Last of three parts

The debate over "too big to fail" raises tough questions about the complexity of big banks — not just whether their breadth is worth preserving, but whether it is even capable of being managed.

Fresh calls from respected corners of finance to limit the size or scope of banks have yet to make a slam dunk case for the dismantling of big institutions. But even those who would argue most passionately for the continued existence of big banks have a hard time defending the poorly run ones.

From Citigroup Inc.'s buildup of risky assets to Bank of America Corp.'s missteps with Merrill Lynch & Co., big banks have done their part to inspire theories that the issue of "too big to fail" may be more of a problem of "too big to manage."

"I'm not of the opinion that we shouldn't have big banks," Credit Suisse bank analyst Moshe Orenbuch said. But "banks with mediocre managements do have to be forced into a structure in which they can be managed."

That process already has taken place on some levels since the start of the financial crisis. The government seized several big lenders that overreached for return, such as Washington Mutual Inc., and sold them off as parts to firms deemed better fit as caretakers. At companies including Citi, structured investment vehicles were brought back onto the balance sheet, eliminating a layer of complexity in an exceedingly complex asset class.

But which is the better-run bank, the one that has figured out how to reduce its complexity, or the one that has learned how to tame it?

Ernest Patrikis routinely encountered the downside of complexity during his 30-year career with the Federal Reserve Bank of New York, and went on to become the top lawyer from 1999 to 2006 at American International Group Inc. — now a poster child for businesses run amok. And even he maintains, "Nothing is too big to manage if you've got good management."

Patrikis, now a partner in the bank and insurance regulatory practice at the law firm White & Case LLP, tasks regulators with being more aggressive in assessing bank management, and cites JPMorgan Chase & Co. and its chief executive, Jamie Dimon, as evidence that banks of enormous scale and complexity can be run well.

Of course, in the wrong hands, JPMorgan could have been just as big a drain on the system as other, more troubled firms in its weight class. Similarly, JPMorgan might have suffered more had the government intervened in the markets differently, in ways that might have prompted a less favorable response from investors.

The continuing threat of systemic risks beyond the control of any one firm or CEO, not to mention the notorious churn on the executive floors of large banks, perhaps argues for new regulatory backstops that go beyond more thorough management reviews.

"I don't think we ought to let our whole economy and financial system ride on the notion that we'll get 10 Jamie Dimons running the banking system," said John Ryan, executive vice president of the Conference of State Bank Supervisors. "Even if we had that, there's no guarantee we'd succeed."

Ryan, whose group has been battling to preserve the multiple layers of industry oversight, said that while bad times often shine a light on bad management, they also sometimes throw even strong managers for a loop.

"We're coming to the point where the [economic] fundamentals may have changed so much in certain markets that even the smartest and most conservative management can fail," Ryan said.

But some banking companies are continuing to thrive, with strong management teams garnering much of the credit. U.S. Bancorp, for example, has weathered the recession better than many large regional lenders, further elevating Chairman and Chief Executive Richard K. Davis' status among many observers as an astute banker with a respectably contained appetite for risk.

The Camels rating system by which bank supervisors rate institutions includes a score for management quality, along with capital adequacy, asset quality, earnings, liquidity and sensitivity to market risk. Yet that has not stopped a trail of disastrous management from coursing through the industry's history.

"The bank examiners really need to take a hard look at management when they examine a bank, and not be afraid to be critical," Patrikis said.

The Federal Reserve Board has indicated that it will be putting a sharper focus on management-related issues such as executive pay. Late last month, the central bank issued a proposal to review compensation policies at 28 of the largest, most complex banking firms, in a coordinated examination designed to ensure that incentives do not undermine the health of the companies.

"Compensation practices at some banking organizations have led to misaligned incentives and excessive risk taking, contributing to bank losses and financial instability," Fed Chairman Ben S. Bernanke said in a news release announcing the proposal.

Concerns about the impact on the industry's safety and soundness also have prompted calls for more drastic action, with some advocating the breakup of large banks to reduce the risks associated with any one entity.

To Robert Bruner, the dean of the University of Virginia's Darden School of Business and co-author of a book about the bank panic of 1907, that idea is reminiscent of the widely dismissed arguments made after Hurricane Katrina that rather than rebuilding the levies in New Orleans, the entire Gulf Coast population ought to just pick up and move inland.

"I will side" with those calling for bank breakups "if we can be persuaded that there are no risk management systems that large institutions can implement to forestall a replay of what we've experienced in the past 24 months," Bruner said. "But I think we should be more artful."

Sounds like a job for ace management.

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