By Sam Forgione
NEW YORK, Nov 26 Another financial guru is
calling for a breakup of the big banks as a step toward
simplifying the worrisome global economy.
Dr. Henry Kaufman, president of consulting firm Henry
Kaufman & Company, Inc. and former economist at the Federal
Reserve Bank of New York, said that big banks have become too
complex to manage efficiently and government reforms have been
"They're too complex. They're too diverse," Kaufman said in
reference to banks that, along with traditional deposit
functions, also have investment banking and wealth management
divisions. Kaufman spoke with Reuters TV for the Reuters Global
Investment 2013 Outlook Summit.
Kaufman said financial conglomerates such as JP Morgan Chase
& Co., Goldman Sachs, and Citigroup are too
massive and could be regulated more successfully if certain
units operated independently.
"Spin off investment banking. No financial conglomerate
should have a mutual fund operation in it. No financial
conglomerate should have wealth management in it," Kaufman said.
Politicians and regulators have resisted calls from some
investors and economists to split up conglomerates that were
assembled over two decades by executives such as former
Citigroup Chief Executive Officer Sanford "Sandy" Weill.
These universal banks offered customers everything from
checking accounts and insurance to derivatives trading and
merger advice. The financial crisis, sparked by the Lehman
Brothers debacle in September 2008, is calling that into
Kaufman said the Dodd-Frank reform law, which the U.S.
government adopted in 2010 to avoid a repeat of the financial
crisis, "goes in the wrong direction" because it upholds the
condition of "too big to fail" in which a bank's pitfalls have
wider systemic consequences.
Kaufman also said the state of the global economy is
"unprecedented" given the high debt overhang in the United
States, the euro zone debt crisis, and economic slowdown in
China and Japan.
"We are in a sort of no-man's land when it comes to economic
and financial policy," Kaufman said, adding that the United
States is in better shape than Europe and the Far East but is
still looking at "modest" economic growth.
Kaufman earned the sobriquet Dr. Doom in the 1970s - long
before Nouriel Roubini acquired the title in recent years. Like
Roubini, Kaufman was prescient in his warnings about excessive
debt in the financial system.
Kaufman said the "fiscal cliff" of roughly $600 billion in
spending cuts and tax increases set to begin in January has
created "a high element of uncertainty". Even a compromise
between President Barack Obama and Congress to cushion the
impact "at best, will have a neutral impact on economic
U.S. Federal Reserve Chairman Ben Bernanke said last week
that 2013 could be "very good year" for the U.S. economy if a
deal is reached, but uncertainty over the outcome of the
negotiations has already damaged growth. Bernanke also repeated
that a failure to reach a deal could lead to recession.
On Bernanke's performance as Fed Chairman, Kaufman said the
Fed had overall failed to anticipate the magnitude of the
financial crisis and "did very little to ward off financial
excesses in that period from 2000-2008". He said he would give
Bernanke "poor ratings" over that period for these slips.
He added, however, that Bernanke's attempts to boost the
economy through bond-buying plans have strengthened the recovery
by eliminating pressures on the housing and automotive sectors.
"I think he has done quite well since we went into the
economic contraction and hit the danger points in the fourth
quarter of 2008," Kaufman said, and added that the extended
purchases of mortgage securities and ongoing low interest rates
on government bonds known as QE3 is "still very much in order."
Kaufman returned to the notion of "too big to fail" banks as
a top concern that, he said, touches on the "economic freedom"
of the United States.
"Big financial conglomerates will breed more concentration
of economic power, and that's the last thing we need," he said.
To see the Reuters TV interview with Kaufman click here: