Too big to break up December 2, 2013 at 6:51 am
Mark Roe has an interesting point: are the mega-banks so large that the usual market mechanisms by which bad management is punished blunted by the funding benefit of size?
For industrial conglomerates that have grown too large, internal and external corporate structural pressures push to re-size the firm. External activists press it to restructure to raise its stock market value. Inside the firm, boards and managers see that the too-big firm can be more efficient and more profitable if restructured via spin-offs and sales. But for large, too-big-to-fail financial firms (1) if the value captured by being too-big-to-fail lowers the firms’ financing costs enough and (2) if a resized firm or the spun-off entities would lose that funding benefit, then a major constraint on industrial firm over-expansion breaks down for too-big-to-fail finance.
The obvious correction of this externality, I say somewhat with my tongue in my cheek, is for the state to provide M&A finance to activist investors looking to buy and break-up mega-banks. Roll-up, roll-up, $200B at Libor flat just for you today missus, buy a mega-bank cheap cheap cheap while you can…