When I was a kid I went to a Yankees game and I was hooked. I became a diehard fan. But my timing could not have been worse. This was 1963, and the team was on the brink of stumbling into a long, dusty slide. So instead of Moose Skowron, Mickey Mantle and Whitey Ford I found myself rooting for Mike Kekich, Andy Kosco and Dooley Womack.
Still, in the one or two successful years during which I was a fan, I became aware of a movement which I’m pretty sure emanated from Boston to “Break up the Yankees.” They were just too powerful, it was said. They hired all the best players (and sometimes just sat them on the bench.) They always won. They needed to be brought down a peg. It just wasn’t fair. It just wasn’t American.
Similarly, these days populists of all stripes clamor to ”break up the banks.” This is also known as the “too big to fail problem.” It is claimed that the large banks are too big, too powerful, and pose a significant risk to the economy. Regulatory actions indicate that the Obama administration buys into this idea, even if it never says so explicitly.
Full disclosure; as an investor, I have always been a small bank guy. I figure that any company that can consistently earn decent returns in one time zone, in one currency, dealing with local businesses is an inherently better business than one that earns similar returns traipsing all over the world. Plus, small banks have the added benefit of occasionally getting acquired at big premiums.
Having said that, I don’t share the regulatory fixation on size as such. If the financial crisis proved anything, it is that the main risk to the financial system is heavily leveraged, short term funded entities that are either beyond the reach of regulators or unequivocally bigger than their economies can support. Our largest banks do not fit either of these criteria.
Just prior to the crisis, Iceland’s Kaupthing Bank’s assets measured five times Iceland’s GDP. (In relative terms, 50 times the size of JP Morgan today.) Now that’s what I call too big. Nations that allow their financial systems to become that unbalanced clearly face danger. But we are nowhere near that point. Wake me up when Morgan’s assets hit $100 trillion, give or take.
I’ll admit to being puzzled by the too big to fail debate. Of course, as a taxpayer, I don’t want my tax dollars going to pay off shareholders of some mismanaged bank. But that’s a straw man; it’s never happened that I’m aware of. There are good reasons why big banks exist and have become bigger over time. Companies like Wells Fargo, JP Morgan, US Bank, and State Street have grown to be as big as they are mainly because they have been better at what they do than their competitors. I reject the notion that these companies represent a threat to the economy or – more to the point – that the government has some superior insight into how they should be structured. It is bewildering to me that our government seems intent on destroying some of our truly great companies when so much of our economy struggles.
Plus, there are clear advantages to having big banks. For instance, it’s nice to be able to make a deposit in Sheboygan and get cash in Hohokus without having to open another bank account and waiting a week for the check to clear. Also, geographic and product-line diversification reduces risk for the bank itself.
Most importantly, big banks render regional economies far less susceptible to economic downturns than they once were. The Texas bank collapse inflicted untold, and largely unnecessary, hardship for the state as loans were called in, properties foreclosed, and credit flows stanched. Today in Texas, low energy prices are likely to cause losses for banks, but unrelated businesses need not worry about obtaining credit.
If you’ve read my earlier posts, you know that I am the last person to advocate slavish imitation of European fashions or fashions of any stripe. Still, it’s possible that a look at the banking systems of other countries might provide insight into the too-big-to-fail problem. Interestingly, one finds that NO other developed country seems the least bit concerned with the issue. I am not aware of any populist groundswell in Germany or France or Canada, for that matter, to break up their banks. The talk in Europe is still about nurturing “national champions.”
Why the comfort among foreign nations with their big banks? Perhaps it is because banking is already so centralized in foreign countries that any attempt to change is viewed as futile. But more likely, this comfort reflects a more sophisticated grasp abroad of the realities of modern finance. That is, the economy has grown more complex and global, bank customers have grown larger and more complex and the bank products they demand are correspondingly more complex and require larger bank balance sheets. It stands to reason, then, that banks, too, need to be larger and more complex.
I find it strange that populists slaver over the prospect of big bank break ups when banking concentration is a hallmark of all so-called “Democratic Socialist” economies. Sweden, Denmark, and Norway all really only have two to three banks each. Concentration makes all of these institutions more readily controlled by the government, which is the point. If that is the objective, then breaking up the banks is the last thing a red blooded (or even a pink-blooded) democratic socialist should want.
Compared to Europe, the US banking system is far more fragmented. It may come as a surprise, for instance, that our largest bank, JP Morgan, is just about the world’s smallest big bank. All European countries, most Asian and South American countries, Australia, and Canada have banking systems dominated by between 2 and 6 super banks. Nearly all of these banks are many times bigger in relation to GDP than any US banks. The biggest US bank, Morgan, has total assets of 1.6 trillion, representing 11% of US GDP. Compare this to Credit Suisse (120% of Switzerland’s GDP), Deutsche (46%) or Toronto Dominion (32%). Yet even though these foreign banks are at least three times the size of the biggest US bank, I do not detect any urgency to break them up.
I may be alone in this, but I consider it a supreme irony (tragedy?) that regulators recently allowed Royal Bank of Canada to poach City National, one of the finest American regional banks and Hollywood’s “Bank to the Stars,” largely because our banks needed to focus on raising capital and not getting bigger. The too big to fail boogie man doesn’t seem to terrify Canadian authorities even though Royal bank is, in terms of GDP, three times as big as Morgan.
These mergers underscore the advantage that foreign banks now have over US rivals both domestically and abroad. To be sure, Canadian banks must adhere to Basel III, but they are not burdened by regulatory animosity or the load of additional capital buffers that US banks must shoulder (standards which remain moving targets.) This gives foreign banks like the Canadians a huge advantage in making US acquisitions. If nothing changes they, and eventually other foreign banks, will continue to expand their footprint in the US at the expense of domestic US competitors.
Don’t get me wrong. I have no problem in principle with Canadian Banks running the US financial system. In my experience Canadians tend to be be competent, sensible folks. But it’s difficult to comprehend how such a tilted playing field might benefit US citizens.
Why too big to fail should be such a peculiarly American obsession is hard to grasp. Maybe there is simply a bias in the US against “Wall Street” and “big city” ways (Donald Trump’s popularity notwithstanding). Sadly, there is more than a hint of anti-semitism in all of this, redolent of Father Coughlin’s “Jewish Wall Street conspiracy.”
Riddle me this: Why does everyone want to break up the big banks, but not the big auto companies? After all, bank “bailouts” such as they were, cost taxpayers nothing. In contrast, GM cost taxpayers $38 billion. We’ll never get all of that back. General Motors failed after a generation of execrable management, coddled unions, and let’s not forget, its own huge role in the financial crisis (does Ally financial ring a bell?.)
Plus, GM engaged in behavior far more reprehensible than that of any bank; selling cars it knew to be deathtraps. This, at a time when the current administration was in control of the company (Let he who is without sin…, well, you know.) Yet the fines paid by GM ($320 mil.) were a pittance next to those paid by banks like JP Morgan ($13 bil. and counting, mostly for loans it didn’t even make.) So far, I’ve heard no calls for GM’s breakup. And that’s a shame, since we already have such great old American names for its constituent parts; DeSoto, Studebaker, and of course, your father’s Buick.