Buyer Beware: When Leaders Of The Financial Industry Ask To Break Up Big Banks

What Happened?

Lately, at least two prominent leaders of the financial industry came out in public to ask that the biggest banks be broken up again to separate commercial from investment banking and one of them regretted to have scrapped the infamous New Deal era Glass-Steagall Act.

One of the leaders is Sandy Weill (Wall Street Journal article, subscription required), the long time CEO of City Bank, who made this bank into a megabank with brokerage and insurance. He also is dubbed the chief lobbyist behind the repeal of Glass-Steagall Act.

The other leader is Nikolaus von Bomhard (link to German language article in the Neue Zuericher Zeitung), the current CEO of Munich Re (the largest global reinsurer). That Mr. Bomhard may favor a breakup of big banks is no surprise. It is well known that insurance companies and banks in Germany have been in a fierce competition with each other for decades. The largest German insurance company, i.e. Allianz SE, was even said to have been more dominant in the German economy than the largest German bank, i.e. Deutsche Bank.

Besides these two men there were apparently a number of other distinguished individuals who concurred.

What Breakup?

Neither Mr. Sandy Weill nor Mr. Nikolaus von Bomhard explained how they would break up the big banks. Let me guess these two gentlemen were looking to big government to do this job.

Unfortunately, if my memory serves me correctly, the history of government antitrust measures in the US is not exactly successful. On the contrary, the history is rather dismal and a chain of failures.

Free Markets And Free Trade Is The Answer

It is foremost a severe government failure that banks got bigger and bigger and that the financial industry is one of the most regulated in the US.

Government, as usual, should get out of the way! Let banks go bankrupt. Open up the banking business to domestic and foreign competition of any kind. Remove barriers to entry. Minimize the cost of doing business and so on.

A particular responsibility rests also with all bank customers who should e.g. never trust all their money with one bank and who should also monitor what their chosen bank is doing with their money.