Dunkelberg: The Real Banking Crisis - They're Too Big to Manage

Although I strongly disagree with Jamie Dimon about the value of large banks, I am disturbed about the furor that has swelled up in Congress over the .

After tossing away $20 billion on GM , it is hard to get too riled up about a $2 billion loss (of private money) at a firm that makes $5 billion in profits. Cumulative government losses in green energy companies have that beat already. It’s this poor investment judgment using taxpayer money that should be the outrage.

The rationale for the GM deal was that without it, the U.S. auto industry would vanish.

This was nonsense of course; GM would have continued to operate while going through reorganization just as American Airlines keeps flying while going through its reorganization. Of course, the unions would not have fared well in a private sector bankruptcy, so the administration intervened, leaving us with a company that still has a dubious cost structure and that will be subsidized with a special tax deal.

The JPMorgan loss does reinforce the concerns about “Too Big To Fail”. (TBTF)

With allegedly the best risk managers money can buy, mistakes were made.

Mr. Dimon admitted that it never occurred to these top risk managers to stress test their portfolio for a decline in house prices a few years ago, and then this rather large mistake.

Such events confirm the fears of the regulators for systemically important financial institutions. Even the best make mistakes, and when the “best” is also the “biggest”, the cost to the financial system can be devastating. There is some support for administratively dismantling these "TBTF" institutions, but having the government decide how this should be done is a reasonable concern. A better way would be to impose FDIC premiums and capital requirements that rise with size and asset opacity. Then the private mangers of these institutions would have an incentive to downsize their firms and reduce their relative importance in financial markets in ways that continued to focus on profitability.

If this process makes our banks too small to do “really big deals” globally, that may not be all bad, it’s those big deals that raise the risk level at financial institutions that are “too big to manage”.

But that’s unlikely to be the case, the banks are big enough to do any global business that comes their way, just not big enough to fit the egos of the CEOs.