Nouriel Roubini: How to Break Up the Banks, Stop Massive Bonuses, and Rein in Wall Street Greed
May 17, 2010 |
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Nouriel Roubini: In my view, the financial reform bill goes in the right direction in terms of what needs to be done, but it doesn't go far enough in a number of dimensions. My view is that if banks are too big to fail, using higher capital charges and an insolvency regime is not going to work. If they're too big to fail, they're just too big, and they should be broken up.
If they're too big to fail, they're also becoming too big to be saved, too big to be bailed out, and too big to be managed. No CEO can monitor the activities of thousands of separate profit and loss statements, and the activities of thousands of different bankers and traders. So that's one dimension. We must be capable of going beyond the Volcker Rule, which is essentially Glass-Steagall-Lite. We need to go all the way and implement the kind of restrictions between commercial banking and investment banking that existed under Glass-Steagall.
ZC: Why do you see the Volcker Rule as insufficient? Why do we need Glass-Steagall?
Roubini: The Volcker Rule goes in the right direction, but in my view, the model of the financial supermarket where within one institution you have commercial banking, investment banking, underwriting of securities, market-making and dealing, proprietary trading, hedge fund activity, private equity activity, asset management, insurance—this model has been a disaster. The institution becomes too big to fail and too big to manage.
It also creates massive conflicts of interest. If you look at the cases against Goldman Sachs and Morgan Stanley, leaving aside whether there was any fraud or illegal activity—that's for a court to decide—there is still a fundamental conflict of interest. These institutions are always on every side of every deal. That's an inherent conflict of interest that cannot be addressed with Chinese walls [internal company barriers between different aspects of its business].
There are no benefits from these economies of scale and scope, as we've seen from the disasters at Citigroup, AIG and others. And there are massive conflicts of interest. So I would separate all of these financial businesses under separate institutions, and I would go back to the kind of restrictions that we had under Glass-Steagall.
ZC: An idea has been pushed by Sen. Blanche Lincoln recently to require the five big bank derivatives dealers to spin-off their swaps desks. Is that a good idea?
Roubini: Yes, I think it's a good idea, and I would go beyond it. I think there is not a good reason for these firms to be involved in dealer's markets where you're not having transactions on exchanges. Whenever you have a dealer market, there is no price transparency. For the same security, you get 10 different quotes, bid-ask spreads are wide, there is not enough liquidity in situations of stress and we've seen it happen.