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While I'm sure some community bankers applauded Sandy Weill's recent call to break up our nation's largest banks, I, for one, did not.
August 1 -
The modern, neo-Glass-Steagall advocacy has a mystical quality about it, an appeal that proposes to rise above the tough debate over the thorny details and reach back to a mythical time when bank regulation worked so very well.
July 31 -
The Clearing House made the case for big banks' "social utility," arguing that banking behemoths pay dividends in efficiency, flexibility, and innovation.
July 27 -
Beth Mooney believes regional banks have a competitive advantage against their largest competitors given the "onerous" compliance requirements for $1 trillion-asset banks under the Dodd-Frank Act.
July 27
Dismantling a huge building is pretty easy – you reverse-engineer the architect's blueprints.
Executing a will is also simple – just follow the grantor's wishes to disburse the documented assets.
However, executing a too-big-to-fail bank's "living will" is not a practical recipe for resolving such an institution's troubles. Besides, there are more productive ways of risk adjusting the TBTFs – reengineer them.
After all, shouldn't we want to preserve the benefits of being big, global and diversified if society can manage their risk exposures and support their stabilizing effects on economic order?
The chorus of those who have called for the breakup of these giant institutions reads like an archive of the once powerful elite of finance – John Reed, Henry Kaufman, Phil Purcell, David Komansky, now even Sandy Weill.
What were these notable deal mavens and creative minds thinking when they brought together "socks and stocks" (the pejorative reference to the Sears acquisition of Dean Witter Reynolds)? Or when American Express bought Weill's earlier contrivance, Shearson Loeb Rhodes, and declared its card the center of the financial services universe?
Weill now says of Citigroup, "
The term "financial supermarket," the precursor to the TBTFs, dates back to 1981 – the year Weill and other CEOs sold Wall Street for the first time to all manner of outsiders.
It was the dawn of the era of emerging awareness of the demographic impact of the baby boomers. A new personalized computing technology was combining with telephone networks, satellites and cable boxes. It was the dawn of both the information age and the financial revolution that promised time-conscious, convenience-oriented, financially savvy, technology literate baby boomers the fulfillment of their dreams.
The information age, led by fiber and the Internet, further propelled the industry to its current state of advanced use of information technology. Financial institutions employed Boomers to trade by computer, to devise mathematical models, to trade in various financial markets both separate and distinct, and connected and interrelated, with sub-second speeds. All the while the infrastructure of the factory – the back, middle and front office, along with the risk models and regulatory oversight – failed to keep pace. The industry poured huge amounts of money into this increasingly Rube Goldberg-like infrastructure to keep the plumbing from exploding.
The architects of that era were strategists and acquirers. They failed to be true architects, to lay out the blueprints upon which these financial conglomerates were to be built. The business-silo model for controlling the enormous growth that evolved proved ineffective when attempting to pull together resources to reengineer the pilings upon which the whole edifice was erected.
These giant financial conglomerations were built one acquisition atop another, always teetering at the edges of an infrastructure needing rebuilding or the whole thing would collapse. The business model did prove faulty, not because it was wrong to be big, global and diversified – that is where the clients were going as well – but because the revenue was pouring in faster than systems could be rebuilt. There were too many black boxes acquired from merged companies piled one atop the other in no particular order. No CEO, auditor or regulator was able to see into it. Forging consensus to fund a redo of the infrastructure required each business line manager, and there were many, to agree to give up some of his profits (which translated into his direct compensation) for the good of the enterprise. Fat chance.
That the blueprints for these financial behemoths were missing is unquestioned. How, then, can regulators, guided by a hastily prepared living will, dismantle or recover these giants from serious capital depletion or failure? A living will requires the drafter to a have a full inventory of assets and liabilities, systems and interconnections, as well as entanglements with all outside facilities and organizations.
We will surely pull the wrong brick or tug the wrong pipe and topple the whole edifice. Best to place society's bet on slowly reengineering TBTFs. This effort is made more doable now that the Group of 20 developed economies has approved a long-missing global identification system for financial market participants and the products they own, trade and process. It is amazing that the industry and its regulators survived without such a means to aggregate and view financial transactions electronically. Perhaps bankers spent too much money on short-term fixes and regulators too easily nodded in approval and issued no-action letters.
Allan D. Grody, the president and founder of Financial InterGroup Holdings Ltd., is writing a book, "Reengineering the Financial Corporation."
