Counterparties: Breaking up is hard to do

March 28, 2013

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Simon Johnson has a rather startling claim in his NYT column today: “the decision to cap the size of the largest banks has been made. All that remains is to work out the details.”

It’s worth reading the entire piece, but Johnson makes a few key points about why the conversation about America’s big banks has changed. First, the world is beginning to learn from Cyprus, which, Peter Gumbel says, proves that Europe has entered a “brave new world where nobody is too big to fail.” This should have come as little surprise: the European Commission last year all but declared that taxpayers wouldn’t be put on the hook for bank rescues. In other words, Gumbel writes, European officials have made it clear that nothing like this will ever happen again:

The Commission has calculated that between October 2008 and October 2011, it approved a staggering $5.75 trillion, the equivalent of 37% of the EU’s GDP, in state aid measures to financial institutions. Of that, about $2.05 trillion was actually used between 2008 and 2010, as banks in countries from Ireland to Greece teetered on the brink of collapse and had to be rescued.

In America, Johnson says, a similar change is happening: “Opinion on Capitol Hill has now moved in a way that will continue to reinforce itself.” Ben Bernanke told Congress earlier this month that too big to fail is “still here” — though Bernanke also said policy on this is “moving in the right direction”. The break-up-the-big-banks crowd now includes liberals, conservativesex-bankers, and Mormons. Last week, the Senate unanimously passed a non-binding (and possibly entirely symbolic) amendment that would end any market subsidy for banks with over $500 billion assets. A bipartisan too-big-to-fail bill from Senators Sherrod Brown and David Vitter is currently being written, Johnson says.

So what could actually happen in Congress? Not much, says Ben White: “There is virtually no chance any significant piece of legislation will pass Congress that would meaningfully reduce the size of the nation’s biggest banks or restrict their activities.” But, as one industry source told the American Banker, it may not take a single bill to break up America’s banking giants: “I just think they will make it so damn hard, burdensome and expensive to be big, eventually some may decide it’s not worth it.” — Ryan McCarthy

On to today’s links:

EU Mess
Cypriot banks gorged on Greek bonds yet somehow passed EU stress tests – WSJ
“The last thing the Eurozone needs right now is uninsured depositors thinking hard about the prudence of their investments” – Pawel Morski
Austerity is threatening Europe’s envied infrastructure – Reuters
Pictures of lonely, expectant journalists waiting for a Cypriot bank run that isn’t happening – New Statesman

New Normal
What the “sharing economy” means to Wal-Mart: you work for them, for free – Reuters
How the food-stamp program evolved to become a “more permanent feature” of the US economic landscape – WSJ
Is job polarization holding back the labor market? – Liberty Street Economics
Student loan default rates are so high, the Department of Education’s collection system can’t keep up – CNBC

Gamblers bet twice as much money on the NCAA Tournament as the Super Bowl – NYT
It costs more to live near a stadium of an elite Major League Baseball team – Trulia
The top four zip codes for credit card complaints are on the Upper West Side and South Florida – Bloomberg

The internet apocalypse, a story manufactured by an internet security company – Sam Biddle

“Access to clean drinking water and sanitation”, and 9 other tips to improve your startup success – Anil Dash

Real Talk
The biggest threat to national security: wars – Spencer Ackerman

Says Science
Like journalists, gang members’ main online activities are “self-promotion and braggadocio” – BetaBeat

The Yale Model of endowment investing is past its prime – Pragmatic Capitalism

Missed Opportunities
Salman Rushdie, Julian Schnabel, and Lou Reed were asked to appear together in Talladega Nights – The Talks

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