Too Big to Prevail?By
The Wall Street Takeover
and the Next Financial Meltdown
By Simon Johnson and James Kwak
Pantheon; $26.95; 304 pp
Alan Greenspan, the master of monetary mumbo jumbo, leaned back in his chair and grew uncharacteristically forthright.
"If they're too big to fail, they're too big," the former Federal Reserve chairman said when asked about the dangers of outsized financial institutions.
It was October 2009, and the man who helped make megabanks possible was starting to sound more like Teddy Roosevelt than the Maestro as he entertained what he called a radical solution.
"You know, break them up," he told an audience at the Council on Foreign Relations in New York. "In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole."
Greenspan the bank buster crops up near the end of 13 Bankers, Simon Johnson and James Kwak's reasoned look at how Wall Street evolved into what they call "the American oligarchy," a group of megabanks whose great economic power has brought them political power. Unless these too-big-to-fail banks are broken up they will cause a second meltdown, the authors write. "And when that crisis comes, the government will face the same choice it faced in 2008: to bail out a banking system that has grown even larger and more concentrated or to let it collapse and risk an economic disaster."
The banks in their sights include Bank of America, JPMorgan Chase, and Goldman Sachs. Though Wall Street may not like 13 Bankers, the authors can't be dismissed as populist rabble-rousers. Johnson is a former chief economist for the International Monetary Fund who teaches at the Massachusetts Institute of Technology's Sloan School of Management. Kwak is a former McKinsey consultant and software entrepreneur. In September 2008 they started Baseline Scenario, a blog that quickly became essential reading on the crisis. When they call Wall Street an oligarchy, they're not using the term loosely.
Drawing parallels to the U.S. industrial trusts of the late 19th century and Russian businessmen who rose to economic dominance in the 1990s, the authors apply the term to any country where "well-connected business leaders trade cash and political support for favors from the government."
Oligarchies weaken democracy and distort competition. The Wall Street bailouts boosted the clout of the survivors, making them bigger and enlarging their market shares in derivatives, new mortgages, and new credit cards, the authors say.
These megabanks emerged from the meltdown more opposed to regulation than ever, the authors say. If they get their way—and they just might, judging from current congressional maneuvering over President Barack Obama's proposed regulatory overhaul—Wall Street will retain its license to gamble with the taxpayer's money. This isn't good for anyone, including the banks themselves, which often feel compelled by competitive pressure to take suicidal risks.
"There is another choice," Johnson and Kwak propose: "the choice to finish the job that Roosevelt began a century ago, and to take a stand against concentrated financial power just as he took a stand against concentrated industrial power."
Obama finds himself in the middle of a struggle that has coursed throughout U.S. history—the struggle between democracy and powerful banking interests. The book's title alludes to one Friday morning in March 2009 when 13 of the nation's most powerful bankers met with the President at the White House amid a public furor over bailouts and bonuses.
The material that sets this book apart can be found at the beginning and end. Chapters three through six present an all-too-familiar, though meticulously researched, primer on how the economy became "financialized" over the past 30 years. Students of the crisis won't miss much if they skip ahead to the last chapter, where the authors debunk arguments that curbing the size of banks is too simplistic a solution. A more complex approach, Johnson and Kwak counter, would invite "regulatory arbitrage, such as reshuffling where assets are parked."
In a nutshell: They propose that no financial institution should be allowed to control or have an ownership interest in assets worth more than 4% of U.S. gross domestic product, or roughly $570 billion in assets today. A lower limit should be imposed on investment banks—effectively 2% of GDP, or roughly $285 billion, they say.
If hard caps sound unworkable consider that these ceilings would affect only six banks: Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. "Saying that we cannot break up our largest banks is saying that our economic futures depend on these six companies," they conclude. "That thought should frighten us into action." Though Jamie Dimon, Vikram Pandit, and Lloyd Blankfein won't appreciate this sort of backtalk (any more than John D. Rockefeller did), incremental regulatory changes are not likely to change the underlying situation. As Johnson and Kwak see it: "If there are no banks that are too big to fail, there will be no implicit subsidies favoring some banks over others."
So why does their sensible proposal now seem so wildly ambitious and unachievable? Whatever happened to Greenspan the bank buster?