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The author of a new book on financial reform makes a case for breaking up the nation's largest banks.
Scott Leibs, CFO.com | US
April 2, 2010
"This is about power and control and who decides your future," Simon Johnson warned for at least the second time on Friday. He had just returned to the campus of MIT's Sloan School of Management in Cambridge, Massachusetts, having been in New York hours earlier to deliver a similar message on The Today Show. Both appearances were part of an intensive launch of his latest book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, co-authored with former McKinsey consultant James Kwak.
The "13 bankers" of the book's title refers to the financial-industry luminaries who were summoned to the White House on March 27, 2009, in a mostly futile effort to enlist their help in solving the very economic crisis they had been so instrumental, in Johnson's view, in creating.
"We're all in this together," President Obama told the assembled bankers. The statement was more apt than Obama intended, Johnson contends. Wall Street bankers have become so entrenched in Washington in the past three decades that the solution proposed by Johnson and Kwak — break up "too big to fail" banks into smaller entities for which failure is, in fact, an option — faces a very long uphill climb.
If Johnson's solution isn't adopted, it won't be for lack of effort on his part. Speaking to an audience of 150 at MIT, where he is the Ronald A. Kurtz Professor of Entrepreneurship, Johnson argued forcefully that the astounding rise of the nation's largest banks mandates immediate corrective action. In 1995, he pointed out, the assets of the six largest banks equaled 17% of GDP; by last year that figure had risen to more than 60%. Profits (and compensation) have followed similarly stunning trajectories, as has the clout wielded by bankers on both sides of the political aisle.
When bankers came looking for a bailout, Johnson said, they not only got one, they got it on terms that were "completely at odds with conventional practices" in similar financial catastrophes. The result was a rescue operation that amounts to "nontransparent corporate welfare that must be stopped."
Johnson disagrees with Treasury Secretary Timothy Geithner's claim that the Great Recession represents a 30- or 40-year flood that few people will see again in their working lifetimes. A more apt comparison, he said, is to weakened levees, and the key question is whether the structural changes that have taken place in the financial industry will cause those levees to be breached again in the near future. "Do we want to experience this crisis again," he asked, "just because six banks can't be made smaller?"
Johnson has no illusions that enacting stronger regulations than those currently put forward will be easy. "It will take time to change people's attitudes," he admitted, but he said there is historical precedent for picking a fight that few people grasp, let alone support. "When Teddy Roosevelt took on J.P. Morgan," he said, "no one understood why, and of those who did, no one thought he would win." Yet Roosevelt triumphed over not only Morgan but also monopolies such as Standard Oil, which was broken into almost three dozen smaller companies.
Asked by an audience member whether banks have learned valuable lessons from the meltdown and thus won't need tighter regulation, Johnson responded, "The recent executive bonuses handed out suggest not much has been learned." Indeed, Wells Fargo and several others have recently announced lavish compensation awards to some of the very executives Johnson believes should have been ousted as one condition of the bailouts.
But he remains hopeful, citing several chief executives who support his argument, sometimes publicly, sometimes privately. Asked about potential support from CFOs, who rarely, if ever, champion any form of financial regulation, Johnson quipped, "I don't expect CFOs to be in the vanguard, but I do believe many will support the concept of breaking up too-big-to-fail banks once they take a close look at the issues."