There has been a lot of discussion in this newspaper and elsewhere about the potential benefits and risks of breaking up the financial services conglomerates.
The reality is, we don't need to make it either-or. Rather, we've long had appropriate statutes and regulations that can help referee the relationships of different lines of businesses under common ownership. These rules would likewise help assure safety and soundness and appropriate oversight not just by regulators, but by managers and directors.
In the 1980s and '90s, in addition to traditional banking companies, I represented several major conglomerates that owned a lot of diverse businesses, including a number of financial services entities. One company in particular strongly believed it was best that each entity largely operated on its own. The company did this because years of prior experience had taught management that the cultures and drivers for each line of business are very different and thus, as a way to prudently manage the subsidiaries as well as maximize shareholder value, kept each entity focused on what worked best for its particular industry including risk management, compensation, etc. As a result, each subsidiary had a wholly independent board of directors and separate CEOs, CFOs and staff.
We have a similar situation with the modern financial services holding company. There are significant differences among commercial banking, investment banking, insurance and other lines of business. It is questionable whether any one management team and board has the temperament and skills to oversee each of these very complicated (and different) types of entities.
It is with that in mind that I propose the following:
- Require all financial services companies to divide themselves into four separate companies: retail and commercial banking (that is, traditional banking); investment banking; insurance; and everything else.
- Don't waste time trying to define the boundaries. Let the companies decide, within reason.
- If management and shareholders think there is value to holding these entities under a holding company, fine. But each subsidiary company must have its own CEO, CFO and possibly one or two others and a separate board, with minimal overlap of directors.
- The entities may share branches, name and back office functions (human resources, computers, possibly legal, etc.). All, however, will be subject to the rules governing transactions with bank affiliates (Sections 23A and B of the Federal Reserve Act and the Fed's Regulation W). Specific changes to those rules can be adopted as needed.
First, this realignment re-establishes a management structure where the CEO, CFO and board can be focused on a particular industry, have a reasonably common culture, know what to look for in the management reports, and so forth.
Second, the benefits of one-stop banking can continue, assuming there is real value.
Third, the structure draws upon an established examination process and set of protocols, including what types of crossovers in products and services are permitted, in what amounts and on what terms.
Fourth, the structure helps implement the framework likely to be needed in the various living wills being drafted pursuant to the Dodd-Frank Act.
And finally, the structure leaves it to the holding company and its shareholders, directors, officers and analysts to decide if there is significant value in a shared name and umbrella structure, or not.
This proposal puts each entity into a position where the individual business decisions can be made on the merits, and where the companies can be manageable (and profitable) in the true sense of that word.
Michael Roster is the former co-chair of Morrison & Foerster's Financial Services practice. He is the steering committee co-chair of the Association of Corporate Counsel's Value Challenge, a project to improve the value of legal services, and a director of MDRC, a nonprofit in New York that evaluates the effectiveness of government and other nonprofit programs.