We find ourselves in a bit of a pickle.
The government basically poured heaps and heaps of cash into the financial system in order to keep it from imploding, which was almost certainly the right call, but this has had the annoying side effect of subsidizing the financial sector, in particular Goldman Sachs, which is now basically a government-supported cash machine which is making billions off of taxpayer subsidies .
But the thing is, there isn’t much we can do about it.
Or is there?
Here’s my modest proposal: why not just break up the banks?
All of the big ones: Goldman, Morgan Stanley, JPMorgan, Bank of America, Citigroup… Too big to fail is too big to exist, right?
EDIT: As I’ve tried to explain in the comments, the reason would basically be moral hazard: “If you screw up the global economy, ok, we’re not going to let you fail, because you’re systemically important, but we are going to break you up after the smoke clears because, hey, come on.”
But mostly it’s about culture: the financial markets are still incredibly skittish, because they don’t know if/when the financial crisis is ending, and they don’t know if/when/how the government will step in. Meanwhile a vast majority of people are angry, ANGRY (not unjustifiably so) at the bankers. This would provide national and even global cathartic closure and allow us to move on.
It’s hard to see why the bits of Goldman Sachs that underwrite bond issues can’t operate independently from the bits that account for most of the high-frequency trading on the NYSE and Nasdaq. You have boutique M&A shops and hedge funds that do each of those things without doing the other stuff, and do quite well. You might have some synergies in there but between how over-hyped corporate synergies are and regulatory China walls, I’m not sure how big they truly are.
Unlike a terra incognita Lehman-style bankruptcy, there are well-established legal frameworks for doing this: banks routinely spin off, sell and buy bits of each other, without creating counterparty risk and widespread panic. Goldman would simply spin itself off bit by bit and the remaining shell would return its symbolic assets (an $80,000 commode and Hank Paulson’s hair, perhaps) to shareholders and shut down.
There are not the ethical or legal problems that you have in a nationalization. Corporations do not have rights as such, and only exist insofar as they are a very efficient way of pooling together financial and human resources and providing products and services to the market. Shareholders would not be expropriated as such, they would only hold, say, a share of Goldman Sachs Private Equity, a share of Goldman Sachs M&A and a share of Goldman Sachs Hedge Fund for every three shares of Goldman Sachs Inc. (Actually, an unwritten agreement to jettison the brand “Goldman Sachs” for a few decades might not be such a bad thing either.) Again, legally and financially, this is very easy to do.
And politically, I suspect not much political capital would be lost by Congress in appearing to be tough on Goldman Sachs.
This would leave aside the difficult question of whether to reinstate Glass-Steagall and whether putting together commercial and investment banking is what destroyed us (or saved us, since standalone investment banks were the first to go under). No messy nationalizations with no exit strategies either.
Right after the banks are broken up, we might see a wave of consolidation and the emergence of new financial behemoths. But that wouldn’t be so bad as watching the old ones rake in billions off of taxpayer subsidies, would it? And more crucially, these smaller entities would have much less in the way of implicit government guarantees so we might actually see a little free market going on. More competition for M&A and wealth management where Goldman and JPMorgan respectively are picking up the pieces of all their fallen competitors. New entities that wouldn’t be in the business of government arbitrage so much as in the business of, you know, business.
And also, it must not be discounted, it would provide a big cathartic moment for everyone, voters, consumers and investors alike, to put the financial crisis truly behind us and start again on a sound footing.
So: why not?
I’m genuinely asking. I mean: I might be wrong about this, but why is it not even talked about and seriously considered except for the odd fringe loony? What am I missing?
Why not just break them up?