After sensational revelations emerged last week that JPMorgan (NYSE:JPM) CEO Jamie Dimon may have withheld information and/or otherwise deceived the public and regulators concerning risk exposures at that institution, many media commentators have (once again) gotten all lathered up in righteous indignation about the supposed fact that some banks are so big and important to the economy that their CEOs are "too big to jail." According to many of these commentators, the Dimon case is simply one more proof that the large US banks need to be broken up.
Sorry to say this, but the argument that US banks need to be broken up because their CEOs are "too big to jail" is pure populist demagoguery. Its hogwash!
Let us assume for one moment that Jamie Dimon and all of the other CEOs of the ten largest US banks such as Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), Morgan Stanley (NYSE:MS) and Goldman Sachs (GS) have actually been guilty in the past decade of various crimes punishable by incarceration, but that they got off scott free. I am not saying that happened - I am merely saying that I am willing to stipulate this assumption for purposes of the present discussion.
Now, ask yourself this: Let us assume that instead of 10 mega US banks, there were 100 smaller banks with 100 CEOs. Does anybody actually think that most of the sorts of transactions that have gotten banks in trouble in the past decade would not have occurred if there were 100 smaller banks rather than 10 larger banks? If you do, you are deluded.
For example, in the mortgage fiasco of the first decade of the second millennium, the vast majority of smaller banks were engaged in all of the same sort questionable transactions as the larger banks - and even more so. It was a systemic problem that permeated all US banks. These problems would have occurred even if all of the banks were small - and, this is not idle speculation, because historically they did occur. If we look back to the "good ole days" when US banks were smaller, the evidence is that bank CEOs have engaged in even more egregious shenanigans (e.g. savings and loan fiasco, and pre-Fed bank scandals of the "free banking" era).
Therefore, does anybody believe that it would be politically or practically easier to put 100 small bank CEOs in jail than it would have been to put 10 large bank CEO's in jail? If you do, you are again deluded. The greater the number of CEOs committing abuses, the harder it is to regulate them and prosecute them by the understaffed regulators and district attorneys. This is both true for practical and political reasons.
Somebody might reply that even if not all of the 100 small-fry CEOs would have been prosecuted for their crimes, at least some intrepid prosecutor somewhere might have gotten up the courage to prosecute at least one of the 100 small-fry CEOs, and that this might have had a deterrent effect on the other 99. Let's ignore, for a moment, the injustice involved in such arbitrary application of prosecutorial discretion. The issue we should focus on is this: If size were really the deterrent to prosecution, then why haven't prosecutors been going after the small fry bank CEOs in the past few years? Size is not stopping them. Indeed, going after the small-fry CEOs would have the exact same deterrent impact on the large guys without actually having to prosecute the supposedly favored large guys.
Sorry folks, but the reality is much more complicated than the populist demagogues would have you believe.
First, the populist demagogues seem so outraged that more bankers have not been jailed as a result of the financial chaos of the past few years, that they have evidently overlooked one teeny-tiny consideration: Is it possible that maybe, just maybe, more bankers have not have gone to jail because they actually did not commit any crimes punishable by incarceration? I know that it may sound scandalous to even have doubts about the righteousness of this witch-hunt. But I ask the question nonetheless, because while I have heard many media hacks rant and rave about criminal bankers and banking cartels, I have yet to see a serious argument by a legal analyst that US bank CEOs have been systematically getting away with crimes punishable by incarceration. If you are aware of any such analysis be a serious legal analysis, please forward it to me.
Second, and more important for purposes of this article: It is critical to understand that having large banks in the US does not make it harder to prosecute the white collar crimes committed by US bank CEOs. To the contrary: Having large banks actually makes it easier and less costly to regulate the banking system, and it makes it easier and less costly to detect and prosecute perpetrators of crimes in the banking system. This is actually one of the lessons that can be learned from comparing the highly concentrated Canadian to US banking system. The US banking system is actually one of the most fragmented and least concentrated amongst all developed countries, whereas the Canadian system is amongst the most concentrated. Yet the mortgage market fiasco happened in the fragmented US system, not the Canadian system where bank concentration makes their financial institutions easier to regulate.
Third, the current hullaballoo over Jamie Dimon only serves to prove my point. The fact of the matter is that Dimon is receiving far more scrutiny as a result of alleged misdeeds than any of the 100 hypothetical "small-fry" CEOs would have - or that the thousands of actual small-fry CEOs in America are actually receiving at this very moment. This proves something that is exactly the opposite of the myth that the populist demagogues are promoting. Jamie Dimon is, in fact, more likely to get prosecuted, if there is any reasonable grounds for it, than if he were the CEO of a small-fry bank. More ominously, in the witch-hunt environment promoted by so many media commentators, the officials of major banks such as Dimon may be even more likely to be prosecuted even if there are not any reasonable grounds for such prosecution. When the public is hungry for scapegoats, the problem is not "too big to jail," it is rather that the major bank CEOs are "too big to acquit." The laws of human nature and politics dictate that in an environment in which scapegoats are sought, politically ambitious prosecutors will go after a big fish more readily than they will go after a small fry.
Folks, don't be deceived: The rantings and ravings on both the left and right about "too big to jail" and "too big to regulate" are mainly all malarkey. It is populist demagoguery that distracts citizens from the real issues.
Jamie Dimon may or may not be guilty of a crime. But whether he is or is not has absolutely no bearing whatsoever on the debate about whether US banks should be broken up and made smaller. If anything, the Dimon example tends to show that banks will be scrutinized more carefully and effectively if US banks are relatively large and their level of concentration is relatively high.