Sandy Weill Says, "Break Up the Big Banks"!

Sanford (Sandy) Weill, former empire builder and former Chairman and Chief Executive Officer of Citigroup, has gotten religion. 

“Break up the big banks,” Sandy cries from the rooftops!

“The big banks do not make economic sense and are subject to systemic collapse.”

“Re-instate Glass-Steagall.”

My question is “What job is Sandy Weill shooting for now?  My goodness, the man is 79 years old.  Does he want to take over for Tim Geithner when Geithner ceases to be Treasury Secretary?  Or, maybe he wants to be the Chairman of the Board of Governors of the Federal Reserve System when Bernanke goes.”

There must be something behind this latest outburst for this man taught the world how to build a “big”…no, a huge…financial institution.  This man did all he could to remove Glass-Steagall and wrote the textbook on how to construct banks that were too big to fail. 

Has he seen the light?  What form did his revelation come in?  He must be trying to trick us to get something he wants.  Be careful…the man is a tiger!

Or, is he just too old?

The banking system is not what it was when Sandy Weill was running things.  Even as he remained Chairman of Citigroup into the 2000s, Citi grew out of his understanding and control.

Finance is different now.  Finance is just about information and how information is used.  Electronics is taking over. 

In one sense, who needs a bank?  I do not “bank” at a commercial bank.  I don’t need to.  My children don’t use a bank.  They don’t need to. 

Today, “banking” can be integrated with a person’s financial portfolio in a non-bank and that person can transfer funds from anything they own into cash, or, transaction accounts, or, money market accounts, or, stocks, or commodities, or, foreign exchange, or, whatever…in real time.     

All these things are just information and modern information technology allows people the opportunity to operate in this sophisticated world of modern finance if they so desire.  And, these systems will become ubiquitous in the near future, all available on a handheld device.

Obviously, if individuals have the ability to act in this way, the institutions that provide these services also have the ability to act in this way.  And, guess what?  These institutions are going to act at the edges of where the technology allows them to act.  And, guess what?  The regulators are going to have very little ultimate control over this. 

In fact, it is my belief that the regulators don’t really know exactly what the banks…excuse me…the big banks do.  As usual, the banking system is out in front of the regulators and, as usual, the regulators are scrambling as hard as they can to catch up with where the banks are.

But, what does the banking system in the United States look like? 

The FDIC tells us that as of March 31, 2012 there were 6263 commercial banks in the banking system, of which, 525 held assets in excess of $1 billion.  Please note that these 525 banks held 91 percent of the assets in the whole banking system. 

The Federal Reserve gives us a little finer breakout.  The largest twenty-five domestically chartered banks in the United States hold 57 percent of the total bank assets of the country, but they hold 66 percent of the assets held by all domestically chartered banks.

Thus, in terms of domestically chartered banks, one can argue that the largest 25 domestically chartered banks in the country hold 66 percent of the assets in domestically chartered banks; 500 domestically chartered banks in the country hold 25 percent of these assets, and 5,738 domestically chartered banks in the country hold 9 percent of the assets.    

Foreign-related financial institutions hold 14 percent of all the bank assets in the United States.  This means that the assets of the largest 25 domestically chartered banks in the United States plus the assets of foreign-related financial institutions total up to 71 percent of all the banking assets in the country!

Where do you draw the line in defining what banks are too big to fail?  And, where do you draw the line in defining what banks are too small to survive?  How can you make judgments like these is a fair and just manner?

And, information technology operates on scale and this means that the future is going to belong, even more, to the larger banks…not the smaller ones.

Right now, however, it is the 6,200 or so, smaller domestically chartered banks that I have the greatest concern for.  The United States still has more than 800 banks that reside on the FDIC’s list of problem banks.  And, this list does not include those banks that are in enough trouble that the FDIC and the OCC are looking for other organizations to acquire them. 

Furthermore, we still have 311 banks that the U. S. Treasury has an ownership position in.  This is down 32 banks from the total in April 2012. This ownership position was achieved during the Troubled Asset Relief Program (TARP) that was launched in 2009. 

Most of these banks are smaller banks…the larger ones have paid back the fund in full.  The bank shares owned by the Treasury are now being auctioned off to investors who would like to own part of a bank.  In April, 20 banks were auctioned off and the Treasury received back 90 percent of what it was owed.  In the latest auction of 12 banks, the Treasury took a 14 percent haircut on 10 of the banks and could only partially sell shares in the two other banks.

The attractiveness of the remaining 311 banks is expected to be substantially less than those that were involved in the latest auction.  The Treasury has several ideas about how the shares of these banks might be made more attractive.

To me, the issue is not about breaking up the larger banks.  These banks are going to all be technologically advanced and very difficult to breakup, let alone regulate.  The issue is about the 6,200 banks that cannot compete electronically and the subsection of these banks that are still facing issues of solvency. 

I remain confident that the number of banks in the banking system will drop below 4,000 in the next couple of years and the trend will continue downwards.  I also remain confident that, in the near future, the largest 25 domestically chartered banks in the country plus foreign-related financial institutions will see their share of assets in the U. S. banking system rise from 71 percent to 80 percent and more.  So let’s see, that leaves the remaining 3,950 or so “smaller” banks less than 20 percent of bank assets in the U. S.  And, it is my belief that of this number, the ones with any chance of survival will not be less than $1 billion in asset size.  What do you think, Sandy?

Small Banks Unlikely to be Able to Repay Bailout Funds

“Most small banks bailed out by US taxpayers during the financial crisis are unlikely to be able to repay the Treasury department, the Obama administration says.” (http://www.ft.com/intl/cms/s/0/bc09f03c-9562-11e1-8faf-00144feab49a.html#axzz1tp5ngu6K)

This came out in a blog post on the Treasury’s website yesterday. See “Winding Down TARP’s Bank Program,” by Timothy Massad, assistant Treasury secretary for financial stability. (http://www.treasury.gov/connect/blog/Pages/Winding-Down-TARPs-Bank-Programs.aspx)

 The Treasury does not expect “the majority of the nearly 350 lenders still partially owned by US taxpayers to repurchase in the next 12-18 months the preferred stock that Treasury received in exchange for bailing them out.”

The “smaller” banks are defined as those with less that $10 billion in assets. 

This is just another piece of information that keeps leaking out that the state of the health of the US banking system is still not what it should be.  We await new information from the FDIC on the number of commercial banks still on its problem list. 

On December 31, 2011 there were more than 800 institutions still on the FDIC’s problem list.  And, we know the problem list does not include all those banks that are “troubled.”  The FDIC not only oversees the closing of troubled banks, it also is active in assisting “acquisitions” of banks that are experiencing difficulties.  In 2011, for example, there were 92 banks that closed.  However, from December 31, 2010 to December 31, 2011, 240 banks dropped out of the banking system.

The point is, the banking system is still not out of the woods.  I am still standing by my prediction that the banking system will decline by more than 2,000 institutions over the next five years, dropping from 6,290 banks on December 31, 2011 to less than 4,000. 

This decline will take place as the bigger banks in the United States become even bigger and as more and more big foreign banks increase their presence in the US.  On this last note I refer you to the list of the world’s strongest banks published by Bloomberg Markets magazine.  Of the top 10 strongest banks in the world, four were from Canada, and there were two more near these, one coming in as the 18^th strongest and one as the 22^nd strongest. (http://www.bloomberg.com/news/2012-05-02/canadians-dominate-world-s-10-strongest-banks.html)  

Note: only three American banks showed up in the top twenty, JPMorgan Chase at number 13, PNC Financial Services Group at number 17, and BB&T Coro. at number 20.

Adding to this movement, let me just add two more aspects of the future of banking that work against the smaller banks.  First, there are the advancements in technology taking place in the world.  Banks are becoming more and more wired (just notice the new bond trading platform introduced yesterday by Goldman Sachs, a development that is highly dependent upon scale) and more and more mobile.  As the world, even the world of Main Street becomes more connected, the smaller banks will be less able to compete.

Second, the “shadow banking” sector continues to grow.  The “new” idea is for banks to outsource some of their “core” small business lending to a new crop of loan funds…”shadow banks.” (http://www.ft.com/intl/cms/s/0/85ce3bde-9546-11e1-8faf-00144feab49a.html#axzz1tp5ngu6K) Financial innovation continues to accelerate.

And, how important is shadow banking?  Well, take a look at the accompanying charts.  

Shadow banking is huge and is growing.  The smaller banks will not be able to compete with them. (http://www.ft.com/intl/cms/s/3/981cb220-8a47-11e1-93c9-00144feab49a.html#axzz1tp5ngu6K)

The United States banking system still has major adjustments to go through.  The structure of banking is changing.  Whereas America has always had a “small bank” culture…my banker grandfather was a staunch advocate of “unit” banking where a bank could only have one branch and must keep its business interests within that state.  Within the current environment, however, is the Canadian banking system, where there are only eight oligopoly banks, more realistic?

The United States banking system is not stable in its current position.  Huge changes are to be expected.  With the Treasury blog post we understand that there still is a solvency problem.  The Fed will continue to keep excess reserves in the banking system to preserve as much stability as possible for the health of the economy.  The economy and the financial system are heading in the right direction but it takes a long time to unwind 50 years or so of economic mis-management.  We must understand the still fragile condition of the financial system in order to understand why the government and the regulators are acting the way they are.