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Library Home Street Smart Report Home BEING STREET SMART by Sy Harding BEING TOO BIG TO FAIL IS OKAY AFTER ALL! June 12, 2009. Government
officials, regulators, and Congress told us what we already knew, that one of
the biggest contributors to the financial crisis was that in the wild merger and
acquisition binge of the 1990s some major financial firms had become "too
big to fail", too intertwined with each other to fail. They had to be
bailed out, or the collapse of one or two could collapse the entire financial
system. Of
course what they didn't say is that they, government officials, regulators, and
Congress, made most of it possible, when in 1999 they rescinded the Glass-Steagall
Act of 1933. Investigations
after the 1929 stock market crash had revealed widespread conflicts of interest
and outright fraud in the activities of numerous banks that had also become
involved in investment banking and brokerage activities. By 1933 a large portion
of the commercial banking system had collapsed, and the Great Depression was
underway. As
one of several actions taken to help prevent it from ever happening again the
Glass-Steagall Act was passed, which separated commercial banking, investment
banking, and brokerage activities, setting up substantial barriers between them.
Savings banks could take in deposits from the public and make home mortgage
loans. Commercial banks could take in deposits from corporations and make
commercial loans. Investment banks could raise capital for businesses by taking
them public, arrange mergers and acquisitions and so forth. Brokerage firms
could provide a market for stocks and engage in brokering and investing in them. It
worked quite well for 70 years. In
the strong economy of the 1990's banks of all types, and brokerage firms, grew
larger within their own areas through mergers and acquisitions of competitors,
the larger gobbling up the smaller, which was dangerous enough in concentrating
financial strength in fewer and fewer but larger and larger hands. Commercial
banks then began peering over the barriers and saw the huge profits being made
by investment banks and brokerage firms in the soaring stock market of the
1990's. The investment banks and brokerage firms peered over and were enticed by
the prospects they could see on the banking side, particularly in home
mortgages. And
by spending humongous amounts of money lobbying regulators and Congress they
managed to have the walls come down, when Congress repealed the barrier portion
of the Glass-Steagall Act in November, 1999. That
opened the doors to financial firms being able to get into each other's
businesses (as had been the situation leading up to the 1929 crash), and they
plunged headlong into doing so. Commercial banks established or acquired stock
brokerage services, launched mutual funds and money-management services.
Brokerage firms began offering banking services and mortgages. Commercial banks,
investment banks, and brokerage firms all plunged into derivatives activity,
excited particularly about the potential profits from packaging and marketing
mortgage derivatives to institutional investors, even forming hedge funds of
their own to invest in them. Well,
we know what happened when it collapsed last year. It came very close to a
repeat of the collapse of the banking system in 1933 and the Great Depression. So
Congress and the regulators are saying – whoops! – let's investigate and
find out how that happened, who it should be blamed on, and what we can promise
as assurance it won't happen again. We
aren't hearing anything at all about re-installing Glass-Steagall type barriers. However,
we are hearing promises about how the financial industry will be closely
regulated and supervised so this 'too big to fail' stuff won't happen again. Yet,
as part of the panicked rescue efforts, in various weekend meetings between
regulators and major financial firms, Bank of America was encouraged to buy
troubled Countrywide Financial (itself the 2nd largest mortgage
provider in the country). A few months later Bank of America was encouraged,
perhaps even forced, to buy Merrill Lynch. Wells Fargo was encouraged to buy
troubled Wachovia Bank. JP Morgan was assisted in its purchase of Washington
Mutual. The list goes on and on. The
too big to fail have been made even larger as part of the solution? This
week it was announced that BlackRock, the 4th largest
money-management firm in the world, with $1.3 trillion of investor assets under
management, will acquire Barclay Global Investors, the largest money-management
firm in the world, from troubled British bank, Barclay's. The
deal more than doubles the size of BlackRock, making it not only the world's
largest money-management firm (with $2.7 trillion under management), but double
that of the second largest (State Street Global Advisors). Wall
Street analysts can't seem to praise the deal enough because BlackRock is one of
the few asset-managers that have remained relatively stable through the bear
market, and the acquisition will provide needed capital to Barclay's Bank. That’s
okay for now. But all the major financial institutions were strong and stable in
the late 1990s and early 2000's too, when they were allowed to make the many big
acquisitions that made them too big to fail. Are
acquisitions like the BlackRock deal, merging two of the largest
money-management firms in the world, not something that should have to meet the
new supervision of the financial industry in the efforts to fix the too big to
fail dangers of the past? Does the vision of $2.7 trillion of investor assets
being managed by one firm not make Congress and the regulators a tad nervous? Just
what are the reforms and oversight we are being assured will prevent the
financial industry from bringing devastation down on the nation again at some
now unexpected, but inevitable troubled time down the road? Looks
like more of the same old same old to me.
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