Bankers Agree: 'Too Big to Fail' Has Failed

Citigroup - Too Big To Fail
Maybe if we called it "2B2F," it would have been more popular. But lacking the street cred of a cool nickname, the idea "too big to fail" is beginning to lose popularity in America.

Just a few days ago, former Citigroup (C) CEO Sandy Weill -- architect of the 1999 repeal of the Glass-Steagall Act -- publicly voiced the opinion that certain banks needed to be broken up. As we've all seen in recent years, the merger of commercial banks with investment banks to form 2B2F megabanks was fraught with peril. A few bad trades and -- poof! -- suddenly the deposits of ordinary investors were at risk.

Weill's solution: "They [should] be broken up so that the taxpayer will never be at risk, the depositors won't be at risk."

That's kind of funny, coming from the guy who helped to create the risk in the first place. But according to Weill, things have gotten out of hand. It's time to "split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something ... that's not 'too big to fail.'"

It's an idea that's starting to gain currency on Wall Street.

The Tide Turns

Just listen to what some people on the Street are saying:
  • Richard Kovacevich, former CEO of Wells Fargo (WFC): "Investment banks ... and commercial banks ... become risky when there is a large proprietary trading. ... This is the activity in which danger lurks, and it should be strictly limited and regulated. We should not put our economy at risk again."
  • Thomas Michaud, current CEO of Keefe Bruyette & Woods: Citi, Bank of America (BAC), JPMorgan (JPM), and Wells "are the biggest banks in the nation and I think that's unsustainable. Either the banks' performance has to get better or ... they're going to have to" break up the banks.
  • Mike Mayo, analyst at CLSA: "This is not a tough call. If you break up the big banks ... I think investors would be huge winners."
  • Philip Purcell: former Morgan Stanley (MS) CEO: "From a shareholder point of view, it's crystal-clear these enterprises are worth more broken up than they are together."
  • Sheila Bair, former FDIC chairwoman: "At the beginning of the year ... [Citigroup] was trading at 58% of tangible book value, while BofA was trading at 48%. If Citi and BofA were broken up into smaller institutions ... their shareholders would see $270 billion in appreciation."
'Too Big' is 'Just Right'

That's some serious moola Bair is talking about. The kind of money that makes even folks who oppose the idea give it serious consideration.

The Wall Street Journal says that in 2010 and 2011, Bank of America executives considered breaking up their own empire... before ultimately deciding against it. And even some folks like Wells Fargo's Kovacevich (who, believe it or not, actually argues against breaking up the banks) admit there's danger inherent in "too big to fail."

As for banking executives who insist that "too big" is "just right," their arguments generally parrot those of JPMorgan CEO Jamie Dimon: "Size matters. The diversity of JPMorgan and the size of it is what gives it its strength." To Dimon's way of thinking, it wasn't the megabanks that got in trouble during the last crisis. It was the "smaller" banks that were "less diversified" that failed.

When You're Right, You're Right ... Except When You're Also Wrong

He's right about that. According to FDIC, 92 banks failed last year. True, most of these were small fry. Tiny banks you've probably never heard of. Banks with names like Badger State Bank, the aspirational Park Avenue Bank, and Superior Bank of Birmingham (which turned out to be anything but).

In 2010, 157 more banks died a quiet death -- RockBridge Commercial, American Marine, and Appalachian Community Bank.

A year before that, the tally was 140. Banks with names like Ocala National, Great Basin Bank, and -- I kid you not -- Corn Belt Bank & Trust.

On the other hand, the mere fact that you've never heard of Corn Belt Bank & Trust did lend one assurance: Alone or all together, these tiny banks weren't of sufficient size to bring down the economy when they failed.

But a big bank like Citigroup or JPMorgan ... or Countrywide or Lehman Brothers? That's a badger of a different color, friends. That's a mortal threat to the system. And it's a good reason to break up the 2B2F banks.

Motley Fool contributor Rich Smith holds no position in any company mentioned. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Motley Fool newsletter services have recommended buying shares of Wells Fargo. Motley Fool newsletter services formerly recommended JPMorgan Chase.

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Worked for the bank back in the late 80's & early 90's. They were separate from investment; I worked for a Federal Savings Bank. They need to go back to that same principal. CEO's have gotten so greedy and feel they have done nothing wrong. At the end of the day they go back to their nice homes in their nice cars and mostly likelly have no idea of what it takes to make ends meet at middle class level. When people have to decide which is more important to buy, gas, food or prescriptions, is should give an indication that this country (and the world) is in serious trouble.

August 10 2012 at 11:31 AM Report abuse rate up rate down Reply

Weak argument. You are confusing former bankers with bankers. Sandy Weill's lack of honesty and professionalism is why he is a former banker and why his opinion should be ignored. Sheila Bair - who I highly respect - is not a banker. The idea that it is better for shareholder value is not the argument that is being used to break up the big banks - the argument is about risk. The government doesn't have any reason to make judgements about what the shareholders value - so this argument is nonsense.

The government's job as bank regulator is to define a set of regulations so that if a bank is going to fail, the government knows how to wind it down. This argument about breaking up the big banks is an excuse to avoid doing that job. The problem with "too big to fail" is not the size of the banks, it is the lack of appropriate regulation so that the government can do its job when a bank fails. That was the problem before 2008. Dodd-Frank deliberately ignored the issue so it is still a problem now.

There is another issue of creating a bright line to separate FDIC insured and non-FDIC insured deposits, which was easier under Glass-Steagle. A wishy washy "break up the banks" approach won't deal with that, and of course Dodd-Frank ignored the issue. But that is a separate problem.

August 09 2012 at 1:13 PM Report abuse rate up rate down Reply

The American public will never again respect or trust the huge banks and Wall Street. They have made their position crystal clear. Guided by personal greed, they will turn on their own and eat them alive if they can. The e-mails and phone calls between the Wall Street buzzards make it clear that they have no concern about the laws; they consider themselves above the law. Salaries in the millions, bonuses in the billions, are obscene to the average American. The Republican outlook of "I'm getting rich - who cares about you?" has bled into the Congress - watch them grovel below the Wall Streeters and the bankers. They have to. They are saying "please, please don't take away my goodies, and I will keep on kissing your butts". Man up, billionaires - pay your taxes; corporations too. We don't think you're 'all that'' anymore. Shut up about 'job growers'. In a short answer, you're not. Stop your lying political ads. We are not as stupid as you think you are, and you're not as smart as you think you are, either. Bring on the auditors. Enforce the regulations. If Republicans still want to cut, cut, cut -- you will see what chaos you create with your cuts. Stop blaming Obama - regain a modicum of respect by admitting that Bush was controlled by Cheney and Rumsfeld, started two wars, cost America a huge number of lives, and maimed many more. Say that you never thought about paying for any of this - you just handed it all over to Obama, right after you wrecked our economic system. Be big boys - admit what you did wrong. And remind me again -- exactly why did you send Martha Stewart to jail?

August 07 2012 at 7:31 PM Report abuse rate up rate down Reply

Wells Fargo -- you hired John Stumpf CEO of Norwest Financials a global derivative investment firm -- yeah now the at the flim flam con game that was rigged has been found out you want to off the bad parts, fire the employees whose retirement can be stolen and start again. think again -- the American public has outed you rats out

August 07 2012 at 2:31 PM Report abuse rate up rate down Reply

Obama wants to wipe all his backers tears with our check book.
now if her was a man of the people he would not have done that.

dem's just pander to the poor, they really dont care.
where is all the commensence people at not washington

August 07 2012 at 12:42 PM Report abuse -2 rate up rate down Reply
2 replies to mquam14891's comment

This was not Obama's idea. Did you read the article?

August 07 2012 at 1:25 PM Report abuse rate up rate down Reply

under which POTUS did the big banks and corp start to fail and then get govt loans from? wasn't Obama

August 07 2012 at 1:54 PM Report abuse rate up rate down Reply

Of coarse the 2B2F banks are on track with recorded earnings and CEO payouts. President Obama consultants are most from this group of banking advisers. Talk about the foxes being put in the hen house with no restrictions…….

August 07 2012 at 12:37 PM Report abuse +1 rate up rate down Reply

Nice of some of these crooks, Wall Street "wise guys" and banksters to wake up after the fact. These folks are unconscionable "greedy bastards." Now, all of a sudden they are developing a moral compass where they didn't have one before? Let's see if we get some real action and banking regulations with teeth. In the meantime, F' em and the loser politicians in their pockets.

August 07 2012 at 12:10 PM Report abuse +3 rate up rate down Reply

The fallacy of "Too Big To Fail" also applies to the USA as well as large companies, cities, and European nations. Recession is leading into Depression, thanks to bankrupting spending by our elected officials (and our own living beyond our means).

August 07 2012 at 12:10 PM Report abuse +1 rate up rate down Reply

Bring back Glass-Steagall......end of story.

August 07 2012 at 12:06 PM Report abuse +4 rate up rate down Reply

We need to let these big companies fail That will send a message that America is tired of million dollar golden parachutes and bonus packages being wasted on the inner circle, causing the business to claim losses for bailouts. Teach Wall Street and their Chosen Ones we are done tolerating it... Also, we should hold the Board and Executives financially responsible for the bankruptcies and losses, of which their mismanagement and personal greed caused.

August 07 2012 at 11:48 AM Report abuse +2 rate up rate down Reply
1 reply to zapdog4's comment

I mostly agreee, but the ones who will get hurt are the small guys.

August 07 2012 at 1:27 PM Report abuse rate up rate down Reply