Right now, the central bankers of the world are pumping liquidity into dozens of near-dead or zombie banks. The stated goal of the liquidity injections is to get normal credit market conditions back on track. In effect, the Federal Reserve and other central banks are allowing big banks to dictate policy such that they have evolved into a new breed of institutions considered by central bankers to be Too Big To Fail. My belief is that these institutions are really Too Big To Manage and they should be broken up.
Too Big To Manage
What do I mean by Too Big To Manage? Consider the latest story of a $2 billion loss at the Swiss banking giant, UBS. The loss stemmed from a so-called rogue trader at the bank. If a junior trader can run up a $2 billion trading loss when he was not supposed to take on much risk at all, well that sounds like a management failure to me.
In this post, Matt Taibbi makes the point that the rogues are not just on the trading floor, but also in the executive suite [emphasis added]:
The news that a “rogue trader” (I hate that term – more on that in a moment) has soaked the Swiss banking giant UBS for $2 billion has rocked the international financial community and threatened to drive a stake through any chance Europe had of averting economic disaster…
…But the reality is, the brains of investment bankers by nature are not wired for “client-based” thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts…
…”rogue traders” are treated like bad accidents and condemned everywhere from the front pages to Ewan McGregor films. But rogue companies are protected at every level of the regulatory structure and continually empowered by dergulatory legislation giving them access to our bank accounts…
No government guarantees for high risk banks
If a banking institution wants the benefit of FDIC guarantees for bank deposits, then it should have to operate in a very low leverage, low risk manner.
Instead, if a UBS or a Goldman Sachs (NYSE:GS) or a Bank of America (NYSE:BAC) wants to be a high flying, free wheeling firm in which traders can take big risks to boost the bottom line, then it can do that too. But, its investors need to know that their capital is at risk, not ours.