Friday, March 15, 2013

Beginning of the end for big banks?

If the biggest banks are too big to fail, too connected to fail, too important to prosecute, and also too complex to manage, it would seem sensible to scale them down in size, and to reduce their centrality and the complexity of their positions. Simon Johnson has an encouraging article suggesting that at least some of this may actually be about to happen: 
The largest banks in the United States face a serious political problem. There has been an outbreak of clear thinking among officials and politicians who increasingly agree that too-big-to-fail is not a good arrangement for the financial sector.

Six banks face the prospect of meaningful constraints on their size: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. They are fighting back with lobbying dollars in the usual fashion – but in the last electoral cycle they went heavily for Mitt Romney (not elected) and against Elizabeth Warren and Sherrod Brown for the Senate (both elected), so this element of their strategy is hardly prospering.

What the megabanks really need are some arguments that make sense. There are three positions that attract them: the Old Wall Street View, the New View and the New New View. But none of these holds water; the intellectual case for global megabanks at their current scale is crumbling.
Most encouraging is the emergence of a real discussion over the implicit taxpayer subsidy given to the largest banks. See also this editorial in Bloomberg from a few weeks ago:
On television, in interviews and in meetings with investors, executives of the biggest U.S. banks -- notably JPMorgan Chase & Co. Chief Executive Jamie Dimon -- make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.

So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

... The top five banks -- JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. - - account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry -- with almost $9 trillion in assets, more than half the size of the U.S. economy -- would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.
So much for the theory that the big banks need to pay big bonuses so they can attract that top financial talent on which their success depends. Their success seems to depend on a much simpler recipe.

This paper also offers some interesting analysis on different practical steps that might be taken to end this ridiculous situation.

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