Economics Financial Crisis The Opinionsphere

Why It’s A Good Sign That Byron Trott Is Leaving Goldman Sachs

[digg-reddit-me]Though the articles about investment bankers leaving the big firms to start up their own smaller, competing firms seem to be trying to suggest that this is a bad thing – I find it hard to see it as anything but good. For example, an article in today’s Wall Street Journal by Heidi N. Moore and Scott Patterson suggests Byron Trott is leaving Goldman Sachs to start his own firm because of caps “on executive pay and calls for tighter regulation” on large banks. Byron Trott is significant because he is Warren Buffett’s favorite investment banker – but the article also suggests he is part of a larger trend. 

This strikes me as an almost unalloyed good. If banks like Golman Sachs, Citibank, Bank of America, JPMorgan Chase, etcetera are too big – and if the government isn’t going to break them up – then this draining of talent and resources into smaller firms run by highly competent former members of these organizations seems like the next best thing. Hopefully, this will help defuse the centralization of power and money in a few big firms which is one of the major factors that led to this crisis. 

Simon Johnson and others have argued that we need to break up these banks that are too big to fail:

Anything that is too big to fail is too big to exist.

My thought is that this might be accomplished with less political capital and more “naturally” in a market-driven approach that simply imposed regulations and costs on institutions that are “too-big-to-fail” that would serve to drive individuals to set up smaller companies.  At institutions that are too big to fail, there should be, for example, a fee similar to that paid to the FDIC by banks to finance the protection given to them. At the same time, pay – rather than being capped at a particular hard amount – should be forced to be tied to long-term results to avoid drastic short-term risk-taking; I’m sure there are other ways out there to limit pay without imposing caps. And of course, regulations should ensure that an appropriate amount of capital is available to handle any leveraged risks.

Even if this market-driven approach is not sufficient, the steps taken so far are at least moving people in the right direction.

Economics Politics

Unintended Consequences

The law of unintended consequences has been demonstrated once again as the healthy banks are using the infusion of cash from the Treasury not to make loans as they were supposed to, but to buy up other banks – or so claims a New York Times reporter, Joe Nocera, who managed to sneak onto an internal employee-only conference call at JPMorgan Chase.

The centralization of the finance industry is one of the factors contributing to this ongoing crisis – and it was the mistakes of companies too big to fail that forced the government to intervene to stabilize the entire financial system.

Now, after this crisis has passed we are likely to be left with fewer and bigger companies – ones that absolutely cannot be allowed the fail.

After this crisis has passed we need to figure out what to do with institutions that are so big they can cause systematic damage if they fail. Whether that means we need to break them up or regulate them further – we cannot allow the power to destabilize the entire financial system to rest in the hands of a handful of executives in a few firms with no accountability to the people who will be affected by their decisions – a kind of market-enabled tyranny.

I don’t know that there is an easy solution to this – but after the financial emergency has been dealt with, we have to remember that it was the centralization of power in a handful of banks that contributed to this mess.