Tags: Duhon | big | banks | systemic

Author Terri Duhon to Moneynews: Big Banks Should Be Broken Up

By Forrest Jones and David Nelson   |   Wednesday, 10 Oct 2012 07:58 AM

Big banks have grown to the point they pose systemic risks to the health of the financial system and should therefore be broken up, said Terri Duhon, a former derivatives trader at JPMorgan Chase and author.

The Glass-Steagall Act, passed during the Great Depression, banned financial institutions from running both commercial and investment banks under one roof, but was repealed under President Bill Clinton.

With its repeal, retail and investment banks, along with other financial services companies, merged into today’s big banks, offering a wider variety of services across the globe.

Many have said, however, that today’s giant banks are hard to manage and took excessive risks that led to the real estate boom and bust, which threw the country into a recession several years ago.

“I think that maybe some of these banks are maybe a little bit too big. When you identify something as systemically important, that’s a little scary,” Duhon, who is now a managing partner at B&B Structured Finance, told Newsmax TV in an exclusive interview.

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“What the investment banking role is in the financial markets is very crucial, and what the retail banking role is in the financial markets is also very crucial," the author of “How the Trading Floor Really Works.” "And it’s not clear to me there’s a huge amount of synergies between those two, to be fair.”

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So, should we break up big banks?

“Yes, I am suggesting that,” Duhon replied when asked by Newsmax TV.

Turning to regulations, the government shouldn’t focus too much on imposing norms that banks can get around anyway, as such policies complicate an already complicated financial system.

“When we look at the letter of the law rather than the spirit of the law, it doesn’t matter what rules are in place because somebody is always going to figure out how to get around the letter of the law and do what they want to do,” Duhon said.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

“At the end of the day, I think we really need to be focused on the spirit of the law and what are we trying to do with these regulations,” she added.

“We need a stable financial system, and anybody that is behaving in a way that regulators think is going to possibly damage that stability, we need to address that.”

After the collapse of Lehman Brothers in late 2008, the government rolled out a slew of regulations under the Dodd-Frank financial reform law, giving regulators greater say-so on bank capital requirements, liquidity levels and risk-management practices and would also ban banks from trading their own money for profit in capital markets.

Calls to break up big banks have grown this year in wake of JPMorgan Chase’s recent $5.8 billion trading loss, with supporters claiming that no matter how solid management might be, banks have gotten too big to handle.

“There’s no alternative but to resurrect Glass-Steagall as a whole. Even then, the biggest banks are still too big to fail or to regulate,” Robert Reich, former Labor Secretary under President Bill Clinton, wrote in a recent blog.

Others agree, pointing out that big banks haven’t created as much value for shareholders than once thought.

“Whatever economies the megabanks achieve from their size are more than offset by the challenges in managing trillion-dollar institutions that are into trading, market making, investment banking, derivatives and insurance, in addition to the core business of taking deposits and making loans,” Sheila Bair, former head of the Federal Deposit Insurance Corp., wrote in a Fortune column earlier this year.

“This is one of the reasons why, even before the crisis, their shares performed more poorly than those of the well-managed regional banks, and continue to do so.”

Editor’s note: To pre-order ‘How the Trading Floor Really Works’ at a great price — Click Here Now.

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