Nov
17

Breaking Up The Big Banks – Part II

I previously wrote a post supporting the break up of the big banks. This is a follow up to that post from November 7.

Rex Nutting from Marketwatch also supports breaking up the big banks in a follow up article he posted today.

There is a simpler answer, one endorsed by former Fed chairmen Paul Volcker and Alan Greenspan, Sen. Bernie Sanders, and Bank of England Gov. Mervyn King: Break them up. Any bank that’s too big to fail is too big to exist.

Nutting’s article brings to light that Rep. Barney Frank is endorsing creating a $200 billion insurance fund to support the unwinding of a big bank.

The fund, like the fund of the Federal Deposit Insurance Corp., would be paid for by a tax on the industry. The idea is to make sure that the banks pay for their own cleanup ahead of time, instead of sticking the bill with the taxpayers. If the banks have to pay in advance, maybe they’ll be just a little more careful.

The problem? The $200 billion insurance fund could not even come close to covering Bank of America’s $2.3 trillion in assets or Citigroup’s $2.04 trillion in assets.

So we are getting the typical Barney Frank and Congress paper over attempt. The big boys pay into a useless fund (which costs will likely be passed onto the consumer) in what looks like an attempt to fix the problem while business as usual continues. Only if the fund was large enough to essentially tax them into a breakup would this proposal have any teeth.

I still have not been able to read anywhere arguments on why we need these big banks and the advantages they provide. And even if there are some advantages, do these advantages outweigh the hazard of too big to fail?

Everyone except the voters of Massachusetts knows that Barney Frank is one of the most damaging figures ever to step into the halls of Congress. We have the case of the fox guarding the hen house.  But where is Barack Obama’s promise of change? As I mentioned previously, breaking up the big banks could be a chance to pass bi-partisan legislation that would get support from both liberals and conservatives.

I’m wishing Mr. Sanders the best of luck with his efforts to bring real change.

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  • victorberry
    I agree that "too big to fail" is "too big to exist." However, the big banks can't be broken up now if it means separating their investment banking and deposit banking sectors. The big banks are making money only with their investment banking services (i.e., taking money from retail investors) and everything else is insolvent. I can see how BofA, C, and JPM could be broken up into multiple smaller regional entities, but what about GS and MS?
  • I'm a realist and perhaps the banks would have to be broken up over a number of years. Regarding the investment banks, I'm not qualified especially without research to give give an opinion but it would seem to me that putting the old leverage ratios back in place and splitting banking and investment banking (putting Glass-Steagall back) would be a good start.

    Also, the big banks are making huge money off conventional banking right now. They are borrowing at 0% and buying treasuries with yields of 2-4%. Free money.
  • To even join in this conversation I have to pretend that the CFR and Trilateral folks couldn't possibly have anything to do with this. I can't so I won't, great post CC!
  • I'm always up to hear about conspiracy theories. Bring it on.
  • I just read your post on oil. I've been saying for a while that I think the dollar will find support at the 2008 lows. I see you are bearish on oil in the immediate term as well. If oil can breakout here, I would be pretty surprised.

    Natural gas taking another beating. I may give UNG a look at $8.5.
  • I do think 90.24 is still in the cards until the SP 500 trades the 1130 area. But the cluster support level at 58.32 is almost inevitable before we trade 100.
  • My background is in banking. I said a last winter this whole bank bailout bs is the largest bank robbery in the history of the world. The perpetrators walked calmy through the gathering crowd, virutally unnoticed and with no repercussions. What a crock.

    This all started with the Banking Crisis in the mid-1980s. I was a external bank auditor in the middle of the country, where the meltdown occurred. The FDIC didn't want small banks anymore. They wanted large banks, regional banks, money center banks to spread out the FDIC's geographical risk, so a bank wouldn't be dependent on a very local economy. Bigger was better, big banks wouldn't fail. Now that has backfired on the FDIC. Sheesh...
  • What kills me is that after the robbery no changes are even made to prevent it from happening again. I'm a realist and know that when the government gets involved many will take advantage and use it as an opportunity to grab a windfall. But man, at least fix this too big to fail problem.
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