Dissembly Required, Instructions Not Included

It’s unlikely that conservative columnist George F. Will and Sen. Sherrod Brown, a liberal Ohio Democrat with a blue collar mien, would agree on anything much less the controversial federal policy of Too Big To Fail (TBTF). And yet both Will and Brown are among a growing list of notables who believe the only way to rescue the U.S. economy from the threat of economic blackmail posed by the megabanks is to break them up. Will, an erudite intellectual, praised Brown in a recent column in The Washington Post for his populist opposition to the concentration of economic power among the country’s largest financial institutions.

The theory behind TBTF is that federal regulators will always bail out a megabank rather than risk that its failure would tank the U.S. economy. Knowing this, the managements of these organizations take crazy risks without fear of the consequences. The capital markets know this too, which gives the megabanks a significant funding advantage over small banks (which are allowed to fail). That’s TBTF in a nutshell.

Title II of the Dodd-Frank Act, which lays out a process for the “orderly liquidation” of large financial companies, was intended to end TBTF once and for all. But doubts persist that the feds will have the courage to liquidate a failed megabank instead of rescuing it when the next financial crisis occurs. Brown has announced that he and Sen. David Vitter, a Republican from Louisiana, plan to co-sponsor legislation that will end TBTF by, presumably, breaking up the megabanks.

One of the strongest advocates of a break-them-up policy has been Richard Fisher, president of the Federal Reserve Bank of Dallas, who has written and spoken extensively about TBTF. Fisher would restructure the megabanks by cutting off their nonbanking affiliates and holding companies from the benefits of deposit insurance and emergency funding from the Federal Reserve. And he would break up their commercial banking operations into smaller units.

I do not disagree that TBTF must be addressed before the next crisis hits, but is such a massive restructuring of the U.S. banking system feasible, and would the death of TBTF be its only consequence? The proponents of BTU (Break Them Up) tend to gloss over the details, and yet many devils lurk therein. To the advocates of BTU, I would submit three questions.

How would this restructuring be accomplished?
JPMorgan Chase & Co., the country’s largest bank with approximately $2.36 trillion in assets, has over 5,000 subsidiaries doing business in 72 countries. Is there a blueprint for breaking up a global organization of such enormous size and complexity into a group of smaller operating entities that can survive on their own? Title I of Dodd-Frank requires large banks to submit to their regulator a plan for their own orderly liquidation, the so-called living will. But liquidations and restructurings are fundamentally different-one dissolves, the other preserves-so those living wills might have limited utility here. Liquidating a megabank would be daunting, but restructuring one in the manner that Fisher envisions might be just as challenging.

What would the size limitation be?
According to Will in his Post column, Fisher thinks that $100 billion would be just about right. A spokesman for the Dallas Fed says Will was mistaken and that Fisher has never offered a specific number. So the first challenge will be to identify an asset size below which a bank no longer poses a systemic threat to the economy. I suspect this would end up being an arbitrary number, but for the sake of argument, let’s say the ceiling is $250 billion. That would require the megabanks to be broken up into multiple entities-perhaps as many as nine for JPMorgan. Breaking up the old Ma Bell into seven regional telephone companies almost seems easy by comparison.

How would BTU affect the U.S. economy?
Would the megabanks be broken up one at a time, in which case it could take 10 years to execute a BTU legislative mandate, or all at once? If done simultaneously, I have to believe that such a massive restructuring of the U.S. banking system could have a chilling effect on the economy. The 12 largest U.S. banks (including investment banks Goldman Sachs and Morgan Stanley) account for 70 percent of the industry’s assets. Management teams and employees at the restructured companies would be focused internally on their dismemberment, not externally on lending or raising capital for their corporate customers. Imagine if this restructuring was occurring now, when the U.S. economy is weak and banks have been criticized for not lending enough. Would BTU flip the U.S. economy into a recession?

A number of serious people have joined Fisher in advocating a break-them-up policy, including former Citigroup CEO Sandy Weill and former Federal Deposit Insurance Corp. Chairman Shelia Bair. It might be the right policy for the country, but I’d like to see more discussion before we take it seriously.


Jack Milligan


Jack Milligan is editor-at-large of Bank Director magazine, a position to which he brings over 40 years of experience in financial journalism organizations. Mr. Milligan directs Bank Director’s editorial coverage and leads its director training efforts. He has a master’s degree in Journalism from The Ohio State University.

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