Breaking up for profit

It’s late and I’m reading the latest on how much of the mainstream media seem to want to pile on the anti-Bernie hobby horse, this time the way they have gone along with the New York Daily News’s crappy editing of their editors’ interview with Bernie. Portraying him as weak and wishy washy about one of his main planks – breaking up the too-big-to-fail (TBTF) banks.

The New York Times gets it right in this piece: http://www.nytimes.com/2016/04/07/upshot/yes-bernie-sanders-knows-something-about-breaking-up-banks.html?_r=0

Anyway – the point of this post isn’t about how corrupted and manipulated the media can be, nope it’s about that plank. Breaking up the TBTF Banks.

When I read the part where Bernie is asked about his bill and the statement “Speaking broadly, you said that within the first 100 days of your administration you’d be drawing up…your Treasury Department would be drawing up a too-big-to-fail list.” And then after that the Times piece points out that “The legislation says that, in no more than 90 days, the Financial Stability Oversight Council, a high-level regulator set up by the Dodd-Frank Act of 2010, would have to draw up a list of firms that appear to be too big to fail. Then steps would be taken to break them up.

A number of things all simultaneously happened at that point. I hadn’t really thought about it and part of me found the idea vaguely unpleasant on first blush. The unhappy feeling of people mucking with the banking system that is rather important to the proper function of our society.

But almost right away I heard another little voice pop up in my head that said: “Would that be so bad?” And that was answered right away by that same little voice saying “Wait – wouldn’t that be like a Good Thing from a shareholder’s point of view? Like maybe that would be more profitable in the long run … wouldn’t it?”

I could tell that this part of my brain was reflecting on the stories, books, documentaries and movies I’d been exposed to over the past few years. In large part the Big Short and Flash Boys, by Michael Lewis, informed my thinking.

In Flash Boys there’s a part where he explains that one of Brad Katsuyama’s team members had done a study of financial system regulation, and systemic response, going back over a century.  What he found was that every regulation brought in to close a loop hole that had been abused for profit created another. The sharp operators in the system then identified the new loop holes and worked out ways to exploit them profitably and that was business as usual until it became greedy profit taking with grievous consequences. Which made the regulators come up with new regulations to close those holes but inevitably flaws exposing exploitable loop holes were found. And the wheel goes round and round and never seems to stop. Greedy people with lots of money employ sharp minds to find ways to make more money with these flawed systems.

So some part of my mind was ‘thinking deviously’ when it looked at the idea of breaking up TBTF banks. And I remembered when I’d seen that before: AT&T. After long years of the USA vs AT&T it came to a watershed moment when AT&T got broken up into 22 smaller phone companies. And within the decade some of those ‘baby bells’ became some of the more profitable companies in the American economy.

So think of it like stock splits. The stock price per share gets higher and higher as the company’s value increases. So the 10,000 shares you bought at 22 cents each climb to $22 and then $220 and somewhere north of that they split the stock and instead of having 10K or $220 each stocks you have 50K of $44 each stocks. Your value is intact, just the numbers expressing them are different.

Well if a TBTF bank is broken up it’s not like they’re being punished for being bad. They’re being split into smaller units. If you had shares in the big TBTF entity before the break up you’ll have some sort of equitable part of one of more of the new entities coming out of the process. And if you do end up with investments in multiple things that means your risk is spread over multiple things.

So I’ve got to think that the smart money will figure out a way to have this work out for them. And the process of getting big enough to be broken up could just become a new part of the evolution of American businesses. Something akin to the change that happens when a privately held company goes public. Founding -> growth -> IPO -> massive growth -> breakup => smaller entities => growth.

It could become a sign of having made it – becoming a TBTF entity. Maybe a thing to strive for … a profitable thing … maybe.

It might be a stupid idea but the again is it any weirder and stupider than Credit Default Swaps being treated as something real in any sense other than they make someone money?

 

 

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