Rumor in the commercial banking industry is that, yes, the government eventually wants to break up the banks. This is what I hear when I occasionally get to talk to people who interface with regulators at a high level.

But any internet blogger can make it sound so easy, as if the government can just say, "Ok banks, time to break up," especially in the current political climate. My uninformed guess is that the government has other worries, and wants to see how the Volcker rule pans out.

The problem is lack of leadership. Who do you mean by "the government"? There are only people in government service and none of them are beating the drum that too big to fail is too big to exist.

By 'the government' I mean Congress and all the relevant regulators such as the SEC and the Fed...

...and please don't imagine to the temptation that the world is not the way you want it because of the lack of a leader, or something. This stuff is heavily politicized and very complicated, and part of that complication is because of the generations of regulators who said 'something must be done'.

But still, really?

All I see is Obama's top team being very cozy with the big banks, and the Republicans would let BofA institute gas chambers as long as it was "free market". Where's 'the government wanting to break them up' in that?

Assuming you're not going on common Internet Wisdom and have some knowledge of this, I'd be interested to know in what ways Obama's top team is cozy with banks. I'm not being facetious--well, maybe a little--but I find this stuff fascinating.

"Evil" is a silly term. Robert Rubin (citi), Henry Paulson (goldman), Tim Geithner (ny fed), these names aren't ringing a bell?

The impression I've gotten is that the financial world is convinced that Obama is out to get them, so of course it's "common knowledge" that he has a plan to break up the banks. But what's he actually done? The settlement with the big banks a couple months ago was a slap on the wrist at best, and removed a huge liability.

Hey, sorry, I edited my post after you responded, but I didn't say and never said that it's "common knowledge" that Obama wants to break up banks.

What I said is that the financial industry, as of recently, has had an antagonistic relationship with the government, and that this is common knowledge in the industry. That's how they see it, anyway. There's a lot of tiptoeing the government has to do, because they're still counting on commercial banks to clear the housing market, to have their back on distressed bank mergers, etc.

Anyway, I'd rather see top bankers in those positions than top politicians. Obama's a moderate and a technocrat; so your thesis isn't distinguishable from the null hypothesis.

> "Evil" is a silly term. Robert Rubin (citi), Henry Paulson (goldman), Tim Geithner (ny fed), these names aren't ringing a bell?

My brain parses that as: people whose roles will require experience and insight in dealing with huge sums of money and complex economic effects at the national level TURN OUT to also be the kind of people you'd want to hire for other roles that benefit from applying experience and insight in dealing with huge sums of money and complex economic effects at the national level.

Now, if they're corrupt, that would be a bad thing. But having prior relevant experience? A good thing.

I understand that generations of regulators that wanted to maintain the status quo followed the logic:

Something must be done! This is something we can all agree on. This must be done!

I also think an insightful leader can propose actions that disrupt the status quo and leave the world a better place.

I posit that the internet would not have been able to take-off the way it did if the DOJ had not successfully broken up AT&T. Remember there used to be exactly one company who owned the phone lines running into your house and across the country. Since they owned the wires they decided what equipment you could hook onto their wires - which happened to be only equipment they sold and installed.

minor point, but AT&T lost the legal right to control the equipment you plugged in at least a decade before they were broken up, iirc.

"why is no one talking about breaking up these "too big to fail" institutions into companies that are small enough to fail?"

Because they're too big not to lobby.

According to Confidence Men Obama had ordered Geithner to come up with a plan to break up Citibank, but Geithner delayed coming up with one until after the window of opportunity had closed.

Who would buy the toxic parts?

That is exactly the problem. The US taxpayers already "own" the toxic parts. Taxpayers are on the hook for whatever bad bets BofA has made yet there is no visibility into those bets whatsoever.

You don't break it into toxic and non-toxic. You break it up by region, so you get small regional banks each with both toxic and non-toxic parts and the don't let them recombine.

ie. Make Bank of America a wet coast only bank again.

Nobody would buy it without some government insurance, making it pointless. The best paths now are either letting it orderly fail (if that's possible) or forced nationalization at a symbolic price.

But if I had to bet, my money would be on some travesty against the US taxpayer like Bear Stearns good assets sold for close to nothing and taxpayers taking the junk mortgage assets.

http://en.wikipedia.org/wiki/Bear_Stearns#Fed_bailout_and_sa...

But current BofA management will keep complicating it as long as possible, maximizing their income. Also the legal pandora's box of imminent lawsuits makes thing very bleak.

Breaking the big banks by region sounds like the AT&T/Baby Bells break up, which created powerful regional monopolies.

Which then all merged into Verizon. The forces of justice win once every generation, but the forces of evil advance every year.

Are there other industries that are "too big to fail"? What if all companies had limits on their size (whether that's region, market cap, or whatever)? The number of companies that exist might grow as big companies spin off divisions or new companies try to serve demand unmet by a size-limited company. More companies would mean increased competition, limiting abusive monopolies and corporate lobbying.

This system might be an example of local inefficiencies that lead to a healthier whole. Big companies are supposed to benefit from "economies of scale", but are there any big companies that are not the wasteful, ineffective bureaucracies featured in Dilbert?

> Are there other industries that are "too big to fail"?

What about governments?

If there are companies that are "too big to fail" and therefore should be broken up, surely the US govt should also be broken up. (CA's govt may qualify as well.)

Good point. I would support that. The US government was designed to be a federation of state governments, but power hunger interests have twisted the definition of "federal" government so as to consolidate power. :\

What you propose is called antitrust, and it is already law, but is mostly ignored or loopholed.