Former JPMorgan Chairman: Breaking Up Big Banks Is a ‘Horrible Idea’

Thursday, 06 Sep 2012 09:55 AM

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Big banks shouldn’t be broken up and calls to do so represent “horrible” ideas, says William Harrison, former chairman of JPMorgan Chase.

Today, scandals have plagued the banking system, ranging from a $4.4 billion hedging loss at JPMorgan to a broader rate-fixing scandal involving the London Interbank Offered Rate (Libor), an interest rates used by banks when lending to one another.

Former Citigroup Chairman and CEO Sandy Weill, an architect of today’s large financial institutions, recently said big banks need to be broken up, with investment banks operating under one roof and commercial banks under another.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

Too much leverage and not enough transparency have made today’s large financial institutions too big to fail and pose systemic risk to the health of the economy.

“I think it’s a horrible idea to break up the banks,” Harrison told CNBC.

“There was a reason why all the banks became large — that is scale and efficiency. It wasn’t an unnatural act.”

The repeal of the Great Depression-era Glass-Steagall Act in the 1990s allowed financial institutions to run investment banks and commercial banks under one roof.

“We have great companies, we have the best banks and our banks have an impact on creating the biggest, deepest capital markets in the world,” Harrison said.

Supporters of breaking up big banks have said the big institutions are too large to manage, though Harrison said otherwise.

“I think this notion that these big banks are too big to manage, too complex, is not right. We live in a complex world, and we just need to manage things better when they go wrong,” Harrison said.

Things can go wrong at smaller banks as well and threaten the stability of the banking sector.

“This complexity argument I don’t buy. Sure big banks are complex, but if you look at the financial institutions that have failed, they have been tended to be more monoline — you take Countrywide or IndyMac or [Washington Mutual], these were more monoline companies. They weren’t nearly as complex by any stretch of the imagination as JPMorgan Chase, and yet those are the ones that have failed more readily,” Harrison said.

“So not a high correlation between complexity and failure that I have seen.”
Some experts point out that the United States needs smarter regulations and not more oversight or intervention.

After the collapse of Lehman Brothers in late 2008, the government rolled out a slew of regulations under the Dodd-Frank financial reform law that would give regulators greater say-so on bank capital requirements, liquidity levels and risk-management practices and would also ban banks from trading their own money for profit in capital markets.

Though banning financial institutions from running both commercial banks and investments won’t solve the problem.

“I’m very concerned about the size and complexity of the big banks. I don’t think that reinstituting the Glass-Steagall barrier between investment banking and commercial banking would serve any purpose … ,” Bill Isaac, former chairman of the Federal Deposit Insurance Corp. (FDIC) and chairman of Fifth-Third Bancorp, told Newsmax.TV recently.

Smart regulations, such has requiring banks to issue long-term senior and subordinated debt on a regular basis would check risky behavior, he noted.

“That will force them to go into the marketplace and justify to very sophisticated debt investors who have nothing to gain from the risks these banks are taking, they just want their money back with interest, they will have to go into the marketplace on a regular basis and convince these people that they’re doing the right things with the bank,” Isaac said.

“If a large bank fails, or a small bank for that matter, those debt holders should be required to take a haircut or a loss when the bank fails. Then we’ll have some really marketplace discipline over these institutions and we’ll have less of the wild and speculative practices that we’ve seen in the past.”

Calls to break up big banks have grown this year in wake of the JPMorgan trading loss, with supporters claiming that no matter how solid management might be, banks have gotten too big to handle.

“There’s no alternative but to resurrect Glass-Steagall as a whole. Even then, the biggest banks are still too big to fail or to regulate,” Robert Reich, former Labor Secretary under President Bill Clinton, wrote in a recent blog.

Others agree, pointing out that big banks haven’t created as much value for shareholders than once thought.

“Whatever economies the megabanks achieve from their size are more than offset by the challenges in managing trillion-dollar institutions that are into trading, market making, investment banking, derivatives and insurance, in addition to the core business of taking deposits and making loans,” Sheila Bair, former head of the FDIC, wrote in a recent Fortune column.

“This is one of the reasons why, even before the crisis, their shares performed more poorly than those of the well-managed regional banks, and continue to do so.”

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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