April 2016 H OUSING N EWS R EPORT
Why We Should ‘Break Up the Banks! ’ BOOK REVIEW
By Octavio Nuiry, Managing Editor
businesses or get out of them altogether,” he writes, referring to the rule named after former Federal Reserve chairman Paul Volcker, which restricts banks from making certain kinds of speculative investment that do not benefit their customers. According to Shirreff, the overhaul of the banking sector, which has taken place since Dodd-Frank was implemented, has not gone far enough. He believes large banks — like JPMorgan Chase, Bank of America and Wells Fargo, and others — should be split up into smaller units that don’t mix investment banking with retail commercial banking. “And though the rule finally went into effect in July 2015 (with some features delayed until 2017), its impact has been muted thus far — perhaps because, while they stalled for time, the big banks went ahead and restructured accordingly.” Although others have hinted at these reforms, they have fallen on deaf ears, he warns. “JPMorgan Chase and Bank of America now have gross assets of over $2 trillion each, while Barclays and Deutsche Bank are not far behind with assets of around $1.8 trillion,” he writes. “However meaningless those numbers may be, they indicate a huge volume and mix of businesses that is a challenge to mange in good times, let alone in a time of crisis. After all the assets of Lehman Brothers were ‘only’ around $640 billion at the time of its collapse in 2008, and the process of closing the bank down — known as the windup process — has been going on for seven years and counting.” He believes that too many banks are still too big to fail, which could cause contagion and trigger another financial meltdown. In Shirreff’s view, a new Glass- Steagall Act should be revived, similar to the one established in theU.S. in1933 after theGreat Depression, which would clearly separate the deposit-taking trading activities of big banks. Glass-Steagall prohibited commercial banks from engaging in the investment banking.
When the U.S. real estate bubble burst in 2008, it not only triggered an avalanche of financial failures like Bear Stearns and Lehman Brothers that rattled Wall Street, but it sparked a recession and a stock market crash that endangered both the entire financial system and almost brought down Fannie Mae and Freddie Mac.
Eight years later, Wall Street and federal regulators have learned very little from the Great Recession, according to a new book, “Break Up the Banks! A Practical Guide to Stopping the Next Financial Global Financial Meltdown,” (Melville House; 2016), written by David Shirreff, a former reporter for The Economist . “This is a call for revolution — a revolution to reduce complexity in global banking, to split them into manageable chunks, and to change the self-serving nature of the culture that dominates them,” writes Shirreff in the introduction. “These recommendations are not plucked out of the blue. They represent a reasonable course of action, give the mess that finance has gotten itself into over the past two decades.” Despite all the tough talk by regulators and politicians around the world, Shirreff claims that the Dodd-Frank Act of 2010, and its equivalent in Europe, are inadequate at best, and, at worst, dangerously counterproductive. “Dodd-Frank and the Volcker Rule, it signature feature, were designed to force big banks to shrink their riskier
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