[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.