Washington: Move over too-big-to-fail. Here comes too-big-to-manage.
Congress’ inquiry into JPMorgan Chase & Co.’s $2 billion (Dh7.3 billion) trading loss has reignited the question of whether a bank can grow too large and complex for its own executives to oversee. The banking industry is taking notice that a move to cap the size of Wall Street firms is gaining traction on Capitol Hill.
“There seems to be growing interest in some type of breakup proposal,” Sheila Bair, a former chairman of the Federal Deposit Insurance Corp, said.
The concept is expected to arise today as JPMorgan Chief Executive Officer Jamie Dimon testifies before the House Financial Services Committee on the trading debacle. Last week he told the Senate that the losses, which carved about $23 billion from the bank’s market value, were due to a poor investing strategy coupled with management failures.
Senator Sherrod Brown seized on that admission.
“It appears executives and regulators simply can’t understand what is happening in all these offices at once,” the Ohio Democrat said during the June 13 hearing. “It demonstrates to me that too-big-to-fail banks are, frankly, too-big-to-manage and too-big-to-regulate.”
Rule against proprietary trading
While bank lobbyists say they are still most concerned that JPMorgan’s trading loss could prompt regulators to write a stronger US rule against proprietary trading, they are also closely monitoring the emerging talk about too-big-to-manage.
The financial industry fears the idea could unite Democrats pushing to downsize banks with Republicans who think the 2010 Dodd-Frank law should be repealed because it offers special regulatory protections to “systemically important” firms.
Shifting the terms of the political debate from the more amorphous phrase of too-big-to-fail may make the efforts easier to explain to the public, the lobbyists, who spoke on condition of anonymity because the discussions are private, said.
Both Democrats and Republicans are weighing versions of too-big-to-manage proposals. Brown has sponsored a bill that would cap the size of what he calls “mega-banks.” FDIC member Thomas Hoenig has been promoting a modern version of the 1933 Glass-Steagall Act, aimed at separating more risky investment banking operations from units handling deposits.
In his Senate testimony last week, Dimon defended the largest banks, saying they are needed to provide services to multi-national corporations, including lines of credit that can reach billions of dollars. He also noted that JPMorgan’s size helped it weather the 2008 economic collapse.
Source of strength
“Our diversification was a source of strength in the crisis,” Dimon said. “It was not a source of weakness.”
Still, with JPMorgan facing federal investigations by the Justice Department, the Securities and Exchange Commission and other agencies over the loss, Dimon’s status as an industry spokesman on over-regulation has been somewhat deflated. None of the chief executives of the other major banks — Citigroup Inc., Morgan Stanley, Wells Fargo & Co., and Bank of America Corp. — have been as vocal in the public policy arena.
Richard Fisher, a Democrat who is president of the Federal Reserve Bank of Dallas, has been a vocal supporter of curtailing Wall Street’s biggest firms. He wrote in the regional bank’s 2011 annual report in March that “downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response.”
Bair, who helmed the FDIC through the credit crisis, has started a group of business executives and former regulators and senators to counter the big bank lobby in Washington. While her Systemic Risk Council hasn’t come to a policy position on breaking up the largest banks, it’s likely to consider it.
Structural solutions
“It’s an important question,” Harvey Goldschmid, a former Democratic SEC commissioner who is on the council, said. “If financial institutions have become too-big-to-fail, too-big-to-manage, and too-big-to-regulate, then wisdom would be on the side of thinking about structural solutions.”
Not everyone agrees.
Peter Wallison, a fellow at the American Enterprise Institute and a former general counsel of the Treasury Department, said nobody really knows how big is too big.
“Shall we size banks so only stupid people can manage them, or should we be allowed to size banks so smart people can manage them?” Wallison asked. “There isn’t a lot of thought given to this, it is just a lot of chatter.”
