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Why Financial Institutions Must Be Broken Up

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If they're small enough, they can't destroy the system in the future.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).


I'm not going to quibble about the fact that in late 2008, our financial system was within 24-48 hours of a complete systemic collapse, and the Fed and Treasury had to bail out the banks and investment banks. It had to be done and it saved the system, at least for a while. The reason this happened was a pure case of overleverage and institutional risk-taking for personal gain, without regard for the unexpected consequence that you might take down the country and/or world by mistake.

China has an interesting approach to discouraging future misbehavior by simply executing people guilty of products that poisoned people. An extension of that to credit default swap writers (a few people at AIG (AIG), for example) and CDO developers might serve to straighten out institutional risk-taking, but we don't have the guts to address that.

So, if we can't execute the quants (and their supervisors) who developed these products without regard for the fat-tail consequences that almost destroyed "Western civilization as we know it," then their institutions have to be broken up until they're small enough that they cannot destroy the system in the future, not to mention next year.

A couple of quotes:

Power tends to corrupt, and absolute power corrupts absolutely.

-- John Dalberg-Acton

Leverage up, boys. Heads we win, tails we get bailed out. Next year we get to play the game again from scratch.
-- James Anderson

Is the bonus problem more obvious than this? Back in 2008, Goldman Sachs (GS) and Morgan Stanley (MS) had to become bank holding companies. That has to be reversed immediately. There's no reason that they need that other than to enrich themselves with cheap Fed money.

Goldman should go private. It's just a hedge fund with a fee business on the side. Morgan with its broker business can probably do fine staying public. Citigroup (C) simply needs to be broken up. There's been nothing but pure incompetence since the Sandy Weill merger of Travelers and Citibank. This is the best example of a needed breakup since the Standard Oil antitrust breakup in 1911.

If you're too big to fail now, then we can't allow "heads they win; tails, America and the world loses."
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