NEW YORK (Reuters) - America’s big banks must be broken up and their risk-taking curtailed or the world’s richest economy will face another massive financial crisis, former IMF chief economist Simon Johnson says in a new book.
In “13 Bankers, The Wall Street Takeover and the Next Financial Meltdown,” published on Tuesday, Johnson and his co-author James Kwak describe Wall Street as an oligarchy holding the country hostage to its risk-taking.
According to Johnson, when the financial crisis hit in 2008 and 2009 and the banking system was rescued with a government bailout, Washington made a crucial misstep.
“The crisis exacerbated the problem by allowing the largest banks to get bigger at precisely the moment that the government should have been doing everything in its power to make them smaller,” Johnson told Reuters in an interview.
“The process of saving them ... has allowed them to build themselves up so that their balance sheets are now bigger than they were before the crisis. That doesn’t make any sense, the too big to fail problem has become worse.”
The notion certain banks are too big to fail is the central perception lawmakers in Washington must overcome if they are to undertake meaningful reform, said Johnson, who believes reforms now before Congress will not address systemic problems.
Specifically, he says the six biggest banks — Citigroup (C.N), JP Morgan Chase (JPM.N), Morgan Stanley (MS.N), Goldman Sachs (GS.N), Wells Fargo (WFC.N) and Bank of America (BAC.N) — should all be cut down to size, Johnson says.
“We should make them all smaller and safer so that if somebody does fail ... we can let them go through some sort of bankruptcy,” he said.
The other firms that must be broken up are Bank of New York Mellon (BK.N), American Express (AXP.N), Northern Trust (NTRS.O), Freddie Mac FRE.N, PNC (PNC.N), State Street (STT.N) and U.S. Bank (USB.N).
The title of the book comes from a meeting on March 27, 2009, when the heads of those 13 institutions gathered at the White House to meet President Barack Obama and chart a way forward after the crisis of 2008 and early 2009.
But instead of being held to task, the banks were bailed out for what Johnson sees as nothing in return, and all the bankers left the meeting with their jobs.
Of the big six, Johnson said he would have demanded the resignations of the chief executives and board of directors of Citi, Morgan Stanley, Goldman and Bank of America for bailout money. He said JP Morgan and Wells were better managed.
“The comparison I would draw is with Rick Wagoner of GM — the government fired him, or forced him out,” Johnson said, referring to Wagoner’s March 29, 2009, resignation as chairman and CEO of troubled automaker General Motors at the request of the White House.
Now the six biggest banks are even bigger than they were in 2008, which means that unless there is significant reform of the financial system it is only a matter of time before there is another financial system collapse, the book contends.
Johnson wants reforms that would demand that banks shrink the size of their nominal liabilities compared to the size of the U.S. economy to return them back to the comparative size they had in the early 1990s.
He says that could be achieved through changes to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. He also wants more capital at banks and more transparency around derivative trading.
Johnson admits it may be difficult for lawmakers to convince the American public that such steps are in the country’s best interests, and he expects there will be a tough fight ahead in Washington in the coming years.
And so, if boiling it all down to one simple political slogan would help, he has a suggestion: “Too big to fail is too big to exist — that’s a very simple message.”
Editing by Daniel Trotta and Eric Beech