Why Financial Institutions Must Be Broken Up
If they're small enough, they can't destroy the system in the future.
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."
The information on this website solely reflects the analysis of or o=
pinion about the performance of securities and financial markets by the wri=
ters whose articles appear on the site. The views expressed by the writers =
are not necessarily the views of Minyanville Media, Inc. or members of its =
management. Nothing contained on the website is intended to constitute a re=
commendation or advice addressed to an individual investor or category of i=
nvestors to purchase, sell or hold any security, or to take any action with=
respect to the prospective movement of the securities markets or to solici=
t the purchase or sale of any security. Any investment decisions must be ma=
de by the reader either individually or in consultation with his or her inv=
estment professional. Minyanville writers and staff may trade or hold posit=
ions in securities that are discussed in articles appearing on the website.=
Writers of articles are required to disclose whether they have a position =
in any stock or fund discussed in an article, but are not permitted to disc=
lose the size or direction of the position. Nothing on this website is inte=
nded to solicit business of any kind for a writer's business or fund. M=
inyanville management and staff as well as contributing writers will not re=
spond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter