Remember back in the fall of 2008 when failures, mergers and government takeovers on a magnitude you never dreamed possible actually happened again and again?

Back then there was a lot of talk about what a lousy job everyone was doing of imagining the worst possible scenario and then preparing for it.

Barbara A. Rehm

Four years of coping with the crisis seems to have dulled the urgency for this sort of defensive thinking. But it is exactly the sort of mind-set the largest banks ought to be embracing if they want to avoid being broken up by the government.

The chief executives and the directors who lead our largest banks ought to be spending their time trying to get ahead of the next problem and righting their corporate cultures to strike a better balance between risk and reward.

If they don't, and the sort of blunders we've been seeing of late continue, it may be only a matter of time before Congress breaks them up.

Why? Because the recent string of blowups — Barclays and Libor, money laundering and HSBC, the trading mess at JPMorgan Chase and mortgage discrimination by Wells Fargo — is turning the public solidly against the industry. Heck, even Sandy Weill, the major force behind the repeal of Glass-Steagall, told CNBC this week that commercial and investment should again be split.

Friends I've known the entire 25 years I've been writing for American Banker and who have never asked me a single question about the business now want to know what Libor is and how the rate-fixing scandal affects them. They want to know how JPMorgan can manage their money when it can't manage its own. They want to know if terrorists and drug lords are using the U.S. banking system to finance their crimes.

If Congress enacts legislation breaking up the big banks it will be because their constituents asked for it.

"People are angry and that will force the change," Tom Hoenig said in an interview this week.

Hoenig, who has spent much of his career fighting "too big to fail" policies, no longer sits in Kansas City as the president of the Federal Reserve bank there. He is now in Washington, on the Federal Deposit Insurance Corp.'s board. Should Mitt Romney win the presidential election in November, Hoenig may just be the next FDIC chairman, a position that would obviously allow him to wield much more influence.

Hoenig says the industry's repeated missteps bolster his argument. "With every surprise, it is a step closer," he says of a law cutting banks down to size. "If we see more surprises, more abuse and so forth, then I think finally people will realize" that the large banks are too big to manage.

He's been at this fight a long time, but Hoenig is more confident than ever. "I think it will be done now or it will be done later," he says. "But it will be done because we haven't changed the incentives, and when you don't change the incentives, the outcome doesn't change."

Among the incentives is the ability to use deposits backed by federal insurance to fund trading operations. Without insured deposits, it's unlikely JPMorgan would have built up such a huge position that ended up costing it nearly $6 billion.

The debate over too big to fail was supposed to end with the Dodd-Frank Act. The 2010 law gave the FDIC the power to take over and unwind a broader spectrum of financial institutions and it required all the biggest firms to write living wills showing the government how they could be resolved in a failure. But the drumbeat for something more comprehensive, more systematic has not let up, and the series of monumental flubs by the largest banks may prove a tipping point for policymakers.

Former FDIC Chairman Sheila Bair in June announced that a who's who of financial policymakers had joined together to shadow the regulators tasked with implementing Dodd-Frank. No one will be surprised if her Systemic Risk Council eventually endorses breaking up the big banks.

Federal Reserve Gov. Sarah Bloom Raskin seems to have slid quietly into this camp this week.

Calling much of the capital markets business underpinning some of the largest banks a "low-road banking model," Raskin said some companies "are so complicated that they cannot be regulated without the expenditure of significant public or private dollars. When these business models have such a distant connection to meaningful financial intermediation, I believe that we as a society may very well want to rethink whether we want to support these business models at all.

"The costs of supporting them, simply put, may be prohibitive."

OK, so she's still using conditional verbs. But if you are an executive at a megabank you ought to read her speech. Raskin describes a "high-road" model as one that "offers a way to do business and to succeed over the long term by building enduring relationships; structuring profitable, win-win arrangements; and treating customers and communities as meaningful stakeholders in the bank's work."

Focusing more on customers and on businesses that actually provide a service or a product is the surest way to stave off critics. The industry's largest players have to make a better case that the economy, the country, needs them. Any move in Congress to tame TBTF will be debated long and hard, but the largest banks should not waste this chance to improve their odds of winning the argument.

Stop grumbling about how complex the rules are. The simple counterargument is that complex companies require complex regulation. Don't give lip service to the living wills. Use them to figure out where you stand and to chart a course to a profitable, productive future. Get rid of capital markets businesses that you can't justify with a straight face. And take the one concrete step everyone will cheer: split the chairman and CEO jobs.

Remember it's not just policymakers who are worried that the biggest banks are too big. So are investors who are valuing many large banks below book value.

Wising up now might boost your stock and save your company.

Barb Rehm is American Banker's editor at large.
She welcomes feedback to her column at
Follow her on Twitter at @barbrehm.

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