Why Capitalism Is Against Big Banks
JPMorgan is under assault from shareholders, not regulators
Jamie Dimon is feeling particularly defensive these days. You can tell because he’s ratcheted up the hyperbolic whining, most recently complaining that banks are “under assault” from regulators, and even calling the fact that his bank, JPMorgan Chase, has to deal with multiple regulatory agencies un-American and unfair. (Of course, Dimon doesn’t mention the various favors that Congress is now scrambling to do for him, as discussed by Alexis Goldstein.)
The new Jamie Dimon likes to blame his problems on Washington. Things were not always thus, remember: Dimon did not turn his nose up when those same regulators agreed to absorb the downside risk on Bear Stearns and handed him Washington Mutual on a silver platter. But this time he has only capitalism to blame for his problems. The latest round of problems began earlier this month when analysts at Goldman Sachs, of all places, argued that JPMorgan should be broken up into two or four smaller pieces—in order to unlock shareholder value.
The argument is one that critics of big banks like Simon Johnson and me have been making for years—it features prominently in the last chapter of 13 Bankers, for example—but, like all things, it means more when it comes from the mouths of our Goldman overlords. There are all sorts of good reasons why behemoths like JPMorgan Chase should be broken up. There’s the simple fact that they are too big and complex for even an ubermensch like Jamie Dimon to manage; witness the litany of crimes and “civil violations” that JPMorgan and its employees have committed over the past decade—which, of course, Jamie Dimon couldn’t possibly have condoned. There is the tremendous market power they possess in markets ranging from OTC derivatives to bond trading to equity underwriting to mortgages. Most importantly, there’s the risk that they pose to the financial system and the real economy, which justifiably exposes them to higher capital requirements (although they still aren’t nearly high enough) and greater regulatory scrutiny — requirements and scrutiny that the pieces of JPMorgan, if small enough, would not need to face.
The main arguments for the big banks have been economies of scale and synergies. There is a large body of empirical research on the question of whether very large banks enjoy economies of scale — a question complicated by the fact that banks’ primary “cost” is interest paid, and very large banks enjoy lower interest costs precisely because of the perception that they are too big to fail. (This body of research has recently received a huge boost from bank-funded research trying to find economies of scale.)
The synergies question is equally controversial. It shouldn’t be surprising that there are some synergies to operating in different businesses: companies tend to want their equity and debt underwriters to be able to trade the securities they are issuing, for example. But the general argument for “one-stop shop” banking — that people and even companies want to get all their financial services in one place — doesn’t even make sense to begin with. The reason one-stop shopping works for Target or Wal-Mart is that I actually have to drive somewhere to buy things, and I prefer to drive to as few places as possible. Financial services are overwhelmingly electronic and are therefore just about the easiest things to unbundle, and it’s preposterous to think that any wealthy person is going to move his investments from Vanguard to JPMorgan because she has an account at Chase. (Do you have a credit card issued by your retail bank? Do you even know what banks issued your credit cards?) The one-stop shop argument is also undermined by the comic ineptness of some banks, like JPMorgan rejecting a friend’s request for an increase in his credit card limit — after underwriting his company’s IPO!
Jamie Dimon’s real problem is that when people like bank analyst Mike Mayo or the analysts at Goldman say that JPMorgan should be broken up, they’re not writing academic papers or opinion articles. They represent real money, and an increasing proportion of the real money doesn’t buy Dimon’s story. They think that whatever economies of scale and synergies exist are not enough to make up for the fact that banks like JPMorgan are impossible to manage and therefore must be closely regulated — to prevent them from blowing up the global financial system, again. It’s easy to demonize regulators and politicians; it’s a lot harder to demonize shareholders, especially smart ones.
In a sense, this is the way things are supposed to happen. Big banks pose a major threat to the financial system, and therefore they should be regulated more tightly. Among other things, they should face higher capital requirements. If that turns out to crimp their profit-making ability, then they should shrink, and they should shrink in the manner that is most efficient and best for their shareholders. That’s all that the buy side is saying.
So why isn’t it happening? Well, the people who make enormous piles of money in a capitalist system fall into at least two different categories. One is those people who only care about making money. You haven’t heard of most of them: they are hedge fund managers, private equity partners, venture capital partners, owners of private companies — people who stay out of the news and do whatever will bring in the most cash. They don’t think companies should be large or small, only that they should be profitable.
The other group are people who like being famous and powerful. They like money, certainly, but (past a certain point) as a symbol of success and power. What they care about are the size of their empires and the frequency of their media mentions. CEOs of large banks, like CEOs of most large companies, fall into this second category. They are constantly talking about the merits of size and scope, usually to justify some acquisition that will further expand their empire. (Those empires rarely get broken up by sitting CEOs; instead, it is activist shareholders or private equity firms that do the job.)
The debate over JPMorgan is not a debate between capitalists and socialists. It’s a debate between two types of capitalists: those who care solely about returns, and those who care about size for its own sake. In this debate, let’s hope the greedy bastards win over the megalomaniacs.
James Kwak is, among other things, an associate professor at the University of Connecticut School of Law. Find more at Twitter, Medium, The Baseline Scenario, The Atlantic, or jameskwak.net.
