Greenspan Says U.S. Should Consider Breaking Up Large Banks

Greenspan Says U.S. Should Consider Breaking Up Large Banks


By Michael McKee and Scott Lanman

Oct. 15 (Bloomberg) -- U.S. regulators should consider breaking up large financial institutions considered “too big to fail,” former Federal Reserve Chairman Alan Greenspan said.

Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and creates a danger to the financial system, Greenspan told the Council on Foreign Relations in New York.

“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac, and the Treasury and Fed bailed out Bear Stearns Cos. and American International Group Inc.
“It’s going to be very difficult to repair their credibility on that because when push came to shove, they didn’t stand up,” Greenspan said.

Fed officials have suggested imposing a tax or requiring higher capital ratios on larger banks to ensure the firms’ safety and reduce some of the competitive advantage from the implied subsidy. Greenspan said that won’t work.

“I don’t think merely raising the fees or capital on large institutions or taxing them is enough,” Greenspan said. “I think they’ll absorb that, they’ll work with that, and it’s totally inefficient and they’ll still be using the savings.”

‘Really Arbitrarily’

The former Fed chairman said while “just really arbitrarily breaking down

organizations into various different sizes” goes against his philosophical leanings, something must be done to solve the too-big-to-fail issue.

“If you don’t neutralize that, you’re going to get a moribund group of obsolescent institutions which will be a big drain on the savings of the society,” he said.

“Failure is an integral part, a necessary part of a market system,” he said. “If you start focusing on those who should be shrinking, it undermines growing standards of living and can even bring them down.”

To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net



Last Updated: October 15, 2009 10:50 ED

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it really annoys me when those in power wait until they are out of power to state the obvious.

President Clinton and his comments on the legalization of marijuana (as he was leaving office) comes to mind, as well.

and I will take it even if it is HIM who is saying this.

but it's a drop in the bucket compared to how wrong he was as Fed chairman. I really hope he doesn't get the chance to die peacefully of natural causes rather than being hanged as a traitor to the country.

b b but you can't break up the banks now, we're all about to get rich in teh stox marketz!

In canada we have only a few banks (5 big ones). The government of Jean Chretien decided there was too much concentration of money in these fives banks so they regulated them so they would stay safe and refused to allow them to merge. 10 years later no Canadian bank failed or came close to failing after last year. No government bailout. And they are showing a profit this year.

Should have never let him get that close to our money. :(