The Edmond Sun


August 15, 2012

Break up the banks? Why not let the market do it?


Hey, let’s break up the big banks. Yeah! That would show those Wall Street fat cats and solve a lot of problems to boot — especially the risk that taxpayers could be tapped again in a panic under the “too big to fail” doctrine. The banks wouldn’t be too big, right? One reason we had the last crisis was deregulation, namely repeal of the Glass-Steagall law separating commercial and investment banking.

Well, that’s the argument anyway, boiled way, way down. Even Sandy Weill, who built Citigroup into the behemoth it is today, recently jumped on this bandwagon.

I admit the break-up-the-banks idea is attractive on the surface. Years ago, economists Milton Friedman, John Tobin and others pushed a notion called “narrow banking.” Banks that held government-insured deposits would be restricted. They’d operate almost like public utilities. They could make traditional loans, but none of that masters-of-the-universe stuff. No collateralized debt obligations, no credit default swaps, etc.

The rest of the financial world would be largely free to whoop it up, with funding sources limited to high-wealth investors who would penalize reckless brokerages by quickly yanking their money. Everyone would know that no government guys or gals would ride to the rescue.

Former Kansas City Fed President Tom Hoenig, now a director at the Federal Deposit Insurance Corp., has a proposal generally along these lines. But it’s not clear this idea would eliminate bailout risk, and “breaking up the banks” may not be possible, at least in the way advocates seem to envision it. Even if Congress was willing to plunge into this issue again — highly unlikely — anything it coughs up would be full of loopholes.

“Technology has melded stuff together so much that the line between commercial and investment banking is not easy to draw,” said Bert Ely, a Alexandria Va.-based banking consultant.

Even if we went to some version of narrow banking, how could we know the lightly regulated part of the financial universe won’t still pose a threat? After all, the entities that set off the panic, Bear Stearns and Lehman Brothers, had no commercial deposits. The repeal of Glass-Steagall, Ely observed, was “totally irrelevant to the too-big-to-fail issue.”

Which takes us to the real question: whether a collapsing brokerage’s counterparties would be forced to eat losses, and whether that prospect would trigger the kind of freeze-up we saw in 2008, when banks ceased doing business with each other, paychecks were on the verge of bouncing and suppliers couldn’t be paid. We were truly on the edge of a precipice.

As former Fed chairman Paul Volcker has said, nobody wants to be the one who triggers a financial collapse. In the face of a potential catastrophe, Treasury and the Fed would probably start bailing.

Maybe one solution is simpler than the debate over bank breakups suggests. The financial author William Cohan argues that to change bankers’ behavior, change how they’re rewarded.

Under his plan a bank’s top people wouldn’t be paid unless the entire firm has pre-tax profits; no more skimming compensation from the revenue an individual banker generates. More: The top 400 people in each bank would have their personal net worth on the line every day, as in the days when Wall Street was run by private partnerships. The firm loses, they lose.

Cohan’s idea would dramatically change how Wall Street views risk.

In any case, the market itself may break up the big banks. They’ve become ungainly blobs with chronically low shareholder returns. Expect hedge funds and vulture capitalists to move in, buy up blocks of shares and start pushing for breakups.

E. THOMAS MCCLANAHAN is a member of the Kansas City Star editorial board. Readers may write to him at: Kansas City Star, 1729 Grand Blvd., Kansas City, Mo. 64108-1413, or by email at

Text Only
  • Welfare state grows as self-sufficiency declines

    For the past 50 years, the government’s annual poverty rate has hardly changed at all. According to the U.S. Census Bureau, 15 percent of Americans still live in poverty, roughly the same rate as the mid-1960s when the War on Poverty was just starting.
    After adjusting for inflation, federal and state welfare spending today is 16 times greater than it was when President Lyndon B. Johnson launched the War on Poverty. If converted into cash, current means-tested spending is five times the amount needed to eliminate all official poverty in the U.S.
    How can the government spend so much while poverty remains unchanged? The answer is simple: The Census Bureau’s “poverty” figures are woefully incomplete.

    August 1, 2014

  • Let laughter reign in Turkey

    This week, Bulent Arinc, the Deputy Prime Minister of Turkey, verbally chastised Turkish women for laughing in public. Before we take a closer look at these remarks — in the interest of full disclosure — I need to confess a personal bias. I love to hear my wife’s laughter. Sometimes, when I review the day’s highlights, the most pleasant thing that comes to mind is her laugh — it’s frequent, genuine, pleasantly-pitched, melodious, appropriately timed, infectious and charming.

    August 1, 2014

  • Is English getting dissed?

    Is the English language being massacred by the young, the linguistically untidy and anyone who uses the Internet? Absolutely.
    Is that anything new? Hardly.
    Many words and expressions in common parlance today would have raised the hackles of language scolds in the not-so-distant past. For evidence, let’s look at some examples from recent newspaper articles.

    July 31, 2014

  • 'Too big to fail' equals 'too eager to borrow'

    Four years ago this month, President Barack Obama signed the Dodd-Frank Act into law, promising that the 848-page financial law would “put a stop to taxpayer bailouts once and for all,” he said. But recently, Massachusetts Sen. Elizabeth Warren told a Detroit crowd that “the biggest banks are even bigger than they were when they got too big to fail in 2008.”
    Who’s right?

    July 30, 2014

  • Sheltons travel for better life for family

    Some time around 1865 a mixed-race African American couple, William and Mary Shelton, made their way from Mississippi to east Texas. Nothing is known for certain of their origins in he Magnolia state, or the circumstances under which they began their new lives in Texas.

    July 29, 2014

  • Film critic Turan produces book

    Kenneth Turan, who is the film critic for National Public Radio’s “Morning Edition,” has written a book “Not to be Missed, Fifty-Four Favorites from a Life Time of Film.” His list of movies span the gamut from the beginnings of filmmaking through the present day.
    There are some surprising omissions on his list. While he includes two films, “A Touch of Evil” and Chimes at Midnight” made by Orson Welles, and one, “The Third Man,” that Welles starred in but did not direct. He did not however, include “Citizen Kane,” that was the first movie Welles made, that is  often cited by both film critics and historians as a favorite film.

    July 28, 2014

  • Logan County’s disputed zone

    Watchers of “Star Trek” may recall the episode from the original series entitled, “Day of the Dove.” In this episode, Captain Kirk and his crew are forced by a series of circumstances into a confrontation with the Klingons. The conflict eventually resolves after Kirk realizes that the circumstances have been intentionally designed by an alien force which feeds off negative emotions, especially fear and anger. Kirk and his crew communicate this fact to the Klingons and the conflict subsides. No longer feeding upon confrontation, the alien force is weakened and successfully driven away.

    July 28, 2014

  • Russell leads in Sun poll

    Polling results of an unscientific poll at show that Steve Russell, GOP candidate for the 5th District congressional seat, is in the lead with 57 percent of the vote ahead of the Aug. 26 runoff election. Thirty readers participated in the online poll.

    July 28, 2014

  • Healthier and Wealthier? Not in Oklahoma

    Increased copays, decreased coverage, diminished health care access, reduced provider budgets and increased frustration are all the outcomes of the Legislature’s 2014 health care funding decisions. Unlike some years in the past when a languishing state economy forced legislators into making cuts, the undesirable outcomes this year could easily have been avoided.

    July 26, 2014

  • Medicaid reform a necessity

    Historically, education spending by the state of Oklahoma has been the largest budget item. This is no longer the case. In recent years, the state of Oklahoma spends more on Medicaid (operated by the Oklahoma Health Care Authority) than common education and higher education combined, according to the state’s Comprehensive Annual Financial Report.

    July 25, 2014


The runoff race for the 5th District congressional seat is set for Aug. 26. If the voting were today, which candidate would you support?

Al McAffrey
Tom Guild
     View Results