Are Regulators Trying to Make Bank of America Smaller?

By James Kwak

Last week, Charlie Gasparino reported at Fox Business that “Executives at Bank of America are coming under increasing pressure to downsize the firm as federal regulators seek to prevent large, cumbersome financial institutions from once again tanking the financial system as they did in the fall of 2008.” Later, he writes, “people close to the bank and government officials say government regulators have made it clear to BofA executives, including its new CEO, Brian Moynihan, that they want the bank to become much smaller.” The article refers to officials at Treasury and the Federal Reserve.

This would be interesting for a couple of reasons. One is that the administration and its allies in Congress are insisting that breaking up large financial institutions is not the answer to the too big to fail problem. If regulators are pressuring BofA to get smaller, that would seem to imply the opposite.

The other question is: why BofA and not, say, JPMorgan Chase, which is roughly the same size and has a similar profile? (I know BofA is bigger in retail and JPMorgan in wholesale, but basically both are big universal banks.) JPMorgan is in better shape right now and has the reputation for having superior management, but even if true those are not things you can rely on staying true indefinitely.

I’m not optimistic that much will come of this, but it’s interesting to think about. The most simple way to make BofA smaller would be to spin Merrill Lynch right back out again, but who (meaning equity investors) would buy it right now?

27 responses to “Are Regulators Trying to Make Bank of America Smaller?

  1. You seem to be assuming that these regulators are working for the U.S. citizenry and not, say, Jamie Dimon.

    Nothing like a little “selective enforcement” to really drive home the exact nature of our current system of government.

  2. In a “plutonomy”, according to Citigroup global strategist Ajay Kapur, economic growth is powered by and largely consumed by the wealthy few.

  3. (audio)

    “A Bank of America director questioned the CEO’s $76 million pay package in a year when the bank laid off 12,600 workers. She was dropped from the board a few months later….In his book Money for Nothing, author John Gillespie chronicles these and other corporate excesses. But he places the blame on the shoulders of elite but dysfunctional boards that fail to reign in corporate leadership. He argues that this is the true source of the recession and, that if we don’t reform corporate governance, another economic catastrophe is inevitable.”

  4. >>The most simple way to make BofA smaller would be to spin Merrill Lynch right back out again, but who (meaning equity investors) would buy it right now?>>

    They could just spin it out, that is, distribute the shares of ML to the BofA shareholders. Are they getting any syngergies, cross-marketing, other benefits from ML?

    They won’t do it because it would be admitting error.

  5. I can’t tell whether James is implying that no one would see Merrill as having value, and whether you are implying that BOA management made a mistake in acquiring Merrill. I don’t think either implication is consistent with the consensus.

    That said, a more complicated division would probably do more to enhance competition

  6. OldApacheReject

    Barclay’s Capital is hunting for US banks to buy into according to FTAlphaville James. Your old pal–OldApacheReject

  7. Very interesting. Could it be that many of the other larger banks are really not banks, except in name, except for Citi? And, so far as Merrill is concerned, BOA was a victim, as I understand it, of Paulson’s arm twisting (and maybe a tactic to remove them as a potential threat to Golman’s strength, figuring that the Merrill merger would weaken them, which it may have but not noticably). I believe that cutting loose Merrill would solve that problem, and maybe pave the way for making the other oligopolists lose their duality. It really depends on where Congress and the administration are really heading in so far as reregulation goes, which is still sorting itself out, but this may be a leading indicator and not just jawing. Only time will tell.

  8. I don’t think anyone really thinks BOA was a victim, in that the word was that Merril has been the most profitable part of its business since the acquisition.

    But BOA and Citi, and to a lesser extent JPMorgan, are different critters than Goldman and Morgan Stanley in that they are massive in large part thanks to their giant commercial banks.

  9. As someone else pointed out, Jamie Dimon and Lloyd Blankfein aren’t being required to shrink the size of their empires, even though they represent a dangerous systemic risk. It pays to be part of the inner family. Not enough of BoA’s top managers are in that inner circle for them to get the same protection.

  10. Garrett Wollman

    BofA is anticipating some synergies from Merrill as they consolidate their mostly outsourced consumer brokerage business with Merrill’s. I’ve seen disclosure notices about how, later this year, BofA’s brokerage customers will be using Merrill’s back-end systems instead of Fidelity’s NFS as they do now. (There’s obviously a cycle of reincarnation here: I started out with Quick & Reilly, which outsourced its back end; they then merged with Bank of Boston, which brought it in-house, BKB then merged with Fleet and spun off the back-end business, then moved their retail customer to NFS, then merged with BofA which bought Merrill and is now taking it back in house.) For competitive reasons I’m certain BofA wants to remain in the consumer brokerage business, so I’m not sure that’s the line along which they would choose to divide themselves if it’s left up to them.

  11. When you do not speak out against regulations which favor those perceived as representing lower risk and the credit rating agencies, the official perceivers of risk, include explicitly among the criteria they use while rating the willingness of government to bail out, you are in essence also quite heartedly supporting “the too big to fail”.

    The “too big to fail” problem will not be eliminated by shouting or prohibiting the big but by reducing what helps them become big and by making sure they can fail. To be “too big to fail” you just need the market to believe you are “too big to fail”.


    Simple breaking up and downsizing is not going to work simply because we can’t go back in time by simply rescaling. A revision and reorganization plan needs to be revised that creates something of a co-operative consortium with interdependencies built into a process that is regulated by external checks and internal balances. The middle class bankers probably could revamp a network system that would be a working proposal, but we keep hearing only from self serving interests from Big Financial monopolies.
    J.P. Morgan, BlackRock and Goldman are not going to give us a working model for reorganization but they will bring us back to the brink of total crisis just to prove we can’t live without them.
    The second thought is that aside from a middle class banking revolution, we need a PUBLIC OPTION in banking and finance to compete with the private modality. Something along the lines of a public health system that systemitizes public utility and prioritizes stability. Liquidity must be distributed if a truly capitalistic solution is to be envisioned and enacted for the 21st century. We need to stop lock stepping in line with the standardized rhetoric of collusion and exclusion and start public dialogue about authentic solutions. The reality of the schism between domestic and international economies needs to be measured and realizations that infrastructure is the priority right now in both rhelms. Considering the fact that the economy has become politics and politics has become business; it seems we need nothing short of an all out revolution to fix that arena.

  13. And do not forget or ignore the regulatory stranglehold that the Basel Committee and their public relation agency, the Financial Stability Board, hold on the current financial system with their truly destructive capital requirements for banks based on perceived risks.

    Zero, none, zilch marginal capital requirements for banks when lending to sovereigns rated AAA to AA-… frankly how crazy can it get?

  14. Kurowski,
    You often seem to speak in riddles, and reminds me a little of “Bond Girl” and her intentionally vague statements. Are you saying the capital requirements are too strict or too mild?? Often times you SEEM to imply capital requirements are too strict for the regional or smaller banks. Based on the high number of failures of smaller banks announced by the FDIC this year, I think that opinion would be contradictory to the facts.

    Also, when the bank is so large, like AIG, Bank of America or Goldman Sachs, it forces the government’s hand to nationalize them or bail them out, because if they let them go insolvent and take them into receivership, the entire economy has a high chance of collapse. They have to set exact technical limits on size of the banks. Period.

  15. I am not saying the capital requirements are too strict or too mild. What I am saying they are too wrong….too discriminating. Capitals are coward by nature and so when you on top of that awarr special incentives like low capital requirements to what is perceived as low risk you end up, as we did, dangerously overcrowding the supposedly safe AAA havens…. And I sincerely hope this is not considered a riddle as I do my utmost to try to find the words that can help understand what happened.

    What I also hold is that more than allowing banks to become too big to fail we have to become much better at allowing banks to fail. Do not forget that a couple of banks at “the exact limits on size of the banks” could prove to be just as bad, or even worse, than a too big to fail bank.

  16. Yes there is the issue of bad incentives for the credit rating agencies but even if you got that right the system would still be wrong because in a world of coward capitals why on earth should you want to give additional incentives (low capital requirements) to what is already benefitting from being perceived as low risk? Do you not think you might be overdoing it and creating the kind of stampedes towards AAA land that caused precisely this crisis?

  17. Sorry I meant “that more than NOT allowing banks to become too big to fail we have to become much better at allowing banks to fail. Do not forget that a couple of banks at “the exact limits on size of the banks” could prove to be just as bad, or even worse, than a too big to fail bank.”

  18. I see some of the point you are making—BUT disagree on the CAUSE of the problem. I think that gets back to the problem of the bad incentives for ratings agencies (Moody’s, S&P) which encourages them to lie when they are making new issues, NOT on capital requirements. Although obviously I think banks’ capital requirements should also be raised.

  19. Since I think most of us agree here that a much smaller bank is appropriate, I’d like to know from someone (Simone?) what the “right size” of BOA is. One-half, one-fourth? How far can the regulators realistically squeeze?

  20. ideally, BoA should be broken up into 7 or 8 (pick your flavor) regional banks and each regulated to disallow it from doing business out of its region, and its financial services divisions spun off into separate companies in accordance with the repeal of the odious Gramm-Leach-Bliley Act. So should all the other “national” banks.

    Then rainbow and unicorns should spew forth from my nether regions!

  21. Why would you want to prevent them for competing with each other?

  22. One is that the administration and its allies in Congress are insisting that breaking up large financial institutions is not the answer to the too big to fail problem.

    Interesting way of phrasing it.

    If one doesn’t think breaking up the big banks is (a necessary part of) the answer, than by definition he doesn’t think TBTF is a problem at all.

    And indeed, Obama and his gang are on record saying they don’t believe it’s a problem.

    So if they’re pressuring BofA, whatever their proximate rationale, there has to be some other fundamental reason. Probably pro-JPM and -Citi favoritism. (Recall how Dimon, Parsons, and Pandit were high on Geithner’s to-call list, while BofA was not.)

  23. Or perhaps political reality?

  24. Yup, when you have the power to choose whatever reality you want, as Obama and the Dems did, the one they chose became their reality.

  25. It sounds like the regulators want to preserve their “policy by deal” ad-hocracy rather than codify into rule or law what they think ought to be done. I’m not sure why this mode of thinking prevails now that Hank “Let’s Make a Deal” Paulson is out of the picture. Perhaps Geithner and Bernanke found that they really enjoy the role of calling the shots and picking winners and losers; it certainly gives them a lot of personal authority, prestige, and power. Or, perhaps they genuinely believe that regulators need the freedom of action to break up or shrink players that are “dangerously” big, while strengthening players that are “competitively” or “efficiently” big.

  26. Size by itself is not the issue. A huge mortgage lending business would create business risk for the bank, but it would be in proportion to its size. Whether such risk is held within one bank or ten, it really doesn’t matter. The real issue is system risk, and disproportionate business risk relative to the amount of capital deployed in that business unit. These are the types of risks that need to be separated from the banks, as proposed by Mr. Volcker. Such activities may actually be conducted in very small business units, but that doesn’t mean they can’t bring the whole house down (such as AIG FP). Risk is the issue, not size.

  27. Many of Charlie’s report during the crisis have been wrong. Why should we believe him now? Is he just trying to stir the pot?