The To Big To Fail firms consider themselves essential to the world economy. Thanks to their scale, we’re told, they offer “synergies” and “efficiencies” and other benefits. The global economy can’t function without them, they say.
This is preposterous. For starters, the financial-supermarket model has been a failure. Institutions like Citigroup became gargantuan monsters under the leadership of empire builders like Sanford Weill. No CEO, no matter how adept, can manage a global institution that provides thousands of kinds of financial services. The complexity of these firms, never mind the exotic financial instruments they handle, makes it mission impossible for CEOs—much less shareholders or boards of directors—to keep tabs on every trader.
Even nominally “healthy” firms like Goldman Sachs pose a threat. Not that you would know it listening to the firm’s CEO, Lloyd Blankfein, who in early 2010 defended handing out record bonuses by claiming, “We’re very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose.”
Spare us. Like other broker dealers, Goldman Sachs has a long history of reckless bets and obscene leverage. It was at the center of the investment-trust debacle that exploded in 1929, ushering in the Great Depression. It spent the succeeding decades operating in a relatively prudent fashion. But that changed in the late 1990s, when Goldman went public. Since then, it has helped inflate speculative bubbles, ranging from tech stocks to housing to oil. After the SEC eliminated leverage restrictions for investment banks, Goldman’s leverage ratios soared to all-time highs, making it vulnerable when the crisis hit.