We’ve Already Built the Next Banking Disaster

Having reported on a few banking disasters, I can assure you they’re different than other business meltdowns. A loss of confidence in a bank, leading to a run on deposits, quickly threatens other banks and entire economies, as the poor Cypriots are experiencing just now. It’s not like General Motors (GM) suffering a slow but steady decline. It’s a panic, moving at frightening speed.

So, what comes out of banking disasters is the result of panicked thinking. And in the months and years following, those decisions deserve to be seriously reviewed, and even undone if they’re deemed unwise.

This all came to mind, again, reading the brilliant column by Floyd Norris Friday about JPMorgan’s (JPM) London Whale positions gone wrong. Floyd, mining the Senate report on the mess, tells a story of bravado, stupidity and, ultimately, cover-up. It’s a doozy. And it leaves one wondering: No matter how smart Jamie Dimon, CEO of JPMorgan, is, or how smart the people around him are, can they really hope to manage an institution as huge and far-flung as the bank has become?

I don’t think so. They might get lucky and avoid other major screw-ups, but the top executives at such a place have little chance to know of all the risks that exist on the balance sheet and off.

If you’re inclined to agree with me, then this chart is truly mind-blowing:

JPM Total Assets Chart

JPM Total Assets data by YCharts

The government was compelled to bail out certain banks because they were deemed too big to fail, and they were. Other institutions’ exposure to failing banks made clear that letting them go bust would have spread losses and created panic. So, how do we fix the mess?

We panic and have un-failing banks acquire the failing ones, making the surviving institutions even that much more impossible to liquidate, or to manage, one might argue. Only Citigroup (C), among the top four that now dominate banking nationwide, has done much shrinking, and given the extraordinary bailout it required to stay in business one could argue it should get a lot smaller. But JPMorgan, Bank of America (BAC) and Wells Fargo (WFC), are vastly larger than they were before the crisis and regulating them will only grow more difficult because of that.

It’s just swell that regulators are requiring banks to file winding-down plans that could be used in the event of a next crisis, but with the Federal Deposit Insurance Fund so tiny it couldn’t liquidate any of the largest banks, the Treasury (that’s you, taxpayers) seems the only source of money to prop up a failing banking monster.

The Dallas Fed’s Richard Fisher, pictured here, has continued his lonely campaign to break up the biggest banks, and it appears he’ll fail and then be warmly remembered years from now when his warnings are proven correct. I'd even toss out Fisher's complaint that too-big-to-fail gives an unfair advantage to the biggest banks and hurts smaller ones. Who cares? What worries me is the cost to taxpayers, and the economic disruption, when one or more big ones collapses.

Bankers will talk about being entrepreneurial and needing the freedom to compete. This is B.S. The only reason they're able to stay in business is FDIC deposit insurance and access to the Fed's discount window for emergency borrowing. They exist by virtue of extraordinary government assistance, and while their shareholders get to upside of this deal, taxpayers are hugely exposed to the downside. Tough regulation -- and it should be counter-cyclical, bearing down hardest in a booming economy, easing up in a downturn, which sadly is the opposite of how we regulate now -- isn't anti-business in this industry, it's merely pro-taxpayer.

Despite what bankers claim, their multinational customers don’t need one-stop shopping for financial services, and in fact the biggest companies raise capital with only modest help from banks. Nor are bigger banks more profitable and thus competitive, as seen below, with far smaller U.S. Bancorp (USB) and relatively smaller Wells Fargo, which disdains proprietary trading and other giant-bank obsessions, based on return on assets, demonstrating that simpler and smaller is better for everyone when it comes to banks.

JPM Return on Assets Chart

JPM Return on Assets data by YCharts

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.



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