‘Too Big to Fail’ or ‘Too Big to Manage’?

in In the News
October 3rd, 2013

From Corporate Counsel
By Cornelius Hurley
October 3, 2013

On Thursday, former General Electric Company senior vice president-general counsel Ben Heineman Jr. posted an essay to the Harvard Business Review blog network, “Too Big to Manage: JP Morgan and the Mega Banks.”In it, he looks at the recent history of regulatory and legal issues faced by large banks in the U.S. and asks, “Are these huge major financial institutions not just too big to fail, their leaders ‘too big to jail’ (as some critics charge), but also ‘too big to manage’?”

CorpCounsel.com reached out to Boston University professor Cornelius (Con) Hurley for his thoughts on Heineman’s essay. Hurley’s response follows:

Almost every sentient being, from Federal Reserve chairman Ben Bernanke and Treasury Secretary Jack Lew to the man and woman on the street, recognizes that the too-big-to-fail problem persists. The essence of the TBTF business model is to impose the risk of a firm’s failure on society.

What kind of a business “culture” does JPMorgan Chase & Co. CEO Jamie Dimon want to create that depends upon this risk transference for the firm’s success? Is it a culture where the rewards of success flow to managers and shareholders while the losses are borne by the taxpayers—and haven’t we been down this road before with Fannie Mae and Freddie Mac?

Before we get to Ben Heineman Jr.’s admirable “prevent, detect, and respond” approach, we should be asking a very basic question: Can we tolerate firms that pose such enormous negative externalities to the financial system to exist in their current form? I think you know my answer.

Luckily, the General Accountability Office (GAO) is currently at work on a report that will document the advantages of being TBTF. Of course, the principal benefit is lower funding costs, a la Fannie and Freddie. It appears that immunity from criminal laws is another.

Upon the release of the GAO report, due early next year, look for Mr. Dimon and his hired guns to protest, “Yes, but look how heavily regulated we are and the cost of our shiny new ‘prevent, detect, and response’ systems.”

Don’t listen to them.

Messrs. Dimon, Blankfein, Gorman, et al., need to understand that they’re not doing anyone any favors by adopting these new safeguards. They are merely making a small down payment on the havoc their unmanageable firms are going to wreak on the economy the next time—and there will be a next time—one of them crashes.

Read the full article at Law.com.