Big Banks Seen in Need of Breakup Amid Mistrust in Poll
The world’s largest banks need to shrink or be broken up in order to regain investors’ confidence after four years of scandals, high-profile trading losses and financial crises, according to a Bloomberg poll.
Almost 60 percent of respondents said they were not confident or “just somewhat confident” that banks are taking prudent risks and conforming to the law, and getting smaller was seen as the top fix in the Bloomberg Global Poll, with 29 percent choosing that remedy. Changing the compensation structure was the No. 2 way to improve trust, with 23 percent.
A police boat passes the Canary Wharf business district in London. The Jan. 17 survey of the 921 investors, analysts and traders who are Bloomberg subscribers showed trust in the largest banks has failed to recover four years after the worst financial crisis since the Great Depression. Photographer: Simon Dawson/Bloomberg
After injecting $600 billion to rescue failing banks during the worst financial crisis since the Great Depression, governments around the world have tried in the last four years to strengthen banking regulations to prevent a similar outcome. Those efforts have been stymied by conflicting laws and increasing complexity, making the changes harder to implement and reducing their effectiveness.
Solutions suggested so far are “a grab bag of minimalist Band-Aids to patch up the self-inflicted wounds” of the financial system, said Lew Coffey, a poll participant and a fixed-income analyst at Windsor Capital Management LLC in Phoenix. “What’s required to re-establish investor confidence is a series of basic measures to simplify the business, isolate different kinds of risks into different boxes and increase transparency to outsiders.”
Coffey, who’s been managing money for more than 35 years, suggested reinstating the 1933Glass-Steagall Act, which separated commercial and investment banking, and limiting the size of banks’ balance sheets. Both ideas have been proposed in Congress since 2008 and failed to garner enough backing.
The U.S. and other countries have considered alternative ways to separate risky activities from the more plain vanilla functions of banks. The 2010 Dodd-Frank Act bans depository institutions from making short-term bets with their own money, while the U.K. is weighing how to wall off the trading units from commercial lending operations. The European Union is discussing a possible combination of the two measures.
The EU also is considering limiting executive pay at banks. In an effort to tie employees’ compensation to long-term performance, the largest firms have extended how long it takes for stock awards to vest. Many have instituted claw-back provisions to reclaim bonuses from employees whose bets end up losing money, though no bank has yet to invoke such a provision.
“You can de-risk activity more effectively if you limit the incentive portion of compensation, most likely a cap as to percent of salary,” said Vincenzo Galli-Zugaro, managing partner of Seven Pillars Capital Management LLP in London and another poll participant.
The Jan. 17 survey of the 921 investors, analysts and traders who are Bloomberg subscribers also showed that trust in the largest banks has failed to recover four years after the crisis. A majority said they lacked or had little confidence that the biggest institutions are taking prudent risks and conforming to laws.
Half said their opinion of the world’s largest lenders hadn’t changed over the past year, while 61 percent said legal troubles such as the Libor scandal had affected their view.
When big banks break the law, they’re treated more leniently than individuals doing the same, said David Wren- Hardin, a trader at Ronin Capital LLC in New York. Banks caught laundering money for criminal clients were allowed to “get off with a slap on the wrist,” he said.
Republicans Renew Effort to Dismantle Obama’s Health Law
Two top Republican senators began a fresh effort to dismantle President Barack Obama’s U.S. health- care system overhaul, attempting to succeed where other lawmakers have failed in trying to annul the law.
The legislation would repeal a mandate that most Americans carry medical insurance starting in 2014, Senators Orrin Hatch of Utah and Lamar Alexander of Tennessee said today in a statement. The insurance mandate is the heart of the 2010 Affordable Care Act’s purpose of extending health care to most Americans.
The Republican senators face an uphill battle with Obama’s Democratic party controlling the Senate. Two bills that Republicans in the House of Representatives passed to repeal the law in 2011 and 2012 stalled once they reached the Senate. The insurance mandate also survived a legal challenge in June before the Supreme Court.
“This legislation we are introducing today is simple: it strikes the individual mandate, so we can instead find ways of providing people with health care, but in a manner that doesn’t run counter to our constitutional framework of limited government,” Hatch, the senior Republican on the Senate Finance Committee, said in the statement.
He said the health law marked the first time that every American would be required to buy insurance even if they don’t want it. Alexander is the top Republican on the Senate committee for health.
Obama’s administration has argued in court that the government can’t require insurance companies to cover sick people -- another key element of the law -- without also requiring healthy people to purchase policies.
A White House spokesman, Bradley Carroll, didn’t immediately respond to an e-mail seeking comment on the proposed legislation.