No longer too big to fail

[BodybyFisher]

This is an excellent article in todays Washington Post, from Jamie Dimon, CEO of JP Morgan Chase, I am VERY impressed

No more 'too big to fail'

By Jamie Dimon

Friday, November 13, 2009

Our company, JPMorgan Chase, employs over 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if one day, some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail. As Secretary Timothy Geithner recently put it, "No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure." That is exactly right. The term "too big to fail" must be excised from our vocabulary.

But ending the era of "too big to fail" does not mean that we must somehow cap the size of financial services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk.

Creating the necessary structures to allow for the orderly failure of a large financial institution starts with giving regulators the authority to facilitate failures when they occur. Under such a system, a failed bank's shareholders should lose their value; unsecured creditors should be at risk and if necessary, wiped out. A regulator should be able to terminate management and boards and liquidate assets. Those who benefited from mismanaging risks or taking on inappropriate risk should feel the pain. We can learn from our experience with how the Federal Deposit Insurance Corp. closes banks today. As with the FDIC process, as long as shareholders and creditors are losing their value, the industry should pay its fair share.

Establishing this resolution authority will require thoughtful legislation that promotes predictability in the resolution process in accordance with recognized priorities, requires sound risk-management practices, and maintains a level playing field among firms with similar business models. It also requires effective international cooperation, as the implications of a major financial institution's failure are global. This is challenging, but worth doing. The alternatives, neither of which is acceptable, are to perpetuate the politically, economically and ethically bankrupt "too big to fail" idea, or to try to impose artificial limits on the size of U.S. financial institutions.

As we have seen clearly over the last several years, financial institutions, including those not considered "too big," can pose serious risks for our markets because of their interconnectivity. A cap on the size of an institution will not prevent that risk. Properly structured resolution authority, however, can help halt the spread of one company's failure to another and to the broader economy.

While this strategy of artificial limits may sound appealingly simple, it would undermine the goals of economic stability, job creation and consumer service that lawmakers are trying to promote. Let's be clear: banks should not be big for the sake of being big. Moreover, regardless of a company's size, it must be well managed. As we've seen in many industries, companies that grow for the sake of growth or that expand into areas outside their core business strategy often stumble. On the other hand, companies that build scale for the benefit of their customers and shareholders more often succeed over time.

To understand the harm of artificially capping the size of financial institutions, consider that some of America's largest companies, who employ millions of Americans, operate all around the world. These global enterprises need a financial-services partner with whom they can do business not just in the U.S. but also in China, India, Brazil, South Africa, and Russia: a partners that can efficiently execute diverse and large-scale transactions; that offers the full range of products and services from loan underwriting and risk management to providing local lines of credit; that can process terabytes of financial data; that can provide financing in the billions.

And it's not just multi-national corporations that rely on such large scale. JPMorgan Chase and others supply capital to states and municipalities as well as to firms of all sizes. Smaller banks play a vital role in our nation's economy, too—but a fragmented banking system cannot always provide the level of service, breadth of products, and speed of execution that clients often need. Capping the size of American banks won't eliminate the needs of big businesses; it will force them to foreign banks that won't face the same restrictions.

It is vital that policymakers and all those with a stake in the future of our financial system work together to overhaul our regulatory structure thoughtfully and well. While these changes may seem arcane and technical, they are critical to the future of the whole economy. It is clear that we must modernize our financial regulatory system. The stakes are simply too high and the consequences too far-reaching to do this hastily. Many of the rules that govern our markets today were put in place more than 70 years ago. On a timeline, that Depression era would be closer to the Civil War than to our current century.

Global economic growth requires the services of big financial firms, but it also requires that big financial firms be allowed to fail.