A Modest Proposal

The tea party masquerading as a colonoscopy, better known as the stress tests was meant to examine which banks were too big to fail. Those with particularly big holes to fill included Bank of America, Wells Fargo and Morgan Stanley. Those that came out smelling of roses were, as ever, Goldman and JPMorgan.

But there seems a certain illogicality to the process and the outcome. The process was designed to discover which banks were too big to fail. All the emphasis was on the failure side. I would suggest that if regulators really want to encourage competition, free markets and a total departure from the collusion that got the world into this mess, they should look at the first part of the equation, the words “too big”. Taken to its logical conclusion this would necessitate ordering the break up of JPMorgan and Goldman Sachs. Both firms’ size and connection into nearly every facet of the financial markets has grown over the past year. If ever there was a systemic risk to the system, these two firms represent it.

Don’t get me wrong, competition breeds winners and no one should be punished for their success. And in the current light, it seems unthinkable that either JPMorgan or Goldman would fail. But such thoughts were equally valid in the summer of 2007 about AIG, Lehman and perhaps Bear Sterns.

Unfortunately there are probably too many shareholders and ex-employees of Goldman in the US government for this to happen. But if one thing could be done, to really signal that it is not business as usual in the financial system, this would be it.