There is an old saying that criminals serving long-term prison sentences can become “institutionalized,” meaning they become so reliant on the jail system to provide their basic necessities of life – food, water and shelter – that they can’t live without it, or outside of it. They become institutionalized when the very thought of maintaining sanity and civility outside the institutional borders scares the hell out of them. When they reach this point the person has grown so attached to the institution that they prefer a jailhouse bunk over freedom and independence. It’s an ill state of mind.
That is the state of the financial industry today.
Banks began losing their independent identity during the deregulation that occurred in the 1990’s. It was then that banks began transforming into “financial institutions” by offering services beyond traditional banking boundaries. It also brought about major industry consolidation in an attempt to offer consumers a “breadth” of services. Consolidation got a further boost during the panic stricken market Crash of 2008 – when bailouts and takeovers were everywhere, and even Goldman Sachs changed their operating structure to a “bank holding company” to qualify for emergency cash funding through the Federal Reserve’s discount window. By the time the dust settled from the ’08 financial crisis, and after an unprecedented amount of industry consolidation, the financial industry was essentially nationalized through the banking system by the end of 2009. Today the industry is inundated with companies that are “too big to fail” or “too important to the economy” to allow all them to go out of business. Something that adds little incentive for fiscal prudence.
And then Jamie Dimon rattled the hornet’s nest by losing a few billion dollars in hedge fund activity. The government is now investigating what should be illegal behavior from a bank that receives taxpayer funded bailouts. But no one will go to jail for this, all will still get bonuses, and nothing will ever change — let there be no doubt.
Indeed, there are suggestions of more financial regulations and tighter boundaries — but who can believe that? Banks have lobbied against the so called Volker Rule (not to be confused with the Dimon Rule of Stupid) since authorized in Dodd-Frank in the wake of the ’08 crash, while also making this type of activity illegal. But Wall Street successfully lobbied Congress (a clean word for bribery) to not implement these critical operating boundaries, which is why nonsense like this continues.
The only way to end “too big to fail” is to break-up companies that fit that bill.
Why not start this process by making banks be banks. Banks don’t sell insurance. Insurance companies do that. Banks provide banking services and asset based lending/financing (i.e. the purchase of a primary residence, commercial property, small business loans, capital equipment, etc.) They’re not investment banks. They’re money banks. Investment companies provide investment services and effectuate investment transactions – they’re not insurers or money bankers. They’re investment banks.
Let’s take JP Morgan Chase for example. At the very least it should be broken into two parts: JP Morgan Investment Company and Chase Manhattan Bank. (How’s that for radical?) Banks cannot place bets in “synthetic portfolios” like Mr. Dimon did. But investment companies can. As such, Jamie Dimon can’t be the CEO of Chase Bank but could be for JP Morgan Investments, or vice versa.
Banks must be more conservative. They facilitate market activity (spending and making payments) and should be dedicated to instruments of savings and financing long-term purchases. As such, banks should focus on calculated credit risks attached to actual and legitimate items of collateral. Anything else is an insurable risk, an investment, or a speculative gamble – none of which have a place inside bank operations.
Hey, free-markets are just like free-people, both can overindulge at times. The financial industry has done this through deregulation and wide-scale consolidation. By providing all the same services in massive form – banking, insurance, and brokering investment transactions – financial institutions have become too much of the system, and hence, “too big to fail.”
That must end.
The industry needs to change its mindset and de-institutionalize, making itself smaller and less reliant on other parts of the system, government intervention, and taxpayer funded bailouts. Bad businesses deserve to go out of business, like investment companies that make too many bad bets, like Lehman Brothers.
Failure is a part of freedom and free markets.
Purging the weak leads to a healthier, stronger, and freer market.
It won’t happen until we unite with one loud voice to change it. That’s step one.
Here to help if you need me.
Stay tuned…
