one of the reasons that the U.S. economy is barely chugging along.
Well, there is some need to break the big banks up. Although you are right and making it easier to form small banks (apparently it only costs $12MM from what I hear... who knows) to open is a huge factor to mitigate this issue. The big problem is not that they are integrated, it's how do you protect the consumer deposits. What Glass-Steagall did was prevent Banks and Insurance companies from having a retail/commercial arm. Gramm-Leach-Bliley effectively allowed an investment bank or insurance company to have a secondary deposit base that can be used to cushion losses. I mean, if you remember the JP Morgan CIO Scandal from a few years ago (In a nutshell, JPM's CIO and Treasury group arbed the HY and IG Indexes and while they made significant money on the trades, they also cornered the market and nearly blew up the bank. The kicker is that they had ~$450 in Excess Consumer Deposits that they used to help fund the trades. Those Excess Consumer Deposits came from the Commercial/Retail banking unit), that's a prime reason why I am all for breaking up the banks. I mean, I'm less concerned about the concentration of wealth that the biggest banks have, but more the need for consumer protection in the event of problems like this. Don't get me wrong, there is legislation in place that supports TBTF establishment which needs to stop ASAP, and the system is built to incentivize TBTF, but the first thing that needs to be done is reduce the likelihood of the consumer being screwed. That's why I referred back to Glass-Steagall and Gramm-Leach-Bliley, because the impact those two laws had was huge. The former stood as a consumer protection act while the latter served to make it easier for potential abuse and misuse of the depository base.
I'm not sure breaking up the banks would create any advantage in the competitive environment. The industry isn't monopolised by any single major player, it formed by a number of large competing institutions with highly interchangeable products. For investment banking in particular, the customer also holds a strong enough position to negotiate terms they are happy with, and seek help elsewhere if they aren't. Compare this to your AT&T example, where the end consumer has zero bargaining power, and limited options.
I agree with Virginia Tech's point in regard to barriers to entry. If you look at retail banking/lending, a lot of small firms can find cheap funding opportunities that aren't scalable for big banks. This is a big advantage for consumers.
Overall, i feel if you were to argue for breaking up the banks, it would only be valid from a system risk pov (the consumer effect is small). Maybe if they reduce systematic risk through smaller institutions, they could lessen regulation, and encourage new entrants? Just a thought, not sure how that would pan out.
The argument here is not a question of competitive advantage, but when four banks (JPM, BAML, C, and WF) control ~$4.5 Trillion Dollars in deposits, but what happens if there is a problem and the bank taps into the excess deposits it holds to fund the gap. You have to consider that the depository base only makes up part of the $6.5 Trillion in assets these four banks have. The next largest, US Banc, it's got ~$409 Billion in deposits vs ~$410 in assets. Do the math there. That's the issue with breaking up the big banks... it separates out the depository base from the investment banking aspects.
Your agreement is on the basis that... what... there is no monopoly? You confuse industry segmentation with the industry overall. That is why I mentioned the JP Morgan Whale from a few years ago. Go read up on it. The Treasury/CIO Gropup made Investments in HY and IG Credit Swap Markets as part of their synthetic loan portfolio. This resulted in losses and should have caused anyone to look at the breakdown between assets, liabilities and equities that were used in the decisions to fund this. And that's not even looking at things from a Risk Management standpoint, which, I might add, was non existent because Iskil got away with whatever he wanted. Where did the difference in funding come from? The excess deposits that the bank had went to fund the trades, which is where the problem lies. It's one thing to lend out the excess deposits in the form of loans or invest the excess deposits into safe, liquid, government assets and it's another to have a bank use those deposits to potentially fund investments for their CIO/Treasury group. JP Morgan used more than $350 Billion in funds from Federally Insured Deposits. That's a clear case of moral hazard. That's what people are complaining about when it comes to breaking up the banks. No one cares about the competitive advantage that an IBD has when discussing breaking up the banks. It's not a discussion on one bank offering a better or worse product than others - it's a discussion about consumer protection and ensuring that banks don't improperly use their clients deposits to fund investments that these deposits should not be used for in the first place.
It was pretty ambiguous, so maybe I'm wrong, but I'm pretty sure OP's comments were in reference to competitiveness and advantage for consumers. You've somewhat run away with the topic - not a bad thing, what you are discussing is more interesting. Anyway..
I agree with you though, hence my comment: "Overall, i feel if you were to argue for breaking up the banks, it would only be valid from a system risk pov (the consumer effect is small)." I'm really just talking from a TBTF perspective still with the above, but I second concerns with separation.
I actually think splitting up the banks could benefit shareholders, and that as S&T becomes much less profitable (part natural business model maturing and part capital regulations), many big banks will split up voluntarily. When you do napkin math and realize that most of the big US banks trade below book value, I think it's obvious that the banks would benefit from splitting up. The reason these banks trade below book is because of the risk of S&T and the earnings volatility hangover since the financial crisis. If you spun/sold S&T off into a separate entity, bank stocks would probably rise on the news with increased earnings predictability, and while cost of funding for trading businesses would increase, they would no longer be required to hold so much equity against their trading positions and could be more profitable (and investors could invest in them if that's the risk profile they were looking for). I worked on a desk that interacted with the JPM Whale, and have friends on other distressed / structured products desks who will tell you the vast majority of their profit still comes from just buying and sitting on securities and being completely subject to the market (aka still "prop" trading). Those businesses detract from the overall ROA and hurt share prices post-crisis. I think if actual "synergies" were worthwhile, these banks wouldn't trade at such a heavy discount to book value.
I agree with your opinion on benefiting share holders considering their discount at book value. Do you think that the banks would benefit being split up into their original subsidiaries but being allowed to prop trade and with less of the post crisis regulation considering they would no longer be 'too big to fail'.
I agree with Virginia Tech 4ever
Although C-level executives may not see salaries like in 07, being smaller, banks with lower regulation and a higher return of capital may be able to justifiably pay them more than they are earning now. Equally, I feel that there would be a lot less bureaucracy and a much clearer line to the top for employees.
Monkey shit for you The AT&T reference is out of scope Banking now is global, and with China's steroid-reserve-powered banks you need heavyweight US champions to compete globally
No... I wouldn't argue that Grandma Bell was not out of scope. I think that the idea was worth exploring, but I think it was misapplied. The OP focused on the use of Grandma Bell as a means of increasing competition when the RBOCs were actually a rather clear example of creating an oligopoly via regional monopolies. Although you have a number of independent systems (such as GTE, which oddly enough acquired a number of the largest independent providers, prior to their merger with Bell Atlantic), the RBOC system dominated most of the telephone user base. It wasn't until the '96 Telecommunications Act that deregulated the Long Lines business, in which competition could be had as long distance service could be offered by any provider. I would have presented the entire issue of in reference to the long lines business as the RBOCs and local competition was the result of patents expiring.
However, the argument for using Grandma Bell ties back into the notion of what Glass-Steagall was, a consumer protection act that had, to some effect, mirrored the Sherman and Clayton acts. The breakup of Grandma Bell effectively each of the 7 Baby Bells and AT&T (which was AT&T Long Lines, Bell Labs, and two or three communications ventures) served to represent the different aspects of finance, Insurance, Retail and Commercial Banking and Investment Banking/S&T/Prop Trading/VC/PE and everything else ensconced in IB. Keep things broken up and it offers up more competition... that's how you frame the Grandma Bell argument.
Whoa guys, just wanted to see what everyone's perspective was. I think people are making valid points, I'll agree the AT&T reference is out of scope. After doing further research I don't think I'd want to bring Glass-Stegall back.... don't really think it's necessary.
Sandy Weill: Break Up the Banks (Originally Posted: 07/26/2012)
So the big news yesterday was that Sandy Weill, former Citigroup CEO and slayer of Glass-Steagall, called for the break-up of the Too Big To Fail banks. Take a moment to savor the rare irony in that notion. The guy who more or less created the monster is now calling for its destruction. Is he atoning for his sins and finally looking out for the little guy?
Ummmm...not so much.
His rationale is that smaller banks run leaner and therefore pay their executives better bonuses. He didn't say that, exactly. But if you read between the lines, it's pretty obvious:
Interestingly enough, legendary bank analyst Mike Mayo thinks the proposed break-ups could be a huge boon for investors, specifically Morgan Stanley shareholders. At the same time he was calling bullshit on Weill's hypocrisy, he said Morgan Stanley's break-up value was $32 a share (the stock is currently $13) and that MS short sellers would get "blown to Neptune" if a break-up were announced. That's some food for thought right there.
Does anyone doubt that breaking up the banks would be a good thing for the US economy? I'd like to hear the arguments against it, because I'm having a hard time coming up with one. Repealing Glass-Steagall was a 100 year storm-level fuck up, and the tsunami it caused destroyed the entire planet's financial system in less than a decade.
Maybe it's time to close those floodgates again. Ya think?
i'm expecting WSO guys to start calling Sandy Weill a socialist...
I think these comments from former executives are useless in that it will have no influence.
But I do seriously believe that deposit-taking firms should not be allowed to trade with their own capital.
And one thing we should be careful about when discussing this matter is that the real problem lies in what sorts of activities the firms are engaging in, rather than the size. The reason why big firms are being hammered by the public and regulators is because it usually is the case that these firms happen to do all the perceived bad things, such as selling insurance against default, trading with their own capital, etc.
That being said, I actually think banks that only do traditional things, such as lending to corporations , taking deposits, setting up ATMs etc., can benefit from their size if they are willing to expand overseas.
Come on, it's Sandy Weill. I actually laughed when I saw this yesterday. Although Glass Steagall was being circumvented abroad, he's the guy who officially opened the floodgates.
In other news, Bill Gates calls technology evil, and Jack Welch declares that internal management training is useless. Sandy Weill wishing for smaller banks strains belief.
First off, Sandy of all people calling to break up the banks is hilarious considering he helped break the mold. I think , however, there is something to the fact that he of all people is realized what a cluster it has become. The only arguments I've heard for it are that now foreign banks will have a competitive edge and the United States will lose it's financial dominance throughout the world if our banks are put at a competitive disadvantage against foreign institutions. I'm not quite sure I buy that whatsoever and that seems like more of a standard line repeated by lobbyists. I for the life of me can't understand why banks don't like this. I get it from a perspective of oh, we hate regulations, as I hate regulations. But really, why stay massive but get neutered in the process when you could break up and do whatever it is you want to do again.
San Jose, I actually disagree with you on that one. I think the issue is totally size. If I have a couple million and am engaging in all sorts of CDS swaps and exotic instruments and I blow up, no one cares. It hurts myself and whoever invested in me. Done and done. When I lever that up and go to 500 million it still doesn't hurt that much. When you start talking about doing it with hundreds of billions, even trillions and having deposited capital underneath it that is publicly insured and could be affected if I take on too many derivatives bets, that is when it becomes a problem. Increase that to trillions and you get my point. Scale is everything when it comes to systematic risk. Thus, the bigger you are the more scrutiny you get on your activities.
Typically those who rail the most stand to lose the most. Usually it starts out with "we need to be careful..." and ends with "...and then the gravy train just came to a halt."
Glass Steagall shouldn't have been repealed in the first place. This is yet another one of Alan Greenspan's legacies of laissez faire policy gone wrong. Then again, how tough was it to believe he didn't see subprime coming? I mean, have you seen those glasses Mr. Magoo is wearing?
Just because it's ironic, doesn't mean it doesn't need to be done. JPM anyone....? Just sayin...
Sandy Weill : banking ideas :: Newt Gingrich : politics
Next, is Mike Tyson giving a seminar on sexual harassment? Will Newt Gingrich detail his adultery while he pursues an adultery inquiry? Can we get an AMEN from Christopher Hitchens? Dude made a career and a fortune fucking A LOT of people over, I mean a lot, this was a systemic mistake....now we're supposed to want to hear from him at all?
We've seen two models: (1) G/S seperated banks, decades of relative stability (2) universal bank era, total collapse, gov't receivership of entire financial industry
So y'all tell me. Results speak for themselves. Typical fucking boomer "I got mine, fuck you. Oh, and BTW, here's some good ideas that I fought against". We're way beyond atoning for past misdeeds and cleaning up a legacy: Sandy, please, KILL YOUR SELF
I got mine
As Ray Liotta said in Goodfellas, "Oh...business is bad? Fuck you! Pay me!"
Either looking to profit, or looking for last minute redemption.
Kind of doubt the latter.
I just saw the swing PIMCO took at Sandy on DealBreaker, fantastic.
http://dealbreaker.com/2012/07/oh-no-you-diint/
[quote=Grayson]I just saw the swing PIMCO took at Sandy on DealBreaker, fantastic.
http://dealbreaker.com/2012/07/oh-no-you-diint/[/quote] Loving the comments.
Seriously, Bess Levin would be an awesome guest here....whaddya think Eddie?
Mike Mayo is the fucking man. "Blown to Neptune" made me laugh out loud.
Sandy Weill, on the other hand, can eat a dick. I'm glad he's calling for it because it's tough to ignore the Father of TBTF, but he's still a dickhead for calling for this after he made a mint and helped destroy the global economy.
I've said it time and time again, there are no legitimate arguments against bringing back Glass Steagall. None.
Ron Paul addressed this on Bloomberg yesterday.
at the 2:00 mark
Ron Paul is one of the few people that gets it.
With that said, the moral hazard can't be removed without bringing back Glass Steagall. The gov't and the Fed will simply NOT let the banks fail. If shit hit the fan again, I really do not believe that the Congress, President, and Fed would let the banks fail. They just won't do it. And that is why we need Glass Steagall. Because we won't let them fail, we need rules to stop TBTF banks from existing.
I find this funny Eddie because this is somewhat characteristic of good old Sandy. He wants to break up the banks because he wants more money. This, from the guy that pushed for Glass Stegall to be repealed, I've got one word to describe him. Hypocrite. The man's a hypocrite. He pushed for Citigroup to be formed now he wants them to be broken up since it's unprofitable. I'm not shocked, but even in his apparent hypocrisy he has a few good points. First, Banks should reduce leverage to between 12-15 times. Second, there needs to be transparency, so that nothing is hidden off balance sheet. Third, assets must be marked to market every day. For as much as I think he's backpedaling after his desire to create megabanks, at least he's being honest with what needs to be done to help fix the problem he started.
I love listening to Ron Paul. The only thing i don't fully understand is his advocation of a gold backed dollar. Can any one elaborate and explain his reasoning?
Well, Phil Purcell, former head of MSDW has made the argument that commercial banking should be separated from investment banking. His view is that it would be better for stockholders. Fact is, if Glass Steagal were reinstated, the Volcker Rule wouldn't matter any more. Traders at investment banks can get back to trading their own money and not simply acting as an agent.
I agree that repealing Glass-Steagal was a huge error. It enriched Robert Rubin but screwed over a lot of other people. Besides, it only served to handcuff banks today from engaging in trading the way it should be.
Ah ... Citi. The bank that is too big to fail , yet still keeps failing.
haha, old school salomon guys at my work are still pissed at this. "that fucking cocksucker took the money and ran and now he's on this bullshit?" zero hedge was killing it on twitter when dude was on squawk box
Holy shit, you've still got Salomon guys around? Are they on fucking ventilators???
A fragmented banking system is just as likely to face liquidity issues from a panic as our current system. This is the exact reason the Fed was founded in the early 20th century!
We just have moved more money from FDIC insured deposits to institutional investors and funds which are not explicitly backed by the government, making us more prone to panics.
Everyone should read "This Time Is Different" by Kenneth Rogoff. He collects empirical data on the past 800 years of economic crises. This has nothing to do with consolidated banking systems-just confused politicians and reporters misunderstanding corporate executives (not picking on you Ed).
It is not about "fragmenting" banks because they are too big. Is about separating investment banking from commercial banking. The last financial crisis would probably never had happened or been much milder if Glass-Steagall was still around. I don't see any benefits in having banks be both commercial and investment banks, none.
I was under the impression before Glass-Stegal, commercial banks handled secured and unsecured mortgage loans. And the depositors in these banks still would not have had their money explicitly backed by the US government-so a panic still would have wiped the commercial banks out.
That would leave the investment banks in tact-but that would have to assume the investors who lost money in MBS did not pull different accounts out of the investment banks to keep themselves solvent.
But I do see a good point that if withdrawal risks did not spread to investment banks, a credit crunch would not affect the private sector as much. Can you convince us that they would be truly isolated?
Mixing investment banking and commercial banking was never a good idea. Much of the magnitude of the meltdown was due to banks that had become supermarkets. The goals and cultures of the two models are too different and in conflict with one another to the point that they cannot function together as a whole. The traders should never have been given cash to play with via deposits. At the same time, the lending function should not have been subjected to the whims of the investment bankers who were interested in underwriting as many MBS's as they could to increase underwriting revenue. The lenders then followed suit and didn't care about the integrity of their loans.
Plus, the Volcker Rule wouldn't even be an issue since if the traders didn't mix with commercial banking, they could just trade their own money like in the old days. It would be their money to trade if the investment banks were independent. They could borrow more money from outside sources, but the complete ban on prop trading wouldn't be an issue.
Breaking Up The Largest "Universal Banks" - Bullish? (Originally Posted: 04/17/2013)
I came across an article from Reuters discussing the potential benefits of breaking up the largest "universal" banks, probably places many of you work now or potentially in the future. The article notes that three analysts have recently reported on some of the benefits of this particular action, analysts from Wells Fargo, CLSA, and J.P. Morgan, which adds an interesting twist to the concept.
It should come as no surprise that the article notes that the impetus of this action comes from the new and expansive regulations in areas like capital requirements, among others, found in Dodd-Frank:
What I find particularly interesting is the comments made by Wells Fargo analyst Matthew Burnell:When I read this, it appears that Burnell is suggesting that the largest banks are suffering from something of a conglomerate discount. I find this peculiar in that "investment banking", "consumer banking", and "wealth management" don't seem to be all that different. At least not in the way that light bulbs and jet engines are; two products built by GE, a company that is undoubtedly a conglomerate. The alternative to this perspective is that the Dodd-Frank legislation is working as intended, as the article notes:
Perhaps I'm being cynical, but I rarely see federal legislation, in general, work as intended, at least initially. However, there do appear to be some revisions being considered to beef up the earlier legislation with some extra regulations for large banks, and as the article later describes:
I suppose requirements like this could be the motivation for the larger banks to begin to separate their operations. I'll be interested to see the unintended consequences, perhaps big banks will opt to break up in order to avoid some of the more onerous requirements noted. How it affect banks that aren't "too big to fail" on the other hand, has yet to be seen. But I digress. The article closes on an investing note that worth considering:
What's your opinion on these large banks? Does their current size represent a risk in your eyes that would require a discount? If they were broken up, do you think the different parts would be more valuable than the whole?
Personally, I think a break-up would be beneficial. These monolithic structures tend to only benefit the dead wood in the organization. I don't think the synergy case is too strong in a market that is so heavily regulated.
Let the IBD stars go off and do their advisory thing, the S&T guys do whatever they want (prop desks/lever up) because it's no a longer systemic risk, let the commercial bank/PWM merge or stand on its own.
Then all the so-called revenue generators will be able to put up or shut up. It would be nice to get some of these guys off the FED tit as well. Real broad strokes here...looking forward to seeing other responses.
I mean, this already happens. There are tons of prop shops and hedge funds on the street. There are far more boutique advisory firms than there are BBs. What is left at the largest banks is typically the type of business that is particularly synergistic with the large bank platform (i.e. BAML and JP make most of their IB fees underwriting debt and equity, not advisory; they syndicate these transactions through large bank networks; they execute IPOs through their capital markets and S&T platforms; etc.).
Riddle me this: everyone seems aghast to the concept of large banks. Outside of the concern that the largest banks participate in the securities business, what exactly would the difference be if we had networks of regional banks in their stead? Historically, the overwhelming majority of FDIC payouts have gone to small regional banks. What exactly would change if a swath of thousands of regional banks went insolvent vs. one mega bank?
Frankly, I'd rather speak to a robot. Doesn't talk back, doesn't steal the silverware, and Dick's gonna get me an exemption.
I would argue that a large network of smaller banks would be a more robust structure for commercial banking. I'd imagine something like that would be less fragile to disruptions or shenanigans (think "London Whale" for instance). That being said, if thousands upon thousands of them were found to be insolvent, then I suspect the difference would be minor (the FDIC would be overwhelmed and the Fed would step in). But, I think the draw of the decentralized banking structure would be that it's less likely for thousands upon thousands of smaller banks to become insolvent then one mega bank.
Just my $0.02.
They wouldn't need to be bailed out to prevent a global financial collapse?
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