Thinking The Unthinkable: Breaking up Big Banks Now Seems Feasible

.. Even in the face of investor pressure, there are forces that would hold bank breakups back. Mainly pay, NY Times Dealbook reports.

“The biggest motivation for not breaking up is that top managers would earn less,” Mr. Mayo said. “That is part of the breakdown in the owner/manager relationship. That’s a breakdown in capitalism.”

Institutional investors — the major owners of the banks — are passive and conflicted. They don’t like to go public with complaints. They have extensive business ties with the banks. The few hedge fund activist investors who aren’t cowed would most likely balk at taking on such an enormous target. Also, there are reasons to think that smaller banks wouldn’t necessarily make the system safer. A wave of small bank failures can have systemic effects, as was the case in the Great Depression. Focused companies like Washington Mutual and Bear Stearns failed in the recent crisis, worsening it.

Making a nuanced argument, John Hempton, a blogger, investor and former regulator in Australia, says that it’s better for shareholders — and societies — to have large banks with lots of market power. That makes them more profitable and leads them to take less risk, making them safer and more enticing for investors….

Read more at http://dealbook.nytimes.com/2011/07/27/once-unthinkable-breakup-of-big-banks-now-seems-feasible/?nl=business&emc=dlbkpma1