Too Big to Fail Banks: Greenspan Says 'Break 'Em Up'. What Are the Chances?

U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said.

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.””

• Greenspan Says U.S. Should Consider Breaking Up Large Banks
• Michael McKee and Scott Lanman
• Bloomberg
• October 15, 2009

If Alan Greenspan has his way then J.P. Morgan (JPM), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS) and Morgan Stanley (MS) will all be carved up into smaller entities. I am glad he makes the point that if they were broken up then the sum of the parts would be greater than the current whole. I am also glad he goes on to blast the proposals of letting the firms remain “as is” but tax them or over-regulate them in order to claw back some of the implicit government subsidy they are receiving. He makes the point very well that the genie is out of the bottle there. Having already rescued them once everybody knows we would rescue them again.

Now what do you think the chances are that Barack Obama is going to go to Jamie Dimon or his friend Richard Parsons and say “I’m sorry but we’re going to have to break you up?” It’s not going to happen and these even-bigger banks are going to continue to wield even-bigger influence.

Comments

[ralph schauss:]

Alan should enjoy his retirement and just shut up,
after all, he is one of the manin architects of the financial crisis along with regulators, the rating agencies, the SEC and hubris by financial firms chiefs,
I must wonder whether Alan's continous comments are intended to support his fee levels,
if I were Ben , I would be deeply grateful for Alan to keep quiet
fromLondon UK

Oct 16 03:38 AM

[prairiedog555:]

Where is Teddy Roosevelt, and his big stick? The US needs a leader, not another reality show.
How many times does Goldman Sachs have to cause financial crisis before they are shut down like Teddy did with JP Morgan?

Oct 16 08:33 AM

[Ferdinand E...:]

He makes the point that if broken up the sum of the parts would be greater than the current whole

I wonder who is the bigger fool: Greenspan or somebody who believes that kind of nonsense.

Why doesn't the guy do something useful. The freshman course in economics at Boston Public is probably looking for a good teacher. Send him around for an interview, although I'm not sure that he'll get my endorsement.

Oct 16 10:32 AM

[notsosmart:]

make him a teacher?how could you.forget this jerk.he was in the forefront of this mess.i dont understand this world anymore.it cant seem to rid itself of the jerks & actually elevates them to the highest positions.

Oct 16 05:32 PM

[Chancer:]

I don't usually agree with Greenspan. But this time he is right.

Why create more government bureaucracy to regulate "too big to fail"? Due to regulator incompetence, those regulators will most likely also fail. Inspector General's report just blamed Geitner for being asleep (his staff knew) re. AIG bonuses while governor of NY Fed. He is supposed to be: Obama's "best and brightest."

Consumers have not benefited from bank mergers, which were really done to generate huge fees for investment bankers and huge bonuses for bank executives. They also caused more job losses.

Remember, they broke up the phone company. We should break up all "too big to fail" financial institutions into "NOT too big to fail."

Oct 17 03:33 PM