AN MBJ BANKING ANALYSIS: Weighing “Too big to fail”

by Ted Carter

Published: August 12,2012

Tags: Citigroup, Glass-Steagall Act, Sandy Weill, too big to fail

It’s as if Johnny Appleseed suddenly developed a disdain for apples, says a banking and investment industry stunned by former Wall Street kingpin Sandy Weill’s condemnation of the marriage of depositor institutions and investment banking.

After all, having the two tie the knot was Weill’s idea, they say, pointing to the former Citigroup chairman’s successful lobbying of the Clinton administration to dismantle the Glass-Steagall Act, a Depression era firewall between commercial banking and investment banking.

Now, Weill fears the government’s adherence to the “Too-Big-to-Fail” doctrine has put the nation’s taxpayers at risk for having to do another bailout — and perhaps a much larger one.

Frank Keating, president and CEO of the American Bankers Association, is having trouble understanding why Weill wants to kabash the good times enjoyed by Wall Street’s bankers and investment pros.

Why would anyone want to stop banks from using depositor’s money on risky bets?

Disappointed and dismayed — that’s how Keating is feeling about Weill’s about-face and sudden call for breaking up the nation’s big banks.

Sandy Weill

Weill’s “misguided proposal” would “damage our still recovering economy,” Keating says, citing the prospect of foreign banks moving in and taking blue-chip corporate clients away from U.S. banks and investment institutions.

In Mississippi, banking executive Greg Taylor shares Keating’s fears. “I’m concerned about the global economic market we’re in,” says Taylor, president and CEO of Merchants & Farmers Bank in Holly Springs and newly installed chair of the Mississippi Bankers Association.

Taylor says he does not think the Mississippi Bankers Association has taken a position on “too-big-to-fail,” but as a banking professional he thinks Keating’s fears may be valid.

“If we start taking the larger banks apart we could lose our financial order and not be competitive with the foreign banks that would come in and start lending to our large corporations.”

The banking crisis of the latter part of the last decade was a “huge picture” with plenty of culprits, including the tens of millions of toxic home mortgages and the subsequent packaging of those loans into stocks traded worldwide.

“I’m not sure that Glass Steagal coming back is the right answer right now,” Taylor says.

Taylor could find plenty of disagreement on that from his fellow community bankers who say the big banks felt they could act recklessly without fear of going under. The doctrine of Too-Big-to-Fail gave them confidence Uncle Sam would pull them out of any fires they started.

Not only can you not fail, you can do your gambling with depositors’ money that is held in your affiliated commercial banks.

Community banks, on the other hand, have no such protection and must weigh their risks accordingly. The result: An uneven playing field, many community bankers say.

Jerry Wilson was a Mississippi community banker until last spring, having retired as president and CEO of BankFirst in Macon. He has brought a community banker’s unease with the “Too-Big-to-Fail” doctrine to his current job as commissioner of the Mississippi Department of Banking and Finance.

“There is no question that our community banks have suffered from the fallout from the larger banks,” Weldon says. “And there’s no question we need to end the To-Big-to-Fail.”

But that is as far as Wilson goes. The nation’s giant banks must be shrunk to a much-less-risky size, he says, but emphasizes he is unsure how that should be accomplished.

“I don’t have enough knowledge on that that to know how to end that,” he concedes.

 

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