Hank Paulson's testimony yesterday was informative, if only because it illustrated that he himself still understands little about the origins and nature of the global crisis over which he presided. Perhaps his book, out this fall, will redeem his reputation.
A fundamental principle in any emerging market crisis is that not all of the oligarchs can be saved. There is an adding up constraint--the state cannot access enough resources to bail out all the big players.
The people who control the state can decide who is out of business and who stays in, but this is never an overnight decision written on a single piece of paper. Instead, there is a process--and a struggle by competing oligarchs--to influence, persuade, or in some way push the "policymakers" towards the view:
- My private firm must be saved, for the good of the country.
- It must remain private, otherwise this will prevent an economic recovery.
- I should be allowed to acquire other assets, opportunities, or simply market share, as a way to speed recovery for the nation.
Who won this argument in the U.S. and on what basis? And have the winners perhaps done a bit too well--thinking just about their own political futures?
On who must be saved, we see the new dividing line. If you have more than $500bn in total assets, post-Lehman, you make the first cut. If you're below $100bn (e.g., CIT), you can go bankrupt.
On remaining private, the outcome is more complicated. Citigroup had the best political connections in the business, but turned out to be so poorly managed that the state essentially had to take over--in a complicated and ultimately unsatisfactory way. Bank of America's relatively weak political connections meant that the impulse purchase of Merrill Lynch could go very badly--and also led to a bizarre form of government takeover.
The prevailing idea and organizing principle for this new sorting is not Lloyd Blankfein's "we're the catalyst of risk"--investment banks are peripheral, rather than central, to nonfinancial risk taking and investment in this country. It's Jamie Dimon's idea: just don't demonize the competent bankers, let us take things over and we'll smooth it all out.
The problem with this approach is its "success," from the point of view of the remaining bankers--their market share is up so sharply that it's embarassing. Of course, they can still argue that banking is a global industry with many competitors (some of which are even bigger, with more state assistance, promising much craziness in the years ahead).
But the real issue now is concentration in the political marketplace. Hank Paulson dealt with a dozen big banks/similar institutions with deep connections to Capitol Hill and a very powerful small banking lobby. Tim Geithner is looking at just a couple of big banks that are still independent. Probably we should start to divide our big banks into the "nationalized" and the "nationalizers."
The small banks still have clout--and you'll see them in force on the regulatory reforms debate this fall--but they know now that they don't get bailouts, and access to contigent state capital-on-amazing-terms is the ironic basis of modern financial power.
We are looking at a concentration of political power in the U.S. banking system that we haven't seen since the 1830s: Shades of Andrew Jackson vs. the Second Bank of the United States. We put up with a lot from our banking elite in this country, but historically we draw the line at financial power so concentrated it can confront the power of the President.
The logic for reform and for breaking up the big banks begins to build. Bank of America's fall was, in some senses, a fortunate accident for Goldman and JP Morgan. But it has also given them an excessive and unsustainable degree of political power.
Of course, you also have to ask: Who can break that power, when, and how?