It’s wonderful when some old wise man – in this case Henry Kaufman, the former Salomon Brothers economist and all-around Wall Street sourpuss – lets loose with an opinion you can agree with.
Kaufman, in the Wall Street Journal, says giant financial institutions are a bad idea. At first blush, the piece seems a nice addition to the let’s-rid-ourselves-of-the-too-big-to-fail banks canon.
The sheer size of the biggest banks – JPMorgan (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) – makes regulating them on a day-to-day basis all but impossible, and resolving an insolvency mind-boggling.
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Kaufman notes the inevitable conflicts of interest at giant finance concerns. They’re buyers, sellers, underwriters and advisors. As we saw in recent years, with one hand a Wall Street bank might be selling a seemingly innocuous pool of mortgages; and with the other, allowing some hedge fund manager to choose the contents of the pool (“let’s make it as shitty as possible, eh?”) so he can short the thing.
Kaufman also correctly says the giant banks are all but unmanageable. Middle managers, he points out, with arcane incentive-pay arrangements, have every reason to take on huge risk, and a CEO is hard-pressed to sniff out all the bear traps. Right, Jamie Dimon?
So far, so good, Henry. But where the old boy loses us is when he starts discussing solutions to the problem. Higher capital levels aren’t he answer, he says, as they may encourage institutions to take on more risk, not less, to generate a return. Kaufman could be right there, but any argument for lower capital levels seems a bit batty at this point, given the huge federal bailouts banks required a few years ago.
But then Kaufman’s argument really jumps the tracks. He writes:
Information technology, once the handmaiden of leading financial conglomerates, now serves regulators. It is not difficult to imagine a day in the near future when credit flow information—data on trades, loans, investments, changes in liabilities, and so on—will flow instantaneously from financial institutions to official regulators.
In the somewhat more distant future, the entire demand deposit function probably could be taken over by governments through a network of computer facilities in "the cloud." Even more likely, within a generation branch banking will become obsolete as the general population (not just early adopters) conducts all its banking on hand-held devices. McDonald's or Starbucks or some other retailing chain will gobble up the bank branches for remodeling.
Having spent many years actually talking to bankers and regulators, I have a hard time imagining regulators gaining the upper hand. For decades, they’ve been either hopelessly behind in appreciating the risk banks are taking on; or shameless cheerleaders to the industry.
Kaufman suggests that shareholders ought demand breakup of giant finance institutions. Nice idea, and if institutional holders in this country ever develop a true public-spiritedness, that will be wonderful. But the record suggests disinterest in all but the most egregious cases of mismanagement or self-enrichment.
By the end of the piece, a cynic might conclude that Kaufman is actually against breaking up the big banks – so unlikely is his approach to doing so.