Bank mergers just create a bigger monster, says expert
Nouriel Roubini, Professor of Economics, Stern School of Business, New York University (NYU), making a presentation at the summit
Friday November 06 2009
New York University Professor Nouriel Roubini, famed for predicting the current financial crisis in 2006, warned yesterday that a series of mergers of large US banks that were previously seen as "too big to fail" threatens to create "an even bigger monster".
Speaking at a financial conference in Dublin, Prof Roubini said this trend could eventually lay the ground for the next financial crisis.
"We had a too-big-to-fail problem in the past, but now the too-big-to-fail problem has become even bigger," he said.
The last year saw JP Morgan acquire Bear Stearns and the banking operations of Washington Mutual, Bank of America purchase of Merrill Lynch, and Wells Fargo take over Wachovia.
"Citigroup wanted to take over Wachovia -- not because it was solvent, but because it wanted to be even bigger to fail," Prof Roubini said. Many observers say the resolve among G20 nations to make too-big-to-fail institutions hold more capital in their reserves may act as an incentive for some of them to break up. "In my view, that is not enough," said Prof Roubini.
Proprietary
He said banks that were too big to fail were simply too big. "If it's too big, we should break it up," he said. "Banks should be banks; they should not be involved in proprietary trading activity, hedge funds activity or private equity."
He said the ideal financial system was not one of the "financial supermarket". "Citigroup has been an absolute disaster. It's been bailed out four times over the last 80 years. No human being can manage an institution with complexity like that. It's mission impossible."
He acknowledged that the collapse of Bear Stearns and Lehman Brothers, which were not universal banks, were counterarguments for the separation of banks along the lines of utility and risky investment activity.
But he said: "The problem here was not only that they were too big to fail, but that they were too interconnected to fail." He said the sources of their funding for investment came directly or indirectly from the banking system, which needed to be addressed.
- Joe Brennan
Irish Independent
