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Recursion

(56,582 posts)
Mon Dec 15, 2014, 06:52 AM Dec 2014

What does "broken up" mean in the context of an investment bank?

The only "breaking up" I know of historically was Bell's national monopoly being broken up into 7 regional monopolies. It's results were kind of a mixed bag (I'm looking at you, Verizon), but on the whole it was probably a net positive. But there was a sensible geographical way to do the break up which I don't see for "Wall Street" (which is a kind of nebulous term to begin with, but that's a different OP).

Before 2008, there were 5 investment banks widely considered "too big to fail":
Goldman Sachs
JP Morgan
Deutsche Bank
Merrill Lynch
Salomon Brothers/Smith-Barney (though it had been dying for several years)

Three of the five were essentially bought out with public money which was then repaid (at a profit to the government) by private investors (Goldman Sachs and Deutsche Bank were in good enough shape to buy themselves back). Because Glass-Steagall was overturned, retail banks could step in and buy up shares in the investment banks, hence Bank of America now owns Merrill, etc. This is why Barney Frank kept arguing that going back to the Glass-Steagall days would be a bad idea, particularly since the investment banks that failed weren't the ones who were regulated by Glass-Steagall in the first place. But that's also a different OP.

(Oddly enough, the phrase "too big to fail" was first actually used about AIG, which isn't an investment bank or even a "Wall Street" firm by most definitions of the term, and Bear Sterns, whose hedge fund crash caused AIG's counterparty exposure was never considered "too big to fail", which is why it was allowed to fail spectacularly.) Meanwhile, the bailout of AIG has produced $23 billion in profit to the government, and is still going on.

But anyways, if I take "Wall Street" to mean the investment bank/retail bank combinations that now make up those five companies, how should they be "broken up"? Into functional units? Given how popular Glass-Steagall is here, I assume there's some desire to make the retail banks divest of their IB holdings, so Bank of America would spin off Merrill, Morgan Chase would have to spin off Bank One (and probably Washington Mutual), etc.? My problem is that this takes us back to where we were in... 2008. Not exactly inspiring confidence here.

If it's not functional, should there simply be limits on their market cap? Say, an investment bank can have a trillion dollars in assets but no more, and if it goes above that it has to split? How would that work?

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RiverLover

(7,830 posts)
1. Here's a look at EW's "21st Century" G-S bill that failed to gather enough votes
Mon Dec 15, 2014, 07:07 AM
Dec 2014
http://www.warren.senate.gov/files/documents/21stCenturyGlassSteagall.pdf


Elizabeth Warren Introducing A Bill That Would Be Wall Street's Worst Nightmare
July 2013

Washington, DC - Senators Elizabeth Warren (D-MA), John McCain (R-AZ), Maria Cantwell (D-WA), and Angus King (I-ME) today will introduce the 21st Century Glass-Steagall Act, a modern version of the Banking Act of 1933 (Glass-Steagall) that reduces risk for the American taxpayer in the financial system and decreases the likelihood of future financial crises.

The legislation introduced today would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. This bill would clarify regulatory interpretations of banking law provisions that undermined the protections under the original Glass-Steagall and would make "Too Big to Fail" institutions smaller and safer, minimizing the likelihood of a government bailout.

"Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," said Senator John McCain. "Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer."

"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," said Senator Elizabeth Warren. "The four biggest banks are now 30% larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk. The 21st Century Glass-Steagall Act will reestablish a wall between commercial and investment banking, make our financial system more stable and secure, and protect American families."...

http://www.businessinsider.com/warren-bill-to-bring-back-glass-steagall-2013-7


Recursion

(56,582 posts)
2. OK. But it wasn't the retail banks that screwed up
Mon Dec 15, 2014, 07:10 AM
Dec 2014

It just seems odd to me. Before 1999, retail banks couldn't run proprietary desks. After 1999, they could. But very few of them did, and those weren't the banks that crashed. The banks that crashed were the pure investment houses that weren't covered by Glass Steagall to begin with*.

* I mean, I suppose after Glass-Steagall was repealed the investment banks had the option of opening retail accounts, but none of them ever wanted to and AFAIK that was never really the concern anyways.

RiverLover

(7,830 posts)
3. I'm sure you are making some excellent points, Recursion, but I haven't had enough coffee yet
Mon Dec 15, 2014, 07:16 AM
Dec 2014

and have to prep for same calls today for work.

Will look into later. This is an interesting Q!!!

unblock

(51,974 posts)
7. i wouldn't say that the repeal of glass-steagall was the "cause" of the debacle.
Mon Dec 15, 2014, 09:13 AM
Dec 2014

rather, it was a symptom of the climate of regulatory approval or indifference to the excessive and systemic financial risks that were becoming pervasive in the financial industry.

part of the solution is preventing companies from taking excessive risks, which is easier for congress to do when the company gets something like federal deposit insurance, but excessive risks can be regulated nevertheless.

another part of the solution is having an efficient means to unwind companies that do fail. in the 80s, the savings and loan crisis was handled fairly efficiently compared to this crisis. failed banks were taken into receivership. essentially, the government forced failed thrifts into bankruptcies and quickly disposed of their remaining assets. part of the reason we've had such a long recovery process this time is because "toxic assets" (mostly based on 30-year mortgages) just sat on banks' books as they slowly paid down. the federal government had no process for taking companies like aig into receivership.

the bottom line is that it should be possible for failed companies to have equity investors and executives completely screwed, creditors partially screwed, but the business to continue to operate, especially if the business had other parts that were profitable and functional. that's how to handle "to big to fail" without the moral hazard.

 

KingCharlemagne

(7,908 posts)
8. Washington Mutual crashed in 2008 and had to be taken over by the FDIC. AFAIK, WaMu was a
Mon Dec 15, 2014, 09:17 AM
Dec 2014

'commercial bank,' i.e., not an 'investment bank.'

 

KingCharlemagne

(7,908 posts)
10. It's a meaningless phrase in the context of an 'investment bank.' The phrase
Mon Dec 15, 2014, 09:53 AM
Dec 2014

has typically been used to refer to the splitting off of retail (or 'commercial') banking endeavors from the investment banking endeavors, putting up a Great Wall between the two (in effect rendering a merger of retail and investment bank under one corporate structure impossible).

"Breaking up" an investment bank would mean seizing its assets, I suppose. But it's really a misuse of the metaphor, imo.

treestar

(82,383 posts)
11. It is simple blind rage against society
Mon Dec 15, 2014, 09:58 AM
Dec 2014

And the desire that the economy be destroyed. Then maybe in the ashes they could have their "revolution." Under which we'd probably all be miserable, under some authoritarian leader of their choosing. We'd be forbidden to practice religion, too.

There is no practical solution and you won't find any of them outlining one.

Paulie

(8,462 posts)
13. There are no more investment banks (meaning non FDIC insured)
Mon Dec 15, 2014, 10:01 AM
Dec 2014

They all became bank holding companies as part of the bailout. The historic wall of separation between deposit banking and speculation banking is long gone.

Death of the Brokerage: http://www.npr.org/templates/story/story.php?storyId=94894707

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