TBTF Means TBTM (Too Big To Manage) Part I

Banks that are too big to fail or TBTF are by definition also too big to manage or TBTM. What does this tell us about the state and the mindset of senior management in our major banks?

In a 2009 article entitled A House Built On Sandy (Sandy, meaning Sandy Weill, the main architect of the modern Citigroup) The Economist describes the decline of Citi in terms which are less than flattering. The following extracts tell the tale:

“TOO big to fail, too shit to buy” is the way some Citigroup insiders describe their employer… Acquisitions were poorly integrated. Cultures overlapped rather than melded)… It may be inevitable that some banks are too big to fail; but the lesson of Citi is that they can also be too big to manage.

Citigroup’s problems had started well before the subprime crisis brought it down to earth. The institution had experienced a spate of legal and regulatory problems all over the world. In India it was for violating its investment licenses, in Japan for having poor internal controls and unsavory sales practices, in Australia for a conflict of interest and in the US it was temporarily banned from making any further acquisitions until both its internal controls and sales practices were put in order.

Someone within the organization should have realized that something was wrong.

RBS is another bank that became TBTF and TBTM. One of the most interesting things about RBS was that while many ill-informed commentators were bewailing the role of traders and derivatives in the bank’s failure, RBS was really brought down by its CEO Fred Goodwin—a man that had nothing to do with either trading or derivatives. Goodwin had transformed RBS from a small regional Scottish bank into a global behemoth and the largest bank in the world in less than 10 years.

Such an insane rate of growth should have set the alarm bells ringing long before the financial crisis brought the bank to the brink of disaster. History tells us that not only was that not the case but in fact, Fred Goodwin was knighted by the Queen and honored by the London Business School.

A prime example of just how RBS became TBTM can be found in one report issued on the bank post the financial crisis. The report stated that part of the reason for RBS’s failure was the fact that because of its size and complexity, it was unable to consolidate its customer exposures. In other words, at any given time the bank was unable to quantify and determine how much it was owed by each customer.

That is never a good position for any bank to find itself in.

In another instance I was privy to, one TBTF bank bought out a portion of the business of another TBTF bank, only to then realize that it was unable to book and process the transactions arising from the acquisition on its own balance sheet. This was surely and indication of the extent to which the management of the acquiring bank was divorced from the logistics of its business ambitions.

Why have the CEOs and executives of major banking organizations insisted and persisted in creating organizations they could never properly manage?

There is of course every indication that big egos and megalomania played a large role in why banks became TBTF and thus TBTM—further reinforcing the proposition that behaviors and values are far more important than regulations, governance and risk management.

The real question has to be what is it about the banking industry in particular that makes it so susceptible to TBTF, even when TBTM issues rear their ugly head?

We will examine that in Part II.


Jonathan Ledwidge is the author of the book Clearing The Bull: The Financial Crisis and Why Banks Need a Human Transformation. You are invited to use this link to give your opinion on the performance of banks post the financial crisis.

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