We could have adopted what I call the Hoenig rule, proposed by former Kansas City Fed chief (and current Federal Deposit Insurance Corp. vice chair) Tom Hoenig, and barred federally insured financial institutions from trading at all. That poses problems, yet at least is workable. But Hoenig’s name carries almost no cachet in Washington.
Similarly, we have “living wills” for several dozen giant institutions such as Goldman Sachs, AIG and JPMorgan Chase, known collectively as SIFIs. The acronym, which stands for systemically important financial institutions, is pronounced SIF-eeze, which evokes images of a communicable financial disease. But SIFIs’ wills are hundreds — and in some cases thousands — of pages long. Good luck on regulators’ reviewing those. Good luck, too, if several SIFIs run into trouble at the same time. If that happens, it’s likely that the whole financial system will be in trouble. That means it will be difficult, if not impossible, for acquirers to raise the money needed to purchase assets from stricken SIFIs.
One proposed magic bullet gaining currency these days is to solve the system’s problems by bringing back the Depression-era Glass-Steagall Act, which separated boring, bread-and-butter commercial banking from the more go-go investment banking. I sympathize with this proposal more than you can imagine. In fact, in March 1995, at my previous job as Wall Street editor of Newsweek, my first column opposed Glass-Steagall repeal. And I wrote it on my own time, before I was even on Newsweek’s payroll.
My problem with repeal wasn’t (and isn’t) that it would violate a supposedly sacred separation between commercial banking and investment banking. That distinction was already blurred. I just thought it was a terrible idea to allow already complex giant financial companies to get bigger and more complex — and less and less manageable.
That proved to be the case. The 1998 repeal allowed Citigroup to merge with Travelers, a giant insurance company. It proved such a mess that the companies have since separated. So the repeal was for nothing.
Institutions, you see, can be too big and too complicated for even superior managers to run effectively. That’s the lesson we should take from Chase’s London Whale fiasco, in which a strategy supposedly designed to protect the bank from various risks ended up inflicting a 10-digit loss. The good news is that stockholders bore the whole $6 billion or so loss, because the company was soundly capitalized. The bad news was that even a chief executive as good and as obsessive as Chase’s Jamie Dimon didn’t know what was happening until it was too late.
In addition to not helping solve the fundamental problem of “too big to fail,” reimposing Glass-Steagall would inflict regulatory whiplash. In 2008, as the world melted down, regulators begged Chase to buy Bear Stearns, leaned on Bank of America to complete its then-pending purchase of Merrill Lynch and begged Wells Fargo to buy Wachovia, which had major brokerage operations. All those deals, done at the behest of regulators, would be reversed. If that happens, can you imagine any big institution helping the government by buying some failing institution the next time around?
Meanwhile, hyper-partisanship is weakening the Fed and the government as a whole, reducing our ability to respond to any new crisis. I’m appalled at the Obama administration’s undermining the Fed by not promptly announcing a proposed successor to Ben Bernanke; the controversy hurt the Fed on multiple levels. Then again, I can’t believe that the Republicans are heading us back into another debt-ceiling drama, but it sure looks that way.
You hear talk these days that big institutions’ higher capital levels, their living wills, and closer scrutiny by better-equipped regulators mean that the days of 2008-type post-Lehman financial panics have come to an end. Don’t you believe it. “This time it’s different” are the four most dangerous words in finance. I’ve heard them after every big financial mess since the late 1960s — and a few years later, there’s another mess. These words haven’t proved right yet. And they won’t be right this time, either.
Sloan is Fortune magazine’s senior editor at large.