It’s Time To Break Up Massive Banks !!!

The banks are blackmailing us, Sigmar Gabriel, the head of the Germany’s center-left Social Democratic Party wrote in a position paper for his party. But with the fuss over Gabriel’s partly justified and partly exaggerated claim, one hopes that the most important words spoken last week will not get lost in the noise. Those words were from Sandy Weill, who for eight years was decisive figure at Citibank, major American bank. This is same Sandy Weill who forged a financial empire and fought against just about every regulation has been thrown at banking sector. His message today? Split up massive banks. (source: Georg Mascolo – Der Spiegel – 01/08/2012) 

What Weill is calling for is a return to rules that already once served the world well. They were conceived during the 1930s financial crisis and then disposed of during the liberalization frenzy of the 1990s. The Glass-Steagall Act is the name of the law that divided the banking world into two categories. The first is banks that are dedicated to the classic business of managing customer deposits and issuing loans making them systemically relevant. These banks must be protected and, in an emergency, rescued by the state. The second is investment banks, which too often have no problem at all with any risky business that comes its way as long as it promises to deliver profits. Weill believes that if things go awry at the investment banks, no one should be too quick to bail them out. These banks would be smaller and no longer the financial Goliaths that they are today.

What is deemed too big to fail, would be deemed too large to even be allowed to exist in the future. America, as well as the entire financial world, is discussing Weill’s proposal. And not without reason, either after all, US banker was one of the people who pushed Bill Clinton in 1999 to repeal Glass-Steagall. He even has a plaque in his office celebrating himself as “The Shatterer of Glass-Steagall.” The proposal still doesn’t have enough backing, despite support in many quarters including those in a number of Germany’s top boardrooms, such as reinsurance giant Munich Re, whose chairman, Nikolaus von Bromhard, also wants to eliminate the design flaw. SPD’s Sigmar Gabriel wants to as well. Objections have been raised from all sides (including the editorial staff of SPIEGEL’s business and economics desk). They argue, for example, that the case of Lehman Brothers bankruptcy shows that nothing can be radically changed. Eventually, the investment bank, whose collapse triggered the financial crisis, should have been rescued in some way or other. That may be true, but only under the current system. If a strict division of banks had been in place, it is highly unlikely that Lehman would have been able to drag entire financial world along with it into the abyss. And, yes, such a division would create problems for an institution like Germany’s Deutsche Bank, which as both investment and commercial bank would be forced to pursue a new business model. Still, advantages by far outweigh disadvantages. So far, any halfway sensible reform of the financial world has failed because of opposition from Wall Street, the City of London or political forces like Germany’s business-friendly Free Democratic Party. Politicians still believe they can honor their pledge to stop the kind of banking excesses that led to the crisis, but so far nothing has happened. It may be true that old dual banking rules wouldn’t be able to function today as they were written decades ago, but they could be adjusted to fit with the current financial world. It would require craftsmanship, but it could and must happen quickly. Incidentally, Glass-Steagall Act was only made possible because a Senate committee had exposed the dumb, risky and at times criminal behavior of banks in the run-up to Great Depression. The outrage paved the way for the law. Sometimes history repeats itself. Glass-Steagall served the world well for decades and it would have been better if it had never been repealed. It is high time to correct this error.


Acerca de ignaciocovelo
Consultor Internacional

One Response to It’s Time To Break Up Massive Banks !!!

  1. There have been plenty of banking scandals, but none quite like this: Investigators and political leaders believe that the manipulation of the Libor benchmark interest rate was the result of organized fraud.

    Institutions that participated could face billions in fines and penalties. Eduard Pomeranz and Rolf Majcen are small fish in the shark tank of international high finance. Their hedge fund, FTC Capital, is headquartered in tranquil Vienna and manages only €150 million ($189 million) in assets. But now Pomeranz, the founder, and Majcen, the head of the legal department, have been able to strike fear in the hearts of the big fish. “The Libor manipulation is presumably the biggest financial scandal ever,” says Majcen, a man with slightly disheveled-looking hair and Viennese sarcasm. Yes, he says, it did shock him that something like this was even possible, namely that a group of international banks had been manipulating interest rates for years. But Majcen takes a matter-of-fact approach to it all. As a financial professional, he is only one of many who want to get back the money that they feel they’ve been cheated out of. At the end of June, British and American regulators imposed a $500 million fine on Barclays, the major British bank, and forced its CEO Bob Diamond to resign. Since then, a war of sorts has erupted in the financial sector. Investigators are attacking presumed offenders, banks that are involved are denouncing others in the hope of mitigating their own penalties, and small investors like Majcen are inundating Libor banks with lawsuits. Deutsche Bank and more than a dozen other financial giants have come under sharp criticism due to the alleged manipulation of the Libor (London Interbank Offered Rate), a benchmark interest rate. Some are even referring to the banks that are instrumental in calculating that rate a cartel, the sort of vocabulary not normally associated with the financial industry. Regulators are using terms like “organized fraud.” European Justice Commissioner Viviane Reding has suggested that bankers ought to be called “banksters.” But in the case of some agencies, especially in New York and London, the outcry is also convenient; it diverts attention away from their own failures. For years, regulators overlooked what was happening right in front of their eyes. Now that the authorities have woken up, they are aggressively pursuing the offenders — and are reaching all the way up to the boardrooms. More than half a dozen government agencies, from Canada to Japan, are investigating the case. German authorities are also involved. A dozen employees of Germany’s central bank, the Bundesbank, have paid several visits to Deutsche Bank in recent weeks. They work for BaFin, the German federal financial supervisory authority, which has ordered a special audit, and are poking around the bank’s headquarters in Frankfurt, traveling to London, where its money market traders are based, and flying to Tokyo. Even the bank’s two new co-CEOs, Anshu Jain and Jürgen Fitschen, are expected to sit down for a question and answer session with the auditors. This is particularly unpleasant for Jain, who, as head of the investment banking division during the period in question, was ultimately responsible for money market transactions (…..)


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