Too-big-to-fail rules forcing too-small-to-compete bank mergers

, Bloomberg

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Zhu Min
Zhu Min

Regulators want safety. Investors want profits. Employees want bonuses.

Stuck in the middle are management teams at the world's biggest banks, struggling to assure taxpayers, shareholders and traders that their pleas are being heard, Bloomberg Markets will report in its April issue.

In response to regulators, banks have reduced their dependence on borrowed money. To answer investors, they're cutting costs and exiting businesses that don't deliver a big enough return on equity. Employees who haven't lost jobs or fled to hedge funds are getting more of their pay in stock awards that are tied up for as long as five years.

The stakes are high. How executives finesse the competing forces will not only separate winners from losers; it will also determine the safety of the largest financial firms, those deemed too big to fail because their collapse would wreak so much damage that governments would be impelled to rescue them.

Almost five years have passed since governments in Europe, the U.K. and the U.S. used about $600 billion in capital to shore up banks during the worst financial crisis since the Great Depression, and regulators are still trying to ensure it never happens again. If anything, some banks have grown bigger and more complex.

"With all the debating going on, the financial market structure didn't change very much," Zhu Min, the International Monetary Fund's deputy managing director, said in January at a World Economic Forum panel discussion in Davos, Switzerland. "We're not safer."

Breaking Up

Some say the industry's biggest banks should be forced to break up. Sanford Weill and John Reed, who created New York- based Citigroup Inc., have said that financial conglomerates could be more valuable and safer if split apart. So have former Merrill Lynch & Co. chief executive officer David Komansky and former Morgan Stanley CEO Philip Purcell.

Financial-services companies and banks, which took more than $2 trillion of losses and writedowns during the credit crisis, were deemed the least-trusted industries for a third consecutive year in an annual poll released by public relations firm Edelman in January. Almost 60 percent of respondents to a Bloomberg poll conducted in January said they weren't confident or "just somewhat confident" that the world's biggest banks were taking prudent risks and conforming to the law.

'Serious Restructurings'

The industry's legal bills have ballooned as practices such as shoddy foreclosures, interest-rate manipulation and money laundering came to light. Even CEOs such as JPMorgan Chase & Co.'s Jamie Dimon, whose New York-based bank reported a third consecutive year of record profit, have had trouble managing their sprawling organizations. Dimon has said he was unaware of complicated trading risks that led to more than $6.2 billion of losses last year.

"Who can tell what JPMorgan's investment office is doing until after it's blown up? Not even Jamie Dimon, so what chance does a supervisor have?" says Amar Bhide, a professor of international business at Tufts University's Fletcher School of Law and Diplomacy in Medford, Massachusetts. "So for that reason, one needs serious restructuring of banks."

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