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The Economy Needs a Big-Bank Break-Up

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Re "Carving Up Big Banks Won't Work, Any Way You Slice It":

Breaking up the too-big-too-fail and too-big-too-manage trillion dollar banks may not work for the CEO's careers or for some of their debt holders and even shareholders, but to say "arbitrarily breaking up the largest financial companies would strike a much bigger blow to our economic philosophy" is simply not accurate and misses the big picture. There's a potential economic payoff from the growth that would come from breaking up the big trillion dollar banks.

Our human "economic philosophy" by its very nature is exactly what got our biggest banks in trouble. Somehow we have ramped up our big bank share of U.S. output to 56% from 43% within only four short and chaotic years.  

How could this consolidation ever be considered a good thing after what we have just done to our own industry? Even if you don't believe in breaking up the big banks today, at some point anything that continues to grow from their current trillion dollar size intuitively creates more uncontrollable material risk at some future point in time.

But let's be honest about human nature, when the banking business is doing well, as banks, we don't proactively fund more regulatory staffing, we fight it, shrink it and create our self-fulfilling human prophecy, over-confidence, which morphs into complacency, then ultimately, ends in failure.

My former employer, Continental Illinois National Bank, tracked this exact arrogant, do-no-wrong fact pattern which, let's not forget, was the largest failure in U.S. Banking history at that very scary time back in 1984.

Bankers generally avoid the topic of their personal financial skin in their own bank, despite the fact that nearly every CEO demands it from any client requesting a loan. This double standard has more to do with the future success and risk management of any bank, big or small, than any useless Dodd-Frank regulatory guideline. How can any trillion dollar bank CEO possibly have enough meaningful skin in a banking business relative to the hundreds of billions in capital? It simply cannot unless you are Warren Buffet.

The notion that global client's need big banks is far from reality. Big banks need big clients but big clients do not need big banks. Just as commercial paper in the late 70s and early 80s decimated the fortune bank loan markets, our global economy, highly advanced technology and social platforms will change how banking is done forever. To fight this inevitable outcome is naïve, unnecessary and counter productive. The banking industry should take proactive action now and avoid becoming the future financial rust belt like our midwest steel companies became in the 80s.

Small businesses don't need them either. Having spent 15 years as a commercial banker at Continental Bank and LaSalle Bank, and another 15 as an independent finance company entrepreneur, I can say with complete objectivity that big trillion dollar banks have done very little for small business particularly during this five year ongoing credit freeze. The data is compelling and abundant even from some honest bank surveys, such as the recent Wells Fargo/Gallup podcast which found that 43% of small business expect credit to remain an ongoing problem at least through this year.  

The recent report by the Organization for Economic Cooperation and Development found that our U.S. big banks reduced lending to our small biz jobs machine during our credit freeze while other countries actually stepped up and materially increased their lending to their small businesses. Breaking up the big banks will create more competition for the most important source of any jobs recovery (and therefore our country's economic recovery): U.S. small businesses.

The question of how to break 'em up isn't that hard to answer. Living wills are the road maps which regulators plan to implement to break up big banks — far sooner than anyone expects. These maps will not just be used after or simultaneous with a failing institution. It is the beginning of the end of the big banks. Certainly bankers understand this possibility which explains their understandable resistance to intentionally contributing to their own obsolescence. 

Make no mistake, this has been and will always be all about jobs. Making trillion dollar banks smaller will, in the long run, create more jobs despite any obvious trauma we must endure to reach that worthwhile goal.

Dale R. Kluga
President
Cobra Capital

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