Too Big To Be Deregulated?
As Big Banks Teeter On Edge Of Abyss, Government Regulation May Rise Again
The Treasury's Entity is seen as a Citigroup bailout by lot of people for the very simple reason that it is a Citigroup bailout. That might not be the only thing it is, but stupid is as stupid does, and one thing this stupid thing does (or will do, if it ever gets off the ground) is bailout Citigroup, which is reportedly on the hook for as much as $80 billion from it’s four mammoth SIVs. Since the fund could buy Citigroup's SIVs, it would reduce the amount that Citigroup would need to write off. And reducing write-offs is something Citi desperately wants to do right now.
There’s at least a fair amount of quiet clapping about the Treasury Department’s role in creating the Entity. Citigroup, some say, is too big to fail, and the Treasury Department should step in to prevent the kind of financial market disorder that would come from the toppling of the towering financial giant.
But this kind of logic has some rethinking the wisdom of the financial regulatory reforms that allowed banks such as Citi to grow so large in the first place. When lawmakers reformed depression era laws that stood in the way of these financial super-markets, they tended to sound libertarian notes about allowing financial innovation and the operation of the free market to control the size and scope of Wall Street firms. The era of government planning was over. So the Glass-Steagall Act of 1933, which had separated investment houses from commercial banks—most famously requiring JP Morgan to part from Morgan Stanley—was changed to permit the growth of the universal banks.
Many now think that the universal bank is a failed strategy. From Citi to Merrill to Bear Stearns, there are calls for Wall Street firms to slim down, break-up and concentrate on the core businesses that made them wealthy and famous to begin with. But was it a failure? If growing into financial giants allowed them to unilaterally acquire a secret—and nearly costless—government insurance policy, it seems like a great gamble. The executives and shareholders get the upside, while the broader public insures against failure.
“What a scam that is,” writes William Greider in The Nation.
And it’s a scam the Greider thinks is over. Banking regulation will inevitably make a big comeback, he predicts.
“At least the unambiguous truth about ‘financial modernization’ is now on the table for all to see,” he writes. “That should keep the Wall Street guys from whining for a while about the oppressive nature of bank regulation. The next reform era, when it does finally arrive, will head in the opposite direction--restoring public protections for the little guys against the greedy excesses of big hogs.”
What Greider doesn’t mention is that this era of new regulations might be coming too late. Or, rather, right on time, depending on your point of view. Resistance to a new wave of banking regulation requiring bank breakups and dividing Wall Street according to regulatory fiats rather than market demand is likely to be weak in an era when many think the financial supermarket model has failed and should be abandoned. No-one expends much time, money or energy defending a right to do something they don’t want to do anyway. What’s more, there will be plenty of money made by investment bankers spinning-off, selling and acquiring the fragments they are shoring up against the ruins of the toppled giants. Some of these people may actually be the same ones who made fortunes building the giants.
And we’ll all raise a glass to the only saloon in town where it’s never last call: the Wall Street punch bowl.
Citibank: Too Big to Fail? [The Nation]
Comments
Carney, the first sentence has me wondering if you even graduated high school. The (lack of) proofreading at DB just hit its 52 week high today. Do yourselves a favor and just read it over once before posting.
Posted by: Sweet Jesus | November 5, 2007 01:35 PM
agree w/Sweet Jesus
Posted by: Anonymous | November 5, 2007 01:37 PM
if a corporation can become too big to fail..then why do we allow mergers that create corporations that are too big to fail..seems pretty stupid to me...
Posted by: Hank Paulson's conscience | November 5, 2007 01:42 PM
The Nation is far from the best source for business analysis...
The issue is how much the "little guy" has been hurt by this whole situation. The people who are worst off are those who bought securities backed by subprime and LBO loans - those are institutional investors, not your average 401K guy. After them, shareholders in certain banks / financial instutions are hurt, but again, not sure how many of them are "little guys." Loose lending standards enabled by the spreading of risks are going to result in mortgage defaults and people going through temporary strife, but they will get back on their feet. Maybe ordinary customers are hurt because the Fed has to lower interest rates to bail out banks instead of watching inflation. Who knows. The issue is that the economy as a whole appear so still be growing and those worst off are those who probably can afford it.
Posted by: Powell | November 5, 2007 02:16 PM
Many now think that the universal bank is a failed strategy. From Citi to Merrill to Bear Stearns...broader public insures against failure
A.) Citi, BOA & JP are the Glass-Steagall universals. Unless you have a Merrill Lynch ATM card.
B.) Merrill liekly isn't TBTF, BSC DEFINITELY isn't TBTF
You have about 5 theses here mashed into one incoherent post.
Posted by: Anonymous | November 5, 2007 02:24 PM
No problem. The Chinese will bail out Citi buy buying a stake in the bank.
Posted by: Anonymous | November 5, 2007 02:31 PM
Agreed that both Merrill and Bear are not universals, but there are pressures for retrenchment at both companies. And this idea is not unrelated to the idea that Citi should be broken up. The idea is that conglomerate banking isn't working out, and firm's need to get back to what management types used to call "core competencies."
And, yes, we have too many ideas in one post. What's new, McGoo?
Posted by: John Carney | November 5, 2007 02:34 PM
First off, I think the word 'Wall Street' is flung around way too casually. Citi, JP Morgan and BofA WERE NOT 'Wall Street' - pre Glass-Steagall repreal. They were 'Main Street.'
And if Glass-Steagall were reinstated the biggest beneficiaries would be the real 'Wall Street' - GS/MS/LB etc. They could then go about their high margin business without big balance sheet firms throwing their weight around trying to muscle into the business.
Also, there would be nice money to be made from the divestitures/acquisitions of the separated retail/investment banking divisions.
Of course that would artificially diminish competition - hence inefficiencies - and hence prices of i-banking services would go up. All of that would benefit 'Wall Street.'
And as far as I know - outside of Merill - no true i-bank is interested in getting a bigger share of the checking account market. So they wouldn't care much.
Btw, Merill may do well to shed the pretence and join the 'Main Street' boys on the other side of the fence. In their hearts, they know they belong there.
Posted by: Anonymous | November 5, 2007 02:48 PM
So Bear should retrench into the mortgage and debt businesses that created all of ther losses last quarter while getting rid of their non-core, yet profitable businesses of equities trading and investment banking?
Goldman is an incredibly diverse firm, no one is asking them to retreat to "core competencies," besides their habit of dominating other firms and their own clients.
Bear, MER, and Citi just made bets too big in risky areas, it has nothing to do with retrenchment or having too many businesses.
And breaking up Citi would result in a bunch of weak businesses that would probably trade at less than the sum of the parts unless they are all sold off to Wachovia, Dubai, and China.
Bottom line is that these banks simply need better management up top.
Posted by: Powell | November 5, 2007 03:02 PM
Re: 2:48
Agree with absolutely every word you said. It's not rocket science. Force the retails to be retails and regulate the hell out of them. Let the IBs be IBs, take on risk and the inherent consequences (Drexel, SB). As for ML...I dunno, unwind it?
It would be a relief for anyone taking the helm of a major, path is laid out for you and everyone is going to make a whole bunch of money unwinding these things. Also, it might bring some actual talent back from the PE side of the fence into banking.
Posted by: Anon 2:24 | November 5, 2007 03:08 PM
Hate to say it, but lack of gov't involvement went screwy on this one...certain industries (power and commercial banking) are better off highly regulated, you don't hear about anyone clamoring to privatize the police force.
I think the idea of core competency is very unfashionable right now. Would you rather be GE or Dell? Blackstone is a conglomerate bigger than anything in the 60s. BSC's Chinese co-invest wasn't a bail-out it was an attempt to diversify and decrease exposure in any one area (sub-prime, US domestic markets...)
Posted by: Anonymous | November 5, 2007 03:17 PM
Oh!!!
What da fuck? You trying to spread dysentary in the ranks here? I been tryin' to privatize,.... or what ever you Wall Street fucks call it,.... the police for quite a while, thank you very much. And if we're gonna use biz-speak here, lets make sure we get our over-archin', co-locational synegistic end-games into the strategy space. You got a problem with dat?
Posted by: Tony Soprano | November 5, 2007 04:17 PM
So... bear with me, but what happens if we just go ahead and let these banks fail? This whole TBTF business is really just borrowing against the future in the form of bad incentives. Wouldn't life go on if Citigroup collapsed?
Posted by: Pender | November 7, 2007 12:34 AM