Bob Diamond and Jamie Dimon are two of the best bankers America has ever produced, and JP Morgan Chase and Barclays are among the great banks of the world. These facts might be lost in the current cacophony of public debate, yet their records of achievement are undeniable and generally admirable. That both proud financial institutions and their leaders should be embroiled in scandal makes the travails of these titans of the banking industry all the more iconic.
Mr. Diamond and Mr. Dimon have long been strident and enormously influential critics of the efforts to reform financial regulation, both in the US and UK. So with JP Morgan currently embroiled in its London Whale trading debacle and a major investigation into alleged manipulation of power markets in the US, and with Bob Diamond’s sudden and dramatic resignation as CEO of Barclays (along with the resignation of Barclays’ Chairman, Marcus Agius) in the midst of Liborgate, the opponents of large universal banks might be forgiven for invoking the caution in Proverbs 16:18, that pride comes before a fall. The attention has moved from Citibank, Bank of America and UBS to two of the best of the best: Barclays, which survived the Financial Crisis without being nationalized (like Royal Bank of Scotland and LLoyds) and brilliantly acquired the pieces of Lehman after that firm’s collapse, and JP Morgan Chase, which until recently had maintained a stellar record despite the Crisis setback.
Beyond mere schadenfreude, the travails of Barclays and JP Morgan Chase have emboldened those who believe that such behemoths are simply too big to manage and, because they are also too big to fail, should be broken up. A persistent problem with this attack, however, continues to be the fact that the large universal banks are united in their opposition to such a move, and their enormous political power, not to mention their codependent relationship with governments, makes such breakups highly unlikely without another crisis.
Nevertheless, current events might be symptomatic of larger forces at work.
Could it be that the banking conglomerates have grown so large that they are no longer sustainable in the financial ecosystem? Like other unsustainable species could they be showing early signs of a gigantic, slow die off?
A healthy market sustains itself through creative destruction. So far the TBTF banks have been protected from the genuine threat of bankruptcy by government and political support, justified by the fact that they can pull everything else down with them.
But if CEOs are no longer able to control corporate actions and performance, the situation might be approaching in which not only regulators but the market itself will find it more efficient to break their conglomerates up into more efficient and profitable entities. Credit downgrades lead commentators to wonder whether we have reached the end of the era of global banking. The production by the big conglomerates of detailed resolution plans (“living wills”) that identify potentially free-standing components capable of operating on their own might also translate into roadmaps for break-up artists, possibly acting in collusion with concerned regulators. The investor community is already starting to mumble.
More London Whales and Liborgates might well have the effect of turning the murmuring into something more like market discipline.