You know we've reached code red Outrageous when even hands off Alan Greenspan believes the banks have become too large. As many sensible people have said, anything that is too big to fail is TOO big period. Something I've posted on the website many times is the large financial entities are now just like Fannie Mae and Freddie Mac in that everyone knows deep in their hearts that the government would come to their rescue - which gives them an inherent advantage. How can small and medium sized banks compete? They cannot - while JPMorgan (JPM) and Goldman Sachs (GS) claim they are government free - they are not. They are like Fannie and Freddie have been for decades... institutionally protected and due to that they have will always receive cheaper funding than medium and small sized financial institutions, because investors know the money they invest will be backstopped by the US taxpayer. Which is why it roils me to no end when I hear these banks claim they are free of government and should do as they please. We have ring fences our top oligarchs and implicitly backstopped them.
Will it change? No - but now you even have the Chief Provider of Narcotics to the financial industry for 2 decades worried about the Frankenstein he has helped birth. The same solution should be applied to these banks as should of been done to Fannie and Freddie; split them into 10, 15, 20 however many are necessary and let them compete with each other. The best win, and the worst fail... and when they fail they are of a size as to not bring down the entire global system. I cannot stress enough not only have we not moved in that direction but we've moved in the OTHER direction, our top dogs are now even bigger than before.
As you note the dogma of thousands of banks competing in the US marketplace, I will continue to post in each of these entries the dominance in assets held by our largest oligarchs - the big 4. Made even more dominant after this financial disaster the past few years.
- Bank of America (BAC) $2.3 Trillion
- JPMorgan (JPM) $2.0 Trillion
- Citigroup (C) $1.8 Trillion
- Wells Fargo (WFC) $1.3 Trillion
To put in perspective let me scurry down the list (looking at commercial banks not the bank holding companies like Morgan Stanley) - even if I go to down to something a few slots lower on the list, such as a Suntrust (STI), assets are $177 Billion, roughly 1/10th the size of our top 4 oligarchs. Even at the bottom of the top 50 (again out of thousands) I find something like TCF Financial (TCB) at $17 Billion. Roughly 1/100th the size of our top 4.
- U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said.
Greenspan makes EXACTLY the point I've offered many times:
- Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations.
- That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.
- “If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
- At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac, and the Treasury and Fed bailed out Bear Stearns Cos. and American International Group Inc.
- “It’s going to be very difficult to repair their credibility on that because when push came to shove, they didn’t stand up,” Greenspan said.
- The former Fed chairman said while “just really arbitrarily breaking down organizations into various different sizes” goes against his philosophical leanings, something must be done to solve the too-big-to-fail issue.
- “If you don’t neutralize that, you’re going to get a moribund group of obsolescent institutions which will be a big drain on the savings of the society,” he said. (like Japan) “Failure is an integral part, a necessary part of a market system,” he said. “If you start focusing on those who should be shrinking, it undermines growing standards of living and can even bring them down.”
I also agree with this comment:
- Fed officials have suggested imposing a tax or requiring higher capital ratios on larger banks to ensure the firms’ safety and reduce some of the competitive advantage from the implied subsidy. Greenspan said that won’t work.
Again that does NOT solve the issue of their inherent advantage of having the US taxpayer as their support.
- “I don’t think merely raising the fees or capital on large institutions or taxing them is enough,” Greenspan said. “I think they’ll absorb that, they’ll work with that, and it’s totally inefficient and they’ll still be using the savings.”