So, why can't we break up banks?

[Mayabird]

This is not me posting an article or op-ed, just asking a political question.

I have heard the phrase "too big to fail" way too many times and I started wondering, if they're too big, why can't they be broken down into smaller pieces? Yeah, yeah, I've heard the stuff about why it's good to have large, stable banks, except we're not getting the stable part. If the Bank of Bumblefuck, Georgia fails, it only hurts the people there instead of making the entire world economy bend over and take it. Doesn't have to be that small, but you can figure out what I mean. And it's not like banks are natural monopolies. Heck, when the Feds seize banks and sell them, why are they sold as a complete package instead of being sold in chunks?

I know I'm no expert in voodoo horseshit the esoteric art of economics, so I'm just throwing this out.

[Prannon]

These likely aren't the major factors, but my guess is that it involves both political lobbying and simplicity. These banks are controlled by people who have had a hand in policy making for a long time. Just look at the numbers. Follow the money. They've spent a great sum of it lobbying Congress for the past couple of decades.

As for simplicity, why go through the trouble of breaking the banks up when you can just "recapitalize" them by pumping a bunch of money into them? If you had to break them up during a time of crisis, that would involve figuring out which assets go where, who's gonna keep their job, market shares, and so on and so forth. It's probably not something you'd want to do when your balls are to the wall like we were in October.

That's not to say that it won't ever happen. As the crisis abates and the urgency goes down, the banks might very well be broken up. From what I understand, It would be a lot better for the financial system if the banks were broken up, because that would create redundancy. However, go back to point number one. I doubt the political will exists to do that without a major initiative from the populace.

[FireNexus]

I mean, at this point it would seem that it's a matter of the same proportion of poison being released in the system no matter how many little chunks you break it into. Ten, fifteen, twenty years ago capping the size a bank could grow to makes a lot of sense for avoiding a mess just like this one. I imagine (though I'm not sure and am too lazy to look it up) that at some point in the 80s or 90s some form of bank size cap was effectively (if not totally) eliminated in the name of economic growth.

[SirNitram]

Because it's Wall Street.

The Dow is up! Good days are here again! We're recovering because Wall Street's trading numbers are up!

People still buy it all.

Liberal or conservative, the majority swallowed whole the nonsense of what's good for 'The Market' is good for the country. And now we are here, with a society and government thoroughly infested with this malignancy, and people are surprised? The brand of capitalism drilled into every person's head early on as the good answer caused all this, and surprise surprise, we're sitting in a shitstorm because experience in that parallel dimension running through NYC is considered a pre-requisite for the jobs that should regulate it.

I will make a note, however, and point out the US has been nationalizing banks on an almost weekly tempo since this began. But they're little ones. Because the Masters Of The Universe being denied free candy from babies would cause them to cry, and the Dow would suffer.

And the Dow always knows best.

[Coyote]

I think the rationale is that smaller banks would not have the credit & lending power for major projects and investments that a big, united national bank has. Something like, say, the Mall of the Americas, for example, could not have been underwritten by "Mom & Pop Bank of the Plains".

[Starglider]

Something like, say, the Mall of the Americas, for example, could not have been underwritten by "Mom & Pop Bank of the Plains".

Firstly it only cost $650M to build. A medium sized bank could fund that easily. Secondly for large projects it's typical to form a consortium of funders, for risk mitigation, so even if only small banks existed such projects would still be quite feasible (the cost of fundraising would increase a little, but it's a relatively small factor).

[aerius]

I imagine (though I'm not sure and am too lazy to look it up) that at some point in the 80s or 90s some form of bank size cap was effectively (if not totally) eliminated in the name of economic growth.

You're probably thinking of the repeal of Glass-Steagall (the separation of investment & commercial banking) which allowed banks to go hog wild with leverage and raid their commercial operations for funds when their investments went bad.


There is a law in effect in the US which limits the size of banks to no more than 10% of the total depositors' base, no bank can hold more than 10% of the total customer deposits in the US. Unfortunately they hand out exemptions on request, Bank of America and JP Morgan got exemptions for the Countrywide Financial and Washington Mutual takeovers, respectively. Both are now over the 10% limit. I'll have to check my numbers but I think the Wells-Fargo/Wachovia buyout is also pretty close to if not over the limit.

---

Anyway, the reason they don't get broken up is they're too well connected, they run the goddamn government. If you actually wanted to enforce the laws and break them up, all the heads & key people in the Treasury department, most of the Federal Reserve Bank, almost the entire government, and who knows how many thousands of banking & financial executives would be in a pound'em in the ass jail on multiple felony charges. And that simply can't be allowed to happen.

[Mobiboros]

Because the media is a bunch of dumb tards and don't report on how parts of banks are sold off all the damned time. I work for a leasing division in a bank and the division started as a private compant was bought by one bank, then that part was lumped with another part and then sold to another bank before THAT bank was entirely bought by yet another bank.

It's not news to say "And XYZ Megabank was amicably sold off in parts to 5 other banks."

"Too Big To Fail" is a media buzzphrase. No bank is too big to fail, and chances are the end results of the failure (ie. parts of it's assets or whole divisions being bought up by other banks or private companies) just isn't interesting enough to report on.

[Nephtys]

One thing. I haven't seen a single quantifiable analysis of if 'breaking up banks' so to speak is even possible without a complete financial mess. They're integral to a lot of business and private life, and reallocating their debts and assets to numerous smaller entities sounds like it's going to be a nightmare.

There's a lot of complexity in the financial sector that my brain boggles at, and gut reactions are not the way to react to things that complex, no more than it is a way to react to complex physical systems.

[FireNexus]

You're probably thinking of the repeal of Glass-Steagall (the separation of investment & commercial banking) which allowed banks to go hog wild with leverage and raid their commercial operations for funds when their investments went bad.

There is a law in effect in the US which limits the size of banks to no more than 10% of the total depositors' base, no bank can hold more than 10% of the total customer deposits in the US. Unfortunately they hand out exemptions on request, Bank of America and JP Morgan got exemptions for the Countrywide Financial and Washington Mutual takeovers, respectively. Both are now over the 10% limit. I'll have to check my numbers but I think the Wells-Fargo/Wachovia buyout is also pretty close to if not over the limit.

---

Anyway, the reason they don't get broken up is they're too well connected, they run the goddamn government. If you actually wanted to enforce the laws and break them up, all the heads & key people in the Treasury department, most of the Federal Reserve Bank, almost the entire government, and who knows how many thousands of banking & financial executives would be in a pound'em in the ass jail on multiple felony charges. And that simply can't be allowed to happen.

That makes sense. I'm not surprised that during the "less regulation equals more prosperity" era that something like that happened. Nor am I surprised that laws aren't enforced even when they exist. Thanks for the clarification, aerius.

[Darth Wong]

Because it's Wall Street.

The Dow is up! Good days are here again! We're recovering because Wall Street's trading numbers are up!

People still buy it all.

Liberal or conservative, the majority swallowed whole the nonsense of what's good for 'The Market' is good for the country.

I would argue that the widespread prevalence of this mindset is due to a single poisonous factor: the same factor which has caused wild mood swings in American politics ever since the 1960s: the Baby Boomers.

In the 1960s, the Boomers advocated free love, free drugs, and anti-establishment thinking. In the 1970s, they herded into the "self-actualization" movement and its voluminous self-absorbed feel-good psychobabble (see Oprah Winfrey). In the 1980s, as they reached their peak earning years, they discovered the virtue of greed, BMWs, Rolex watches, and Ferragamo shoes. In the 1990s, they realized that they would have to retire someday, so the mob poured into mutual funds, and everyone started talking about investment strategies.

Today, they are looking at retirement in their near future, and that means they are terrified of seeing their investment funds lose value. What happened in the last year was an apocalypse for them, and they want to pump up the stock prices to a respectable level so they can dump out, buy annuities, and retire. After that, the economy is somebody else's problem.

That's why stock prices are so important: peoples' retirement funds hinge on their value. That's why they would willingly sacrifice all kinds of other things (including the long-term finances of the entire country) in order to get those stock prices back up.

[tim31]

Is any generation from Boomers onward going to change, Mike? My generation (Y) is so self obsessed and absorbed with modern conveniences that it will continue to fuck the planet to keep it coming, while regurgitating a justification they googled. Your generation (I assume early X or late Jones) is no different, especially in context of parents who gleaned their philosophies from psychobabble-mongors. Not that, in recollection, this model actually fits your parents, whom you have described as quite pragmatic.

[The Yosemite Bear]

Hell the Treasury Department has been owned quite litterially by JP Morgan, since the real JP Morgan Bought the US treasury/Debt back in the 1800's....

[Darth Wong]

Is any generation from Boomers onward going to change, Mike? My generation (Y) is so self obsessed and absorbed with modern conveniences that it will continue to fuck the planet to keep it coming, while regurgitating a justification they googled. Your generation (I assume early X or late Jones) is no different, especially in context of parents who gleaned their philosophies from psychobabble-mongors. Not that, in recollection, this model actually fits your parents, whom you have described as quite pragmatic.

Obviously, there are variations within each generation. However, Baby Boomers had a lot more political clout because of their sheer numbers, and this gave them an inflated sense of their own importance which no generation after them has had (and for good reason: no generation after them has had their political power).