Counterparties: Sandy beached

July 30, 2012

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After Sandy Weill had his say on breaking up big banks last week, backlash to his reversal was inevitable. It turns out Bank of America and Citi had already considered his idea: Execs at BofA studied breaking out troubled Countrywide Mortgage, which has been called the worst deal in finance history, as well Merrill Lynch’s securities business. Citi, apparently at the behest of regulators, did a similar analysis and even employed Bain to conduct it. The bank concluded that tax inefficiencies precluded a breakup; they have yet to pursue changing the tax code with the same vigor they applied to abolishing Glass-Steagall.

Somewhat paradoxically, BofA decided Countrywide was too bad to let go and that Merrill was too profitable to part with. The latter is just wrong, according to their own filings, as Jonathan Weil smartly points out: “Last quarter Merrill reported a net loss of $1.6 billion. It posted a $1.7 billion net loss for all of 2011″.

Before Weill made his comments, Jamie Dimon had already said that he doesn’t think any of JPMorgan’s business would be better off independently. He’s probably unlikely to take advice from a guy who once fired him said. Former JPMorgan Chairman and CEO William Harrison chimed in on the merits of Dimon’s firm with this faintest of praise: “you can screw [management and risk-taking] up at a small bank or a large bank”.

The WSJ reports that Dodd-Frank’s two eponymous lawmakers don’t agree with Weill: Former Senator Chris Dodd thinks Weill is “frankly too simplistic”; Representative Barney Frank says doing “something drastic to a major part of the economy isn’t a very good idea” right now.

Had Weill spoken up a few years ago, Frank says he would have been all ears. And there are also who think Weill hasn’t even started to address his past mistakes. Here’s the Roosevelt Institute’s Jeff Madrick in the NYT: “What was most eye-catching was Mr. Weill’s claim that the conglomerate model ‘was right for that time.’ Nothing could be further from the truth”.

What we haven’t seen is a defense of big banks not just as the status quo or too complex to tamper with, but as better, more valuable businesses which are more socially useful than the alternative. Maybe that’s another legacy of the financial crisis: even their staunchest supporters have defined the benefits of big banks down. – Ben Walsh

On to today’s links:

Say goodbye to 10 consecutive quarters of US corporate profit growth – WSJ

Big government is gone, and what’s left keeps shrinking – NYT

America loves its cops and firefighters. Their pensions, less so – Reuters

New Fed action “will not increase the supply of, or demand for, credit” – The Big Picture

New Normal
A billionaire’s fear: Inequality is creating an impoverished underclass that threatens social stability – NY Mag

Mistakes Were Made
“We apologize”: HSBC sets aside $2 billion for failure to stop money laundering – FT
Why big banks have scandals – The Atlantic

EU Mess
The next make-or-break moment of the euro crisis: after everyone gets back from August vacation – Reuters
Germany and France endorse Draghi’s pledge to save the euro with decisive action – WSJ
The Bundesbank: still opposed to the ECB buying sovereign bonds – FT

Jonah Lehrer resigns from the New Yorker after admitting to lying about Dylan quotes – NYT

I’m Confused
Headline: “Stocks Continue to Defy Investors’ Sour Mood” – WSJ

Primary Sources
Dallas Fed’s manufacturing index hits 10-month low – Dallas Fed

“He was Isambard Kingdom Brunel, a prominent British engineer in the 19th century, not ‘a Dickens character.'” – NYT

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