Biggest Banks Eyed For Breakup

Goldman Sachs Headquarters, New York City

At long last, the case for “too big to fail” banks is falling apart.

In the wake of the residential mortgage crisis, our industry has for years now struggled with finding the sources of capital its needs to finance the commercial real estate transactions that drive the broader economy.  The role of banks is to allocate that capital to our sector, to manage risk and to both set up and follow rules that promote stability and predictability as that capital circulates into and out of our transactions.

But risk management and rules have fallen by the wayside.

When US Attorney General Eric Holder last week testified to Congress that some banks are so big that DOJ is afraid to bring charges against megabanks, not even the most strident opponent of government regulation could fail to notice that the country’s top law enforcement official was actually giving up on law enforcement, at least when it came to TBTF banks.

The reason given by Holder was the same reason given by the banks themselves when accepting the bailouts: what’s bad for megabanks is bad for the entire economy.

In other words, first, in 2007, the banks in crisis managed to call off the basic rules of the market.  Now they have effectively called off the law itself.

You can’t get much more unregulated than that.

If you’re not a megabank, and you gamble and lose, then you leave the table.  But if you’re JPM Chase, you get a pat on the back and a pile of new chips on a silver platter.  Plus a few handfuls for your own pinstriped pockets.

If you’re not a megabank, and you launder drug money, or even posses the tiniest quantity of drugs,  you are facing hard time in prison.  But if you’re Britain’s HSBC, you can admit to servicing Mexican drug cartels and internationally sketchy, terrorist-associated accounts to the tune of hundreds of billions and then atone for your transgressions with a mere $1.9 billion settlement.

For anybody keeping score, that’s about five weeks’ income for that bank.  Calling that a slap on the wrist is an insult to both slaps and wrists. It’s more like a hug and a wink.

Then there’s something much closer to home.  There’s what out-of-control banking culture has done to our leases.

As I’ve written here before, the LIBOR rate-fixing scandal has cost our industry in untold ways.  By messing with the cost of capital and by distorting the interest rate governing rent increases, the TBTF banks have happily bit into our industry’s margins for no other reason than to cover their derivatives traders.

In other words, once one of our own even manages to with the uphill battle obtain capital to finance a bedrock transaction in the tangible supply and demand economy,  the capital costs have been manipulated by banking in order to ensure the banks win on their derivatives trading, a market that is about as speculative and inessential as it gets.

Breaking Up Isn’t So Hard To Do

In this fight over capital and rules, the case for the existence of TBTF banks grows only weaker.  Mainstream pressure to break up these massive institutions is growing. Our pinstriped friends at JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley are simply running out of wiggle room and the writing is on the wall.  In fact, it’s on the Wall Street Journal itself, which has floated a bank breakup plan called “too small to save”.

When the WSJ is advocating for a power greater than the market to wake up and fix things, you know a profound change is in the air.

Speaking only for myself, the commercial real estate markets could only benefit from this long overdue correction.  I know the industry likes its pinstriped friends. It would like to see them get back to allocating capital and managing risk.  It would like to see them again in the market and under the law.  And so would its clients.

Leave a Reply