Bank Superlawyer: Don't Romanticize Glass-Steagall
NEW YORK ( TheStreet) -- Breaking up the largest U.S. banks is back on the table all of a sudden, and Rodgin Cohen is worried.
The Sullivan & Cromwell Senior Chairman is arguably the most influential banking attorney in the country. He is largely responsible for building the banking industry as we see it today, so the notion that he would not happily see it dismantled is not a big surprise.
|Sullivan & Cromwell Senior Chairman Rodgin Cohen|
"Virtually every economic historian who has looked at late 20s and early 30s agrees the rationale for Glass Steagall was a myth. It was not the securities business that caused the collapse of banks. That's absolutely dead wrong. The evidence is overwhelming," Cohen argues, citing the work of economists like George J. Benston, Eugene Nelson White, Mark J. Flannery, Milton Friedman, Peter Temin and Joseph Lucia.
What may be more surprising is that Cohen acknowledges the debate remains alive, and that credible advocates of breaking up the largest U.S. banks include Dallas Federal Reserve President Richard Fisher and Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman.
Cohen says there are three rationales for breaking up the largest banks, two of which he says are "demonstrably incorrect," while the other "has legitimacy, but should be dealt with in a more balanced way."
The first is that big banks are inherently more risky, an argument Cohen says is not sustained by "empirical evidence."
"Yes, some big banks got into trouble in 2008, but so did hundreds and hundreds of small ones," he says.
The second argument, he contends, is a more populist and political one, which is that big banks have too much power and influence. Cohen says this belief has deep roots in the U.S., most famously seen in the decision by President Andrew Jackson not to renew the charter of the Second Bank of the United States.
Cohen believes this view is misguided.
"Almost all small banks do great things for their communities, but this political philosophy is counter to the reality of 20th and 21st century business, which is that in a global economy you need to have major global institutions," he says.
The third concern is a real one, Cohen says. That is the fear that massive financial institutions threaten to bring the economy down with them when they fail. However, Cohen believes Title II of the 2010 Dodd-Frank legislation will prove adequate to resolve big banks when they fail. And this approach avoids all the negative consequences of a forced breakup, he argues.
Other banking industry authorities, such as Davis Polk partner and former FDIC general counsel John Douglas, disagree with Cohen on the likely efficacy of Title II.
In a research report published Monday, financial services-focused investment bank Keefe Bruyette & Woods cited "historical analysis," in arguing "investors should be prepared for the possible eventual break-up of the largest financials, including Bank of America (BAC) , Citigroup(C) and JPMorgan Chase (JPM) ."