Is Sandy Weill Wall Street’s Alfred Nobel, who took his then-untold millions earned by arms trafficking and created an eponymous peace prize? Or is he more like a madam who, recanting profitable sins, heads to a comfortable convent populated by society’s nicest ladies? This is for others to judge, but one thing is certain: Mr. Weill’s new-found support for small-town banking has added still more momentum to the big-bank break-up brigade. Will this give them enough firepower now to change the course of banking? In the immediate term, it helps, as it gives still more credibility to those at the regulatory agencies armed by Dodd-Frank with formidable authority to execute what I have long called the “organic” break-up. But, can a simple size threshold be enacted or Glass-Steagall reinstated? This I think far more difficult, and not just because politics makes it, like everything else these days, hard. Rather, it’s because a big-bank bust-up on these simple, if alluring, criteria will do nothing to make banking safer. What’s needed for that is not artificial limits, but rather clear rules to which both regulators and bankers can be readily and meaningfully held accountable.
A careful look at breakup proposals shows more rhetoric than real specifics on which initiatives could actually proceed. Size limits have a lot of appeal, but other than a $500 billion ceiling some have suggested, no one has a clear standard nor – more importantly – a rationale for why $500 billion is riskier than, say $300 billion. Glass-Steagall is in fact still on the law books despite Gramm-Leach-Bliley, so reviving it per se makes little sense. Advocates of doing this premise their campaign less on legal technicalities than on a simple cry: separate commercial from investment banking. Maybe so, but the ongoing confusion sparked by the Volcker Rule shows all too clearly how hard it is to define even something as seemingly straightforward as “proprietary trading” and, then, issue an edict against it.
But, let’s assume I’m wrong. Someone will come up with a sensible size limit or all will agree that, even without one, a size limit must be set and, then, it is. Let’s assume too that something like Glass-Steagall is substantively mandated. So, to the critical question posed above: does this make banking any better?
To answer this, I have just one word: WaMU. Or, maybe two: WaMU and Countrywide. Each of these was well below $500 billion in size and did nothing but traditional banking, offering mortgages to Americans from sea to shining sea. It’s not their size or activities that made them toxic – rather, it’s that they did traditional banking very, very badly under the most complicit of regulators.
Actually, two more words here: Fannie and Freddie: they did nothing much but traditional asset securitization for conventional conforming mortgages. For all the contradictions of their GSE charter, this too should have been a most boring and safe-and-sound business. But, of course, it wasn’t – again the sorry result of awesomely poor corporate governance and captive regulation.
In essence, advocates of size and activity barriers are seeking to incarcerate traditional banking behind walls thick enough to keep out risky neighbors. But, history shows that even Alcatraz wasn’t secure – with a will and a way, convicts got out and illicit bootie got in. These days, the public – with some reason – has so little trust in bankers that The Rock is an all too tempting place to which many wish to consign the industry. But needed instead is the far harder work of industry and regulatory rehab. Without it, the next set of seemingly high walls will prove only the latest challenge conquered by freewheeling financiers.