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The view from the cocoon must be pleasant. Let's start at the beginning. Gobry is not the first person who is not a loony (this is a subjective measure of course) to ponder this course. Indeed, both the libertarian right and the progressive left have been talking about this for months. True, it was often wrapped up in the notion that the government needed to nationalize "obviously" insolvent banks; but that nationalization, which has quietly occurred in the cases of Citigroup Inc. (NYSE:C) and Bank of America Corp. (NYSE:BAC), was normally viewed as a first step, to be followed by a breakup of institutions to insure that we avoid the distortions of too-big-to-fail in the future. Rational pundits like Simon Johnson, Paul Krugman and Robert Reich argued this position, joined by a large and noisy rump in the blogosphere. And in the case of Citi, a sort of breakup is supposed to be happening, albeit more slowly than regulators really desired. OK, so Gobry missed that debate. One reason may be that the folks in the White House and Treasury have not been enthusiasts for either nationalization or breakup. After the stress tests, the debate fizzled because there was no viable possibility of it occurring, at least over the short term. And, contrary to various arguments (from Simon Johnson to Matt Taibbi) that suggest Goldman and other big banks own the government, there were substantive reasons not to seek a nationalization or breakup. Nationalization would entail a huge management effort by a government that doesn't want to run big and very complex banks day-to-day; the car companies were bad enough. And forcing a breakup of the big banks is not an easy task. In fact it would represent the kind of aggressive intervention in the economy for social and political reasons that Republicans have long argued the administration is just dying to do. True, there are "well-established legal frameworks" for restructuring, but they are voluntary. For the government to mandate an across-the-board breakup of the big banks would require legislative action (unlikely) and judicial review (likely). The government would be bogged down for years in exactly the kind of "legal and ethical" considerations Gobry seems to think don't exist. And it's true: Equity holders or creditors might not be wiped out as they would in nationalization. But they would be stuck in a situation they had never signed up for. Even worse, for investors and the broad economy, confusion, uncertainty and a vast reshuffling of assets would seize these institutions. The economy remains fragile; the banks are central to recovery. You just don't take the largest banks in the economy, break them up on Friday and expect them to function on Monday. It's a joke to think so. And over the longer term, there are other problems, which serious observers recognize as the trade-off to the obvious merits of resolving too-big-to-fail: There are competitive advantages of size that have nothing to do with compensation. Regulators allowed consolidation in the first place because they thought it would be safer and more efficient. Personally, I think that a variation on a new form of Glass-Steagall was dismissed too quickly, and an intelligent and thought-through separation of businesses still makes sense. But I recognize the difficulties. Glass-Steagall was imposed in the darkest days of the Great Depression when the banking system and Wall Street were flat on their backs. There wasn't a lot to lose in the short term. And only one institution had to undergo truly radical surgery: the old House of Morgan, which was broken up into J.P. Morgan & Co., Morgan Stanley (NYSE:MS) and (in London) Morgan Grenfell. To deal with the current market power of Goldman Sachs would require a very different form of Glass-Steagall. (And what about the market power of J.P. Morgan Chase & Co. [NYSE:JPM], which is a different complex of businesses?) Gobry does wonder what would occur if banks do what banks want to do, which is grow. And here, the real point of Gobry's "modest proposal" emerges: It's all about feeling good. 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. Well, no. As banks got larger, they would automatically accrue the government guarantees that accompany too-big-to-fail. The choice is to create a system of controls, not unlike the antitrust system, that would constitute a permanent structural restraint on the market (Gobry throughout confuses "size" and a crude Glass-Steagall distinction between investment and commercial banks that no longer has much market validity). In fact, Gobry's fundamental notion that the free market has disappeared is simply wrong. True, competition across the board in finance has declined as firms have shrunk, shut down or failed. But other firms are already filling the gap. Goldman and J.P. Morgan's dominance will not last forever. There is a market out there, it's alive, functioning and global, and it will provide the kind of competition that will, in time, shrink margins, drive innovation and risk-taking -- and probably create both the ingredients of boom and bust. A serious, as opposed to a modest, proposal would wrestle with that reality. - Robert Teitelman Robert Teitelman is the editor in chief of The Deal.
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