Bank Breakups

Now this requires comment:  In fact, I’ve hesitated from doing commentary type posts, but I figure I have some things to get out, so I’ve created a new post category for these.  I can move some of my prior posts into that category as well.

William Harrison, chairman and CEO of JPMorgan Chase & Co – "It gets back to management and risk-taking, and you can screw that up at a small bank or a large bank."

Correct.  But when you screw up at a large bank, your impact is magnified.  It’s also harder to do at a smaller bank because there are less hands involved and it’s harder to hide your actions.  Notice that the quote is not from a CEO of a small bank.

Robert Bostrom, general counsel of Freddie Mac from 2006 until last year – "The financial crisis was a 200-year event in the making that would have happened regardless of how big the banks were."

I can’t find any relevance to the 200-year figure pulled out of the air here.  The stock market began in 1792 and there was a crisis in 1817, but I suspect that Mr. Bostrom is implying that everything from the beginning of the US stock market contributed to the situation we are in now.  To say that this would have happened regardless of how big banks are is just insane logic.  What a cowardly display of denial of responsibility.

"People around the world, like me, for example, need the services of these big integrated investment banks," said the founder of a major private equity firm.

How many people are like you, Mr. Anonymous Private-equity-firm-founder?  How many banks are needed for your services?  No disconnect here.  It’s entirely possible his statement could have been, “I need the services of one integrated investment bank.”

Richard Kovacevich, former CEO of Wells Fargo – "There is this conventional wisdom that big is bad or risky.  I don’t think there is any evidence that that is the case. Banks fail mainly because of concentration of risk."

A fair statement.  You can be big and diversified.  But you will also be slow to react and burdened with an oversized expense structure.  But in complete agreement with the statement, banks do fail because of concentration of risk.  Why do they insist on doing so?  And if the bank was smaller, its impact on the economy as a whole would be lessened.

Bill Isaac, former chairman of the FDIC- "We need a good discussion about how these institutions might be simplified and much better regulated."

Ok.  The whole structure of corporations is flawed, and it’s interesting to note that Google has gone down this path and is destined for the same result.  One company that tries to do too much and cover too much area will collapse under its own weight.

As much as I hate war, there is something to be learned from it.  Multiple smaller units will outperform a single large unit provided they all share the same vision and battle plan.  As you conquer more area, your supply line increases and slows response and adds vulnerability.

As much as I am involved with software development, there is much to be learned there as well.  If you develop a large application, it becomes harder to change over time due to internal and external dependencies.  Larger applications operate slower because they consume more resources.  Well-designed applications can fail in one section without affecting the whole.

You want a good example?  TD Ameritrade created TD Bank.  They can have all the brand identity, cross-promotion and integration they want, but they are separate entities.  You want a good non-financial candidate?  Microsoft should create Microsoft Hardware and separate the hardware design/manufacture from the software development.  Big companies like to tout that their many departments shield them from losses when one department suffers.  There’s nothing that should stop one company from investing in another partner company, but when they lack that separation, the company as a whole must suffer for the failures of the one department.

It seems everyone on the outside knows what needs to be done, but no one is willing to take the first step.  Everyone on the inside is blinded by the alternate reality.

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