Why Canadian banks, despite their high levels of consolidation, do not face the same problem as the US banks?

Large financial institutions too big to fail, saved: Nouriel Roubini

Nouriel Roubini, Chairman, RGE Monitor, in a chat with ET Now talks about the Volcker rule and the global financial system.

Why do you back the Volcker rule?

If the Volcker rule goes in the right direction by saying if you have access to taxpayers’ insurance, why should you be involved in risky prop trading in private equity and hedge fund activities. Those things should not be allowed by bank holding companies. I would go more far. I would say that the kind of restriction we had under Glass-Steagall were the appropriate one that wanted to avoid massive financial crisis for 40-50 years. They have absolute separation and also are not having derivatives trading occurring in bank holding companies.

Why Canadian banks, despite their high levels of consolidation, do not face the same problem as the US banks?

Resolution regime is not going to work. We are not going to break up Goldman Sachs in the heat of the next financial crisis. So like Gordon Brown, like Alan Greenspan have said, if they are too big to fail, they are too big we will expect them up and by the way they are too big to fail but they are also too big to be saved.

That is what is happening in Europe right now where financial systems are so large that if they have financial crisis, the fiscal resources of the sovereign are not enough. Also these financial are not only too big to fail and too big to be saved or bailed out but they are too complex to manage. When you have a huge financial institution with thousands of different panels- because every banker in trade has a different panel – not even the smarter CEO or board of directors can monitor the activity of thousand panels.

(Ed Note: Seasonality Chart from Don Vialoux)

Why it is that while some big investment banks failed, others like Goldman and Citi have survived?

Goldman Sachs – like everybody else – got a massive amount of financial support from the government. AIG borrowing at zero rate from the Fed and other forms of bailout of the government. They would then not have been alive. Goldman Sachs and Morgan Stanley would have ended up like Bear Sterns, like Lehman, like Merrill Lynch without the support of the government.

The paradox is that Goldman Sachs in many ways is the biggest hedge fund of all, much more leverage than any hedge fund and unlike all the other hedge funds, it is at access to the free money of the Fed and a guarantee of support. So if Goldman Sachs wants to be hedge fund, I will not be against them. Become a hedge fund, do whatever you want but do not be a bank holding company.

What is your take on Financial Reforms Bill?

All these institutions involved in commercial banking, investment banking, prop trading, private equity, hedge funds, market, derivatives, asset management, insurance, you name it, all these things can be done by separate institutions. Each one of them is smaller, not too big to fail and the big financials spread market has been a big disaster.

Look at Citigroup, look at ING. The idea that you have economies of scale and scope has actually shown that this institution is too complex to be managed. So I am in favour having them smaller with less systemic affects