Inside Financial Services

Let’s Hear It For The Big Banks

George Will's call for a breakup is 100% wrong

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In his column this past weekend, none other than George Will himself joins the new drumbeat emerging among conservatives that the big banks be broken up. He really ought to know better. Will says he objects in particular to the credit-cost advantage the big banks are said to have, thanks to their implicit government backing, from being too big too fail. He also doesn’t like the big banks’ complexity, although it’s not clear why.

What’s happened to the poor guy? Even if the problems Will cites are as bad as he says (and I doubt it), there are fixes to them that are far less radical than the breakup of the country’s largest financial institutions. (And make no mistake about it, such a move would be radical. If Bank of America were broken up into pieces smaller than the $100 billion limit on assets that Dallas Fed president Richard Fisher has proposed, for example, the company would atomize into 22 separate institutions. JPMorgan Chase would turn into 24 institutions.) That’s awfully radical surgery to counter a supposed 50-basis-point credit-cost advantage. Why not just charge the big banks even more-on top of the premium hike that was included in Dodd-Frank–for federal deposit insurance, and be done with it? And by the way it’s not at all clear that any credit-cost advantage the big banks have is because they’re supposedly too big to fail. They’re also more broadly diversified, both by product and geography, than community banks are. Maybe that’s why their credit costs are lower.

As for the complexity that troubles Will so, some of us prefer to see it as “diversification.” The fact is that the big institutions that ran into the most trouble following the housing bust -companies like Washington Mutual and Countrywide-were the sort of one-product wonders that George Will seems to believe ought to be the model financial institutions of the future. That’s nuts. There are a lot of reasons why companies such as JPMorgan and Wells Fargo came through the crunch as well as they did (they were superior mortgage underwriters, for one thing), but critics persist in ignoring the fact that their mortgage businesses are just one of many in the companies’ portfolios, and that strength in those other businesses played a big role in offsetting their mortgage losses. This is business school 101. George Will should understand it.

Meanwhile, despite what their critics seem to think, large global financial institutions really do add value, believe it or not-notably by doing an especially effective job providing a broad array of financial services to large global companies. A handful of smaller providers just can’t do that as well. That’s why big companies prefer to deal with banks like BofA and JPMorgan in the first place!

I understand why calls for the breakup of the big banks keep coming from certain quarters. Some people just don’t like the idea of large, global financial institutions, and honestly believe (wrongly, in my view) that the people who run them are blood-sucking plutocrats who nearly ruined the world and who need to be brought down a few pegs. Fine. I get that. And I understand, too, why the Republicans want turn themselves into bank-bashing populists to get in sync with tenor of the times. They’re politicians. It’s their job.

But isn’t it possible for someone in a position of responsibility to propose a banking policy for the country that’s based on something other than retribution and near-term political gain? A breakup of the big banks would be a disruptive disaster that would weaken the U.S. financial system and clog the creation of credit. And if it leaves us (as it would) with more Countrywides and fewer Wells Fargos, the financial system would be more fragile, not less so, heading into the next crisis. That would be insane.

Breaking up the big banks is a terrible idea, regardless of what George Will says.

What do you think? Let me know!

19 Responses to “Let’s Hear It For The Big Banks”

  1. Ole

    Also, Wells Fargo and Morgan were not run by crooks. Look at Ken Lewis of BofA and others like him. Too big to jail? That’s nuts.

  2. c smith

    “Why not just charge the big banks even more–on top of the premium hike that was included in Dodd-Frank–for federal deposit insurance, and be done with it?”

    Great idea. A 50% higher premium ought to do it.

  3. BMac

    Tom this time I have to disagree. While we have a Wells Fargo, we also had a Wachovia and almost a Citibank that failed. As a taxpayer, I don’t want to be in the business of bailing out banks and absent some mechanism to prevent that outcome, banks may have to be smaller.

  4. DSB

    Tom, let me propose a more useful alternative. Repeal every piece of legislation Phil Gramm ever had a hand in authoring.

  5. rivvir

    “But isn’t it possible for someone in a position of responsibility to propose a banking policy for the country that’s based on something other than retribution and near-term political gain?” Not any more. Not by any political party, great or small. For that we can blame our own selves, not only our politicians. No matter, i actually agree with you. Not only for ease of, ” A handful of smaller providers just can’t do that as well. That’s why big companies prefer to deal with banks like BofA and JPMorgan in the first place! ” but also because we are in global competition. Maybe we can control the bigger foreign banks when they’re doing business on our soil, but there’s no regulation i know of that says they can’t do business with these foreign banks off our shores if they find that route to be more convenient and/or efficient. You’d, of course, know better than i on that score.

  6. Talig

    You write a piece about breaking up the banks without once mentioning moral hazard. The problem is creditors of the big banks shovelling money to bad actors, potentially in the trillions, all the while reassuring themselves that if the bank goes under, the American taxpayer will make them whole. It still galls me that creditors and derivatives counterparties of AIG got a hundred cents on the dollar.

    We see industrial companies doing split-ups and spinoffs all the time. If they can do it, then big banks can do it.

  7. Ken Greenberg

    I say break up the big banks when they break up the big Federal government. Start there. Dimon loses $8 billion in a trading loss – while still showing a profit – they’re all over his ass. They lose $1.2 trillion a year, lie to us about the stimulus – which has been quietly buried in the baseline budget every year since 2009 – and they want to break up profitable banks? in case??? It’s a sad joke. Another one: Barney Frank largely responsible for ignoring multiple cries to reign in the GSEs helps break the backs of banks stuck with subprime and mark to market. Who do they get to fix the mess? Frank! As in Dodd-Frank. They guy who blew it is now the genius who will fix it? Only in DC.

    Side note: all this yapping about budget cuts. If only the media would do real reporting and start rewriting the DC propaganda and call them what they really are: decreases in the proposed increases. Yes, it’s shorter to say cuts, but it’s hard for even the average American moron product of the Federal dumbed down education system to get confused between a decrease in the proposed increase and a cut. Enough already. Even the sequester is a decrease in a proposed increase. The Truth is Out There! Can’t we get any???

    I’m all for paying Congress to take a year off with pay. No more bills. No more regs. Ugh!!!

  8. Gerard de Bruin

    Hallo Tom,
    You make a convincing argument. I live in the Netherlands and we are down to only a few banks, two of them government owned not much competition anymore. On top of that increasing government regulations, as a result of that it is the government in cooperation with the banks against the clients.
    Thank you for your letter much appreciated.
    Regards,
    Gerard de Bruin

  9. Larry Horan former Smith Barney colleague

    Spot on! I could not agree more with you.

  10. Brent L

    As a commercial lender working for a large regional bank for the past 30 years, my experience has been that the lowest quality lending has been done by the small community banks. The average person does not understand low quality lending done by these community banks can have a terribly negative impact on these borrowers such as bankrupcty, unemployment, and divorce. Low quality borrowers, like water, seek the lowest level. Tom, your assessment is right on.

  11. Acarolinensis

    Let me see if I get this right. Currently big banks do something dumb and we bail them out. Your objection to knocking everyone down to $100B or less is that they could go out of business? If they do something dumb, they SHOULD go out of business, just like everybody else. Natural selection AKA the capitalist market at work. I’m sure there will be plenty of banks left to pick up the slack . . . Once the gang figures out the how system works, it should be plenty robust.

  12. Bancitatus

    Ken Lewis was a bleepin’ idiot and a credulous dolt but a criminal? Nah. Dick Fuld, on the other hand, would look good in prison stripes, along with the Man with the Tan.

  13. Bancitatus

    Ken Lewis was a bleepin’ idiot and a credulous dolt but a criminal? Nah. Dick Fuld, on the other hand, would look good in prison stripes, along with the Man with the Tan.

  14. Bancitatus

    Ken Lewis was a bleepin’ idiot and a credulous dolt but a criminal? Nah. Dick Fuld, on the other hand, would look good in prison stripes, along with the Man with the Tan.

  15. BH

    I enjoy George Will tremendously, however his success is not because of his analytical prowess. It is from his unmatched eloquent and erudite writing style. He has a habitual habit of making bad recommendations on many topics. It is a tendency that haunts many who espouse such detailed recommendations on so many subjects with little or no experience or expertise on those subjects.

  16. Thecardguy

    Tom, I thought you were the one who a couple of years ago wanted to break up Citi and at least separate out the card business. Did you change your position?
    I do enjoy your thoughtful comments. Keep at it.

  17. oy

    There are certainly benefits to diversity/complexity. There are also costs and the big banks have done a pretty good job of proving that costs outweigh the benefits.

  18. Frank DeSantis

    Tom, you know perfectly well that these behemoths are incomprehensible. No human being on the face of this planet has any clue, whatsoever, whether these companies are solvent. When dear, departed Mercantile Bankshares disappeared into the maw of PNC, the only bank holding company that one could reasonably assert would be the last banking company to ever go belly-up went away. After Ned Kelly did his imitation of a carpetbagger, the remainders are indistinguishable.

  19. Talig

    You write a piece about breaking up the banks without once mentioning moral hazard. The problem is creditors of the big banks shovelling money to bad actors, potentially in the trillions, all the while reassuring themselves that if the bank goes under, the American taxpayer will make them whole. It still galls me that creditors and derivatives counterparties of AIG got a hundred cents on the dollar.

    We see industrial companies doing split-ups and spinoffs all the time. If they can do it, then big banks can do it.

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