Economics

Why isn’t Romney for breaking up the big banks?

It’s the issue that won’t go away. Even though Washington has created a new financial regulatory regime, there are still calls to shrink or break up America’s biggest financial institutions:

The biggest five banks in the United States are too powerful and should be broken up, Dallas Fed President Richard Fisher said on Wednesday. The financial crisis has left the five biggest banks even more powerful than before, he told an event in Mexico City. ”After the crisis, the five largest banks had a higher concentration of deposits than they did before the crisis,” he said. “I am of the belief personally that the power of the five largest banks is too concentrated. The purpose of Dodd-Frank was to reduce the concentration of power and we have a term called ‘too big to fail’ … perversely, these banks are now even bigger, they are too ‘bigger’ to fail than before.”

And in a research note today, superstar banking analyst Jaret Seiberg of Guggenheim Washington Research Group said the issue may actually be gaining momentum:

Federal Reserve Bank of Dallas president Richard Fisher garnered headlines last week when he called for breaking up the biggest banks. Were he the only voice calling for splitting up the banks, then this would be a nonevent. … This is not a threat that should be ignored. The far left and far right are united in calling for breaking up the biggest banks. That is why the increasing polarization of Congress is a negative for the mega banks as it is only the political center that tolerates the status quo.

Mitt Romney has taken several populist policy positions that conservatives hate but work to counterbalance the plutocrat, Gordon Gekko caricature his opponents—both Republican and Democrat—try to promote. He is for cutting capital gains taxes—but only for middle incomers. He is for indexing the minimum wage to inflation. He is for labeling China a currency manipulator and slapping a tariff on its goods.

Message: This is one multimillionaire, corporate turnaround artist who cares about the average American.

But if Romney is looking for a big idea with populist oomph—one that might actually make some economic sense—he should call for breaking up America’s biggest banks. It seems like a perfect “Nixon goes to China” sort of play for the former banker … I mean, private equity investor … I mean, venture capitalist … I mean, conservative businessman. It’s actually kind of surprising Romney hasn’t already made busting up the mega-banks the 60th idea of his 59-point economic plan.

1. It would attack a glaring Obama vulnerability. Back in 2010, President Obama said the Dodd-Frank financial reform law “would put an end—once and for all—to taxpayer bailouts.” Yet the biggest banks are bigger than ever, with assets worth over 66 percent of GDP. And their funding advantage over smaller banks is a sign that markets think they are still Too Big To Fail. It was the financial crisis that caused the Great Recession—and swept Obama into office with a near-landslide victory. Yet the unholy, crony-capitalist alliance between Big Government and Big Money that helped create the crisis still seems intact.

2. Banks and the bank bailout remain tremendously unpopular. In an October CNN poll, 76 percent said they trust banks “a little” (22 percent) or “not at all” (54 percent). Massive majorities said bankers were “greedy,” “overpaid,” and “dishonest.” In an August CNN/Gallup poll, 61 percent were for more bank regulation and against financial aid to troubled banks. In a July Bloomberg poll, respondents by a 58 to 28 percent majority said TARP was “unneeded.”

3. It’s not just an Occupy thing. Many conservatives kind of  like the idea, too. Among the members of the right-of-center, let’s-think-about-breaking-up-the-big-banks crowd: Bill Kristol, Charlie Gasparino, Alan Greenspan, Arnold Kling, and Luigi Zingales. Their arguments can be summed up thusly:

– Big banks are the result of de facto industrial policy favoring mega-institutions.

– Big banks have not made the financial system more robust.

– Big Banks have so much concentrated economy power that it is impossible to either regulate them or prevent future bailouts. (Again, the crony capitalism argument.) Thus we have privatized bank profits and transferred the risk to taxpayers.

Currently, there are 10 percent caps on the total share of domestic deposits and financial assets that any single bank can have. Seiberg says JP Morgan, Wells Fargo, and Bank of America are all near the caps. Romney could simply call for those caps to be lowered to 5 percent or less, thus forcing those banks to divest assets and shrink.

Of course, Romney might think breaking up the big banks is a lousy idea, whatever the political merits. And there are certainly pro-market arguments against doing so.

Still, if Romney is looking for game changer, this could be it.

17 thoughts on “Why isn’t Romney for breaking up the big banks?

  1. Maybe Romney knows that scale and critical mass are necessary for a multi-national competitive marketplace.

    “Breaking up the banks” is political pandering not a thoughtful or considered business position. If the customer is not served by the large institutions, the market will carve up the various business segments.

  2. The problem with big banks isn’t their size per se, but rather the cost if/when they screw up and society has to come to the rescue. The costs are directly proportional to the size of the bank. Reducing the exposure necessitates shrinking the size of the banks.

    And here’s the way to do so without resorting to another round of regulation: explicitly eliminate all forms of government rescue of failed banks. Without these guarantees, depositors and trading partners would have no choice but to diversify their business among many institutions thus reducing the repercussions of even a bunch of banks running into financial problems (diversification is rule #1 for investing, why should it be any different in where you hold your money?). Investors would (likely) institute tighter controls on management, reducing the ability of management to overly leverage the company.

    And since bailouts are perceived to benefit only the privileged few, with one caveat, there ought not be a backlash from the public. The caveat is that given it is political death for any politician to call for eliminating deposit insurance, I’d compromise at to insuring only a token amount of consumer deposits, perhaps no more than $25,000 (an amount that would exceed the holdings of all but a small percentage of depositors.

    • “And here’s the way to do so without resorting to another round of regulation: explicitly eliminate all forms of government rescue of failed banks. Without these guarantees, depositors and trading partners would have no choice but to diversify their business among many institutions thus reducing the repercussions of even a bunch of banks running into financial problems (diversification is rule #1 for investing, why should it be any different in where you hold your money?). Investors would (likely) institute tighter controls on management, reducing the ability of management to overly leverage the company. ”

      Really? You think making a law that bans bailouts will solve the problem? we don’t have a law that says bailouts will happen but they do because of the effects not doing anything would have. A law saying there will be no bailout would ring hallow and would be overturned in 5 minutes at the first chance of a catastrophe. Sorry but we need to make banking boring again. Glass-Steagall was 34 pages…Dodd-Frank was 2000…We didn’t have a melt down like the one in 2008 for about 70 years under Glass-Steagall.

      Bailout perception and reality are 2 different things. When the decision is made the President has to weigh 2 options: Armageddon or Political Backlash. Hoover chose armageddon, Obama chose backlash. But when history looks back…government intervention is the right move. Like it was the 80′s, where we fall short is our government has too many people who won’t make the logical jump to what needs to happen. We were told even by the Obama Administration that Dodd-Frank solves the problem…no it doesn’t. I can find one reputable expert who says that it does. If we had a reall media/press corps we would be able to point that out. It’s like buying a hammer and being told it will put the nail in the wall…all the while some people know the hammer is made of foam. it won’t get the job done.

      • Conservatives may not want to hear this, but the people who created Glass-Steagall and put in place banking regulations back in the 1930s were not stupid, nor were they socialists or communists. In fact, they were trying to save Western capitalist democracy in the US from the growing political strength of fascism and communism. They understood the marketplace and free market thinking–they were all products of an unregulated market to begin with–but they had just seen something go terribly wrong and were determined to prevent it from happening again.

        The regulations that were put in place then may have cramped the style of some, but they protected the American and to a certain extent the world’s financial system until those who could not understand why they were put in place or their importance to the stability of the system decided that they should be eliminated. Since deregulation of the banks began, we have seen first the S&Ls and now the big institutions that are the underpinning of the banking system undermined by the unscrupulous and sheer stupidity at the taxpayers’ expense. Isn’t that enough to make the point that the theory does not match up with practice–that the kind of regulation that was put in place in the 1930s is necessary, if not to save the banking system itself, to save the taxpayer from having to repeatedly bailout the system?

        And, the taxpayer, through the government, had no alternative but to bailout the system because the larger economy–the marketplace–would collapse without access to finance. In theory it’s fine to say, “Well, let it collapse”. But, the reality of doing that would not be a return to a nice, more finely tuned capitalist system: the reality would be a third or more of the workforce on breadlines or starving; riots, radicalization, possibly civil war and/or the end of the democratic system (one need only look to what happened in the 1930s for a preview). And, it’s easy to say, “Well, investors should diversify the places where they put their money”. All well and good, but where can someone safely put his/her money if the financial system is totally unregulated and unstable because the “herd mentality” can cause even the most honest of bankers to lose his/her head and follow the unscrupulous in any sector of the banking system and cause it all to come crashing down? Do you really want to see people socking their money away in their mattresses or the walls of their houses–as some people did before the banking regulations of the 1930s convinced them that they could trust their money to the banks again? That wouldn’t be very good for the overall economy or for their retirement savings.

        Neither Romney or Obama want to do what really needs to be done to protect the country from TBTF because they are both too dependent on contributions by big donors from the financial sector (and sectors related to it) to run their election campaigns. The simple solution is to put back into place Glass-Steagall and those regulations that protected the financial system and the taxpayers for roughly 60 years. It’s potential effectiveness is not based on theory but on tried and true experience–we know that it would work because it has. Give the big financial institutions a set, but non-negotiable period of time to divest or spin-off in order to come into compliance with the regulations.

        Now, I know that conservatives don’t like regulations. But conservatives also don’t like high taxes or having to pay for others’ mistakes through taxation. Lack of regulation in the financial system has shown twice within the last century that it can lead to circumstances that threaten not just the economy, but the welfare of the nation. Twice in the last 30 years, deregulation has resulted in the taxpayer being stuck with a huge bill as a result of unscrupulousness in the marketplace that the government had to pay to re-stabilize the economy. Regulation may be bad (at least in theory), but we and our children are going to be paying for the costs of it for years–and that’s not something that I think conservatives (or non-conservatives for that matter) want to get stuck doing yet again.

  3. Two facts: the government is running trillion dollars deficits as far as the eye can see and you can not finance trillion dollars deficits will milllion dollar banks. There will be no significant break-ups of the TBTF banks.

  4. Perhaps Romney believes in free-market capitalism. Without the repressive regulations currently in place (that Romney has pledged to roll-back) and without crony capitalism (that Romney has pledged to end), capitalist will be able to form new banks that will be able to challenge the big boys and end their iron locks on our economy.

    http://www.nytimes.com/2008/07/01/opinion/01brooks.html?_r=1&hp&o

    Perhaps Romney subscribes to Joe Schumpeter’s creative destruction (and not government interference).

  5. This is the first time I’ve seen anyone touch on this our most important issue in America. Cronyism between banking and government is what destroyed the British empire, both directly and insidiously. Mitt Romney is a crony capitalist only. He is neither an entrepreneur nor an executive. He is merely nepotically connected to both our political and our banking structure. This thread needs to be pulled vigorously between now and the nomination. Romney represents much of the quintessence of what is most wrong in America…. not so much as Obama but nearly so. We need badly an honest man, even though we the electorate are as crooked as a dog’s hind leg!

  6. We should thank the only man running who knows Mitt Romney is skillfully conducting nothing less than a Covert Election Operation against true conservatives, assisted by the Elite Media, including the next CNN (Fox News) and Political Group Thinkers who wish to remain unchallenged in power and who are using the unelectable Santorum to block the true conservative Speaker Gingrich.

    Who could vote for a person like Romney who can only pull others down to his level, instead of running on his own record?

    Congress and McCain will hand Mitt his marching orders, not the other way around. Newt knows how to control the bad eggs of Congress! That is why the elite Washington crowd is running away from Newt!

  7. Break up the banks? How about PUTTING IN JAIL the crooked, corrupt army of Wall Streeters who pillage for a living? I’d be much happier with a conservative candidate who would acknowledge the corruption on Wall Street and promise to make people PAY a price for their reprehensible and/or irresponsible behavior. Instead, it’s business as usual as the Wall Street banks run a huge racket and get away with it because a PORTION of their business is legit. Obama appointed these people to his cabinet and advisory board. We need our people to HOLD ACCOUNTABLE the corrupt who wrecked the economy while bankrolling countless billion$ in taxpayer funds and ill-begotten “profits”.

    Yes, this is where I see eye to eye with “Occupiers”. Wall Street IS a cesspool of corruption and these people, these crooked hedge funds, these crooked bankers….regardless of party affiliation (most of them are actually Democrats) need to be brought to justice.

  8. It’s not necessary to break up the big banks. What is needed are laws that strictly limit the authority of the FED and the Treasury Department to rescue banks , rather than to liquidate any bank. THE FED and Treasury were in bed with the bankers. This incestuous relationship is what allowed the stupidity to fester, and to grow into an unmanageable problem.
    The FED should be removed as the regulator of all banks. The FED has proven that it has neither the understanding of what consitutues financial risk nor the ability to act as a responsible guardian of the public trust. The FDIC should be the only regulator of banks and thrifts, of any kind. The FED should be limited by law to lending as a precursor to orderly liquidation. The FED must lend at prime plus 5, and for a term of no more than 1 year. Bankers that lead their banks into failure must be prohibited from working in the FDIC insured banking industry for life, and they must disgorge all bonuses and profit sharing for the previous five years to the FDIC upon liquidation.
    The FDIC’s only mandate should be to safeguard deposits, and not to defend the value of equity holders or bondholders. The FDIC should limit it’s institutional risk to 1% of it’s capital. Any bank that exceeds this limit should be forced to raise additional bona fide capital, and to inform depositiors that their deposits will no longer be insured above this limit. This will lead depositors to take their funds elsewhere.
    The Treasury department must return to it’s original functions, managing the US debt sales and related activities. Treasury has no business managing rescue funds. Treasury must be prohibited from any rescue activities in the future.

  9. Here is a question. Why has Obama not broken up the big banks? Why has Obama with his Lapdog Holder put some people in jail? I mean the man has been President over 3 years. Typical Obama loving press. Never focus on what dear leader has not done just criticize anyone who would challenge the dictator and Cheif

  10. Too-big-to-fail ‘big banks’ are a Marxist phenomena, not a Capitalist one. The Federal Reserve is the ‘Big Bank’. Without it the size of banks would reflect ‘banking’ skills. Adam Smith wrote that one down in 1775. Our current ‘system’ is just too failed to be big!

  11. Oh, maybe Romney’s not taking this position because he’s deeply indebted to the people who make money hand over fist using the massive leverage and programmatic trading the big banks rely on for their profits? Because all his wealthy friends got incredibly richer in the last decade thanks to these big banks?

    What an ignorant article – you misunderstand completely who Romney is and who he represents. He could care less about the danger these institutions pose to the country. All he cares about is more profits for people like himself.

    • Big banks are public companies. Individual investors can choose to opt out of any investment. Without 401k holders, their power vaporizes. After this recession, individual investors will be more skeptical of large banks as safe investments, which favors their competition. They’ll break up on their own or will make wise business decisions.

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