No more 'too big to fail'?

JPMorgan chief jumps to the front of industry resistance against proposals to break up big banks

By Kim Peterson Nov 13, 2009 2:02PM
JPMorgan Chief Executive Jamie Dimon; Credit:  (© Charles Dharapak/AP)     Banks can live with the fact that people hate them. They can take the PR hit for their million-dollar bonuses and excessive customer fees.

But any talk about breaking them up? That's where banks draw the line. And a potential new amendment that gives the government "pre-emptive breakup authority" has got the banking industry all riled up, according to The New York Times.

This breakup idea isn't a law yet. Heck, the proposal hasn't even been fully written. But that hasn't stopped Jamie Dimon, the head of JPMorgan, from coming out swinging Friday with a column in The Washington Post.

The amendment, still in its draft form, would try to keep banks from getting so big that they become too big to fail and need a taxpayer bailout, according to the Times. It is being pushed by Pennsylvania Rep. Paul Kanjorski, a Democrat.

An independent senator from Vermont, Bernard Sanders, is also jumping in with a law forcing the Treasury Department to break up banks that get so big that their failure disrupts the financial system, according to the Times.

"If an institution is too big to fail, it is too big to exist," Sanders said.

Dimon disagrees. He writes that a failing bank should just be allowed to fail with no taxpayer bailouts.

There's nothing wrong with a big bank, Dimon writes. Scale can create value for shareholders, customers and the economy.

Breaking up a bank because it's too big won't prevent the risk to markets, Dimon writes.

"Capping the size of American banks won't eliminate the needs of big businesses," he adds. "It will force them to turn to foreign banks that won't face the same restrictions."

Ooh, snap! Throw in the threat of businesses bringing all their money to foreign banks. Nice one.

Here's what Dimon proposes:

  • Federal regulators should "facilitate" failures when they occur.
  • A failed bank's shareholders should get nothing.
  • Unsecured creditors should be at risk or wiped out.
  • Regulators should fire executives and boards and liquidate assets.
  • Anyone who brought unnecessary risk to the bank should suffer.

But how to allow a big bank to fail without unleashing a domino effect of chaos throughout the financial system? I don't think Dimon exactly has that solution nailed.

But, writes the Wall Street Journal's Damian Paletta, the column shows that Dimon "has a good political antenna."

That's because the House Financial Services Committee is expected to consider the idea of breaking up the banks soon. The committee's chairman, Barney Frank, says he supports the idea.

At any rate, it's clear we're headed for a showdown soon between the banks and lawmakers. It should be interesting.

Related reading:

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