I will only be addressing the immediately obvious consequences to the banking system however the reader may translate these same issues to the other industries participating in the governments’ largesse.
The first of these unintended consequences is the lack of impact that pumping almost $3 trillion dollars into the banking system has had on making credit more available. The second is what we have created by saving all of the institutions under the banner of “Too Big to Fail”. Policy makers have rushed to the public trough to address the “Too Big to Fail” companies and in typical governmental fashion have created ever larger institutions that we may now consider the “Fourth Branch”.
This Fourth Branch consists of now massive financial institutions that are completely privately held, yet fully backed by the U.S. taxpayer. If you thought the “Quasi Governmental” agency models of Fannie Mae and Freddie Mac were a problem, you ain’t seen nothing yet. That tragic policy has been leapfrogged by the Fourth Branch.
The omnipresent example is the banking system. I have taken two points of observation from the FDIC Statistics on Depository Institutions. The first is 12/31/2006, which is a date prior to the recognition of the credit crisis, and 9/30/2008 the last quarter the bank data is available within the eye of the storm. Consider the following:
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There are 255 fewer commercial banks
- In the Banks with Assets Greater than $1 billion category:
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There are 509 in 2008 vs. 494 2006
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Assets have increased by $1.9 trillion in the period
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The total number of employees has increased 28,425
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Total deposits have increased $1.7 trillion
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Total unused commitments have increased $1.2 trillion
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These startling statistics are prior to major mergers and acquisitions supported by the Federal Reserve and the Treasury that have been completed or are approved (i.e., Bank of Americas purchase of Merril Lynch, JPMorgans acquisition of Washington Mutual and Wells Fargo’s merger with Wachovia). In each of these cases, the Fed and the Treasury worked in concert with these banks by taking responsibility for the bad assets and massive write-downs to make them happen.
The table below shows the impact these mergers/acquisitions/asset purchases have on the “Too Big to Fail” problem, which is exactly the opposite direction this country should be moving towards to avert future problems. Three of the top 5 banks will have doubled their asset size as a result of this too big problem: (click on the graphic to enlarge)
In summary, these bail-out policies have created significantly increased risks in the system by creating even larger, “Too Big to Fail” institutions. In strategic terms, this is called increasing concentration risk. If they were too big to fail, as we were told as the check writing began, what do we have now with so many more assets concentrated in the hands of even larger companies?
The attendant problems, as already clearly evidenced in growing organizations to this level, are the exponential complexities that arise in the management and regulatory skills required for businesses of this size. Inefficiencies creep in quickly and communications and decision making is bogged down as significant functional silos are created across the business. From a management perspective, we have not proven ourselves adept in the management of these behemoths as globalization and the speed of transacting has surpassed our current ability to control them.
From the regulatory perspective, rigorous controls may be implemented, documented and policed however it should be evident at this point that the finest of regulatory policies are poorly enforced through too complicated a lens. The regulatory risk is twofold and regulatory “reform” is not the answer, although it is being pursued. The first is that businesses on this scale have to be reviewed by extremely expert regulators that are not always in abundance. The second is that the consolidated power and influence these institutions wield over policy makers in terms of lobbying, campaign donations, the sheer number of jobs they sustain, and their purchasing power make for very bad regulatory bedfellows. One only needs look as far as Fannie Mae and Freddie Mac for those shining examples.
Some will make the case that all of this scale and consolidation has been a major benefit to the customers, as the bank shares in the benefits of scale with its customers. These purported benefits arise from enhanced customer service and more product options and at less expense. However, this is clearly not the case as anyone with a bank relationship can feel; inadequate customer service, customer fees rising at every level, ATM fees, credit card rates and late fees that have risen to the point they are back up in front of Congress. There will also be a significant dampening effect on the benefits of competition in the banking industry as power, influence and money continue to migrate to the Fourth Branch companies.
As the country begins to consider yet another economic stimulus package in the trillions of dollars, we should consider addressing both issues simultaneously: the banking system and the stimulus. I wish this country could make its way to the very real conversation we should be having about cutting government and government spending at every level, but for some reason it seems to be relegated by our citizens to the “elephant in the closet” no one wants to get serious about letting out.
The latest trillion dollar stimulus bauble is focused significantly on “infrastructure spending” along the lines of FDRs fix during the depression… roads, bridges, and some military construction. While I understand the long term benefits of working on our infrastructure (the policy makers sell is on), I’m not sure how FDR Depression era policies translate into retraining a workforce that has been thrust into unemployment in the Information Age. There are supposed to be other “investments”, such as health, information technology and broadband for schools, but the cost of a few repaired bridges will make those look insignificant.
The banking system should be significantly disaggregated by capping asset sizes to $2 billion or less. This will create substantially more individual charters and institutions (3,150 commercial banks alone by disaggregating the top 3), but will put them in the communities they are meant to serve, provide employment and retraining into information age skills, completely mitigate the “Too Big to Fail” issue and significantly ease regulatory complexity.
Obviously, there are significant considerations to such a policy; however, the allowance for the private markets to control their own destiny has now been washed away in the sea of a soon to be $4 trillion bail-out (more to come), and the open eyed socialization of the financial system. The requirement is to shrink the managerial and financial complexities and distribute the risk in “small enough to manage” financial institutions. Perhaps then we can redeploy, retrain and employ many of our citizens in Information Age jobs.
One thing is certain; the government has already created significantly larger problems addressing the issues we have at hand. What is alarming is that we’re not even out in the years where the unintended consequences should actually rear their ugly heads.
Shouldn’t we ask our policy makers to quit doubling up on the problem they’re trying to fix before we start the whack-a-mole game on the problematic consequences to come?
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