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Just how do we break up the big banks. Anti-trust laws are unlikely to be addquate to the jog.
The question was asked in another post about the consequences of breaking up the big banks. While thinking about how to phrase that answer in pleasant way, I assumed that Anti-trust laws would be used. The Attorney General could do that job through the courts and it would be unnecessary to deal with an intransigent Congress. The problem I've found is that the sources I see all hold anti-trust laws as inadequate to breaking up the big banks.
I am neither a lawyer nor an economist. I don't play one on television. I do not have the money to stay and Holiday Inn Express.
Son anyone with any expertise, or even an opinion, chime in on how we break up the big banks.
Can antitrust laws break up big banks?
Breaking Up Big Banks
The idea of breaking up big banks to make them smaller has support from some influential people. U.S. Sen. Sherrod Brown (D–Ohio), who serves on the Senate Committee on Banking, Housing, and Urban Affairs, said that “Sanford Weill is one of many banking industry experts who have observed that too big to fail is often too big to manage.” Sheila Bair, the former chair of the Federal Deposit Insurance Corporation, agrees with Weill. “I think these banks are too big to manage centrally. They’re too big to regulate, and they don’t produce good shareholder value, either. There’s a lot of value to be had if they were broken up,” Bair said.
I believe that new laws must be passed by Congress to carry out the goal of making banks smaller. As a practical matter, the current antitrust laws can’t be stretched to do the job. The new legislation could be simple: The scope of the antitrust laws could be expanded with relatively few added sentences.
Unfortunately, it is more likely that any new legislation will follow the modern style and be complex, involving modifications of the massive Dodd–Frank Wall Street Reform and Consumer Protection Act. The large and complicated Dodd–Frank statute, signed into law on July 21, 2010, in response to the nation’s recent financial crisis, has as its primary goals increasing financial stability of banks and avoiding systemic risks to the national economy. Reducing bank size or serving competition goals is simply not the main point.
The idea of breaking up big banks to make them smaller has support from some influential people. U.S. Sen. Sherrod Brown (D–Ohio), who serves on the Senate Committee on Banking, Housing, and Urban Affairs, said that “Sanford Weill is one of many banking industry experts who have observed that too big to fail is often too big to manage.” Sheila Bair, the former chair of the Federal Deposit Insurance Corporation, agrees with Weill. “I think these banks are too big to manage centrally. They’re too big to regulate, and they don’t produce good shareholder value, either. There’s a lot of value to be had if they were broken up,” Bair said.
I believe that new laws must be passed by Congress to carry out the goal of making banks smaller. As a practical matter, the current antitrust laws can’t be stretched to do the job. The new legislation could be simple: The scope of the antitrust laws could be expanded with relatively few added sentences.
Unfortunately, it is more likely that any new legislation will follow the modern style and be complex, involving modifications of the massive Dodd–Frank Wall Street Reform and Consumer Protection Act. The large and complicated Dodd–Frank statute, signed into law on July 21, 2010, in response to the nation’s recent financial crisis, has as its primary goals increasing financial stability of banks and avoiding systemic risks to the national economy. Reducing bank size or serving competition goals is simply not the main point.
And from "The Economist View"
Using Anti-Trust Law to Break Up Banks that are Too Big to Fail
Simon Johnson wants to apply anti-trust laws to financial markets and use it to break up banks that are too big too fail. More vigorous enforcement of anti-trust laws is something I've been pushing here for a long time, and as I explain below I agree with this idea, but as I understand it, current anti-trust law is inadequate for this task (particularly on dimensions such as connectedness and systemic risk). So it will likely take Congressional action before we can proceed.
The reason for bringing this up is that I want to amend remarks I made in the past. I have said that there is no single villain in this crisis, no one person, not one change in the law, etc., that caused this. It was a combination of things. But as I think about it more and more, I'm not so sure. The reason? According to the story I've been telling about why the crisis happened, there were incentive failures at just about every step in the process. Homeowners had no recourse loans giving them one way bets on home values, real estate agents are paid in a way that causes them to maximize the value of sales, mortgage brokers faced no long-run consequences from bad loans, real estate appraisers had incentives to validate sales, ratings agencies were paid by the people whose assets were being rated, CEOs and upper level management had incentives to maximize something other than shareholder value, there was a lack of transparency giving insiders an advantage, it goes on and on.There is not a single step in the process that wasn't compromised by an incentive or market failure of some type.
Looking at this at first, I concluded that it was all of these things, and more, that caused the crisis, and that it could have been stopped at any one of these steps. Had anyone at any one of the steps from the sale of the house to the complex securities traded in the shadow banking system said no, we're not doing that, the money could not have kept flowing through the system and blowing up the bubble. For example, if the mortgage brokers would have taken personal losses on mortgages that later went bad, they might have refused to finance them, and the money could not have been passed upwards to the shadow banking system where it caused such big problems. But instead, the brokers simply passed the contracts along, sliced and diced as necessary, to the next person in the finance chain.
Simon Johnson wants to apply anti-trust laws to financial markets and use it to break up banks that are too big too fail. More vigorous enforcement of anti-trust laws is something I've been pushing here for a long time, and as I explain below I agree with this idea, but as I understand it, current anti-trust law is inadequate for this task (particularly on dimensions such as connectedness and systemic risk). So it will likely take Congressional action before we can proceed.
The reason for bringing this up is that I want to amend remarks I made in the past. I have said that there is no single villain in this crisis, no one person, not one change in the law, etc., that caused this. It was a combination of things. But as I think about it more and more, I'm not so sure. The reason? According to the story I've been telling about why the crisis happened, there were incentive failures at just about every step in the process. Homeowners had no recourse loans giving them one way bets on home values, real estate agents are paid in a way that causes them to maximize the value of sales, mortgage brokers faced no long-run consequences from bad loans, real estate appraisers had incentives to validate sales, ratings agencies were paid by the people whose assets were being rated, CEOs and upper level management had incentives to maximize something other than shareholder value, there was a lack of transparency giving insiders an advantage, it goes on and on.There is not a single step in the process that wasn't compromised by an incentive or market failure of some type.
Looking at this at first, I concluded that it was all of these things, and more, that caused the crisis, and that it could have been stopped at any one of these steps. Had anyone at any one of the steps from the sale of the house to the complex securities traded in the shadow banking system said no, we're not doing that, the money could not have kept flowing through the system and blowing up the bubble. For example, if the mortgage brokers would have taken personal losses on mortgages that later went bad, they might have refused to finance them, and the money could not have been passed upwards to the shadow banking system where it caused such big problems. But instead, the brokers simply passed the contracts along, sliced and diced as necessary, to the next person in the finance chain.
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