JP Morgan Chase is the too big bank that just had a $2 billion trading loss. This caused criticism of its Chairman and CEO (Jamie Dimon). Yesterday gave me a laugh when Obama defended Dimon and JP Morgan Chase. Today another big laugh when CALPERS (the too big California retirement fund) is calling for a splitting of the two jobs of Chairman and CEO, as if that’s going to accomplish anything. What needs to be done for all the big banks and big bank holding companies is much more fundamental. One way to go (of many) is to split up these companies altogether. The banks should be separated from the other trading and investment banking operations. Then the banks should be reformed. Too-big-to-fail should be declared a failure and ended by making the banks smaller and requiring them to have capital at least half of their assets. Their assets should be strictly limited in maturity and risk. Maturities should be something like 2 years or less. Risk should be in the top few grades. Derivatives trading should be forbidden for banks. The OTHER parts of these companies can then be free to issue stock and liabilities and trade to their heart’s content, issuing mortgages if they like. However, their liabilities will no longer be insured or be money. This is just one possible way to go that I outline merely to highlight how far away the current crop of recommendations is from what it may take to reform banks. It’s not a radical way. It doesn’t end the FED. It doesn’t change the fiat money. It moves halfway to 100% reserve banks. But even this proposal will appear radical by contrast with the laughable step of splitting the Chairman and CEO office, and it shows how far we are away from meaningful bank reform.
Actually, every bank in the land — of any size — that has deposits regarded as money shouldn’t be making long-term loans, either business or personal mortgage. That’s a recipe for periodic insolvency whenever the asset values decline, for whatever reason. Banks that have money as liabilities should be separated from lending institutions that do not have money as liabilities. In this way, the payments system would be insulated from ups and downs in the economy and from variations due to the speculations of banks and their investments in long-maturity assets. There would be no need for deposit insurance, so that moral hazard would diminish drastically. Non-bank financial companies could still thrive by issuing non-money liabilities and intermediating them into mortgages and other loans, but these companies would be like any other company: subject to failure and bankruptcy. The end result is that banks would be banks with deposits being money, and they would not need any insurance because of their large capital and safe assets. They’d be separated strictly from uninsured non-bank financial intermediaries.8:58 am on May 15, 2012 Email Michael S. Rozeff