Break Up The Banks

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Wanna have some fun?  I have an idea about how to “save” the banking industry.  Through mergers and acquisitions, the banking cartel grew to become infallible.  Dave Shafer pins the tipping point of this crisis to the repeal of The Glass-Steagall Act of 1933.  I’m not so certain he’s incorrect.

The intention of The Glass-Steagall Act of 1933 was to avoid this:

Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks

Do the 1920’s sound like this decade? As Dave Shafer points out,  the Gramm-Leach-Bliley Act of 1999 ENCOURAGED  the financial behemoths  explaining  “economies of scale” as the primary reason for the repeal of Glass-Steagall.  While financial institutions with strong technology infrastructures can reduce the cost of banking processing functions, the GLB act of 1999 discouraged what Greg Swann calls “flinty banking practices” and encouraged rampant speculation, this time in risky home loans rather than new stock issues.

We were so interested in free online banking that we fed the growing gorilla until he bloated to 1600 pounds. Today, we’re shocked that he busted out of the cage and is chewing up the zookeepers and zoo patrons.

Let me try an analogy for those less interested in economic history .  You once had neighborhood grocery stores.  Certainly, economies of scale favor the supermarket approach.  Distribution costs drop which lower retail food prices.  As those supermarkets vertically integrate, they branch out into ownership of trucking companies, slaughterhouses and farms.  Prices keep dropping and everybody is happy. A chicken in every pot becomes two and all praise is given to the phrase “economies of scale”

Then, a company like Starbucks comes around and the demand for coffee, on a retail level, skyrockets.  Supermarket companies, now owning the commodities suppliers, focus the lion’s share of their efforts on coffee bean farming rather than milk production.  One day, consumers realize that massive caffeine consumption is unhealthy and curb their Starbucks-a-day habit; they return to the practice of drinking milk.

…but there ain’t no milk, just coffee.  Really cheap coffee.  Crashing market prices coffee.  Coffee that costs a nickel a cup.  In fact, supermarkets have so much coffee that the supermarket companies hire lobbyists, to encourage the FDA to  stop telling mothers that caffeiine stunts growth, and start telling mothers that whole milk makes for fat kids.

Am I reducing this to the ridiculous?   Of course I am.

Wanna solve the banking crisis?  Break ’em up.  Reinstate Glass-Steagall, stop taking interstate deposits, and limit loan origination to market areas or regions. Securities firms can still package those loans to provide liquidity but an irrevocable loan guarantee, on the originating lender, will serve as a deterrent to poor lending practices. I hypothesized that the problem wasn’t in the failure of the securitized mortgage process, it was its instantaneous success.  That instantaneous success led to the systemetized approach to real estate lending rather than the local approach that is needed for sustainability.  Dan Green’s thoughts on a real estate data inspired that hypothesis.

“Break ’em up !” I say.  Citigroup can become the First National City Bank.  Bank of America can become Bank of California (or North Carolina).  Wells Fargo the Fargo National Bank, etc, etc.  If we spend that $700 billion on an auction process for the break-up of the oligopoly, we may just get banks to lend money to worthy borrowers, again.

Sound nuts?  Look down at your cell phone.  Do you think you’d have that marvel of technology if Ma Bell was still in charge?