What does the dismantling of US banks mean for SA? More than you realise.

PHILADELPHIA -  The US Congress could soon be considering legislation that would enable the government to identify and dismantle banks, insurers, asset managers, hedge funds and other financial services companies that are "too big to fail".

After the ugliness and pain of the financial crisis, Congress, the main legislative body of the US consisting of the House of Representatives and the Senate, began the process of reviewing the country's financial laws with a view to reforming them. Under Representative Barney Frank, the chairman of the House Financial Services Committee, a financial regulatory overhaul bill has been drafted that addresses a range of reforms. However, momentum is growing for some amendments that Frank did not consider, such as the "too big to fail" amendments.

After former Federal Reserve Governor Alan Greenspan told the Council on Foreign Relations "If [banks are] too big to fail, they're too big", it became increasingly acceptable to talk about breaking up America's financial services giants. In the same speech, Greenspan said, "In 1911 we broke up Standard Oil - so what happened? The individual parts became more valuable than the whole. Maybe that's what we need to do."

His comments inspired lawmakers like Senator Bernard Sanders and Representative Paul Kanjorski to propose that the government be given extensive powers to identify companies that are big enough to pose a systemic risk to the financial system, and to dismantle them. In fact, they go so far as to propose that the Treasury be required to identify and break up overly large companies.

It's a scary prospect, and it has US bankers sweating. Meanwhile, as discussed in a previous column, their European counterparts are grappling with their own anxieties about a more interventionist, bold and active band of policymakers.

These changes have implications for South Africa and for South African banks and financial services companies. For a start, this could be a very good thing for our companies.

American bankers themselves have pointed this out, or rather, have pointed out that if the regulators of Europe and the US intentionally break up their - and in fact, the world's - giant financial services groups, the net result would be to create opportunities for foreign companies.

Many South African financial services groups have extensive overseas interests. Old Mutual (JSE: OML), Investec (JSE: INL), Standard Bank (JSE: SBK), Discovery (JSE: DSY) and others operate in the UK, Europe, Africa and parts of Asia. All of those markets are competitive, and there are global gorillas in every one of them, gorillas that South African companies would find easier to manage if they were somewhat trimmed down.

Of course, on the flip side, our companies could find their own wings clipped in some of these markets as regulators become more vigilant and assertive. Particularly in developed countries, the trend is definitely towards a heavier government hand.

What we're talking about here is a sea change, a shift in the way that regulators and governments around the world see themselves and their relationship with business and the economy. It's not the end of capitalism - of course not - but it is a time of change, and it's going to have implications for investors and businesspeople around the world.

As investors, it probably makes sense for us to consider the possibility that the winds of change are stirring. The developed world, which is still reeling from an economic downturn that it won't soon recover from, will be a slower, more cautious place for the next few years. American consumers, who have long been the market of last resort, are going to be slow to spend for the foreseeable future. Although emerging markets will be much more vibrant and exciting, they will still feel the pinch of collapsed Western consumer markets and there will be rough spots.

Opinion is divided on whether now is the time to buy and take risks, or the time to hunker down in safe havens. Every market watcher has a different take on where financial markets are headed. Some believe that stock exchanges are on the up, and that the time to buy is now. Others worry about inflation and weak demand, and suggest assets like gold as a hedge. Still others urge investors to hitch their wagons to emerging stars like China.

There's no shortage of advice out there, but it's worth keeping in mind that while day-to-day market moves are exciting, it's important to have a longer view. Remember that often it's the slow-burning, subtle trends that shape markets in ways we don't expect, and if the world is headed towards a more restrictive, less open and more conservative style of capitalism, then the smart money will be looking for opportunities that fit in with the new milieu.

Write to Felicity Duncan: felicity@moneyweb.co.za or follow her on Twitter at http://twitter.com/FelicityDuncan

*This article first appeared in Discovery Invest

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The Fed Why don't they start with the PRIVATELY owned central bank that creates money out of thin air on which it charges the US taxpayer interest. This interest is then paid to its shareholders which are kept secret by are known to include Goldman Sachs. . .more This is the Federal Reserve. About as Federal as Federal Express and has absolutely no reserves. Payment of interest on government debt consumes a huge proportion of the US tax take and guess who owns the most? . .less by Lord Max master if Infinity on November 17 2009, 01:05 Find this comment inappropriate? Report it

Breaking up is hard to do... Max is quite correct, it's the ultimate con; but that's for another time - possibly not too far into the future if the banks get broken up... I agree that "too big to fail is too big" - I think it's a great strategy to break up the big . .more banks; what concerns me is how they're going to do this... I also have a sneaking suspicion that in the break-up we will see a lot of "value" crumbling into dust and floating away on the breeze... might this be the other shoe waiting to drop? . .less by M on November 17 2009, 06:41 Find this comment inappropriate? Report it

The ANC also failed to act as lender of last resort to Saambou, considered small enough to fail. Then there was a run on the next bigger bank (BOE).. by BP on November 17 2009, 07:12 Find this comment inappropriate? Report it

in the future.... ....banks will hold more capital. banks abroad and banks here which means their returns will be lower which is why their stocks all trade at 50% (or in some cases 10%!) of levels 2 years ago by charlie on November 17 2009, 08:19 Find this comment inappropriate? Report it

Very interesting article It does make sense to make banks more nimble but the size of our banks has meant we have things like Saswitch and atm's and easy interbank transfers etc. Moan all we like about their terrible services but it does work, by Senhor on November 17 2009, 08:28 Find this comment inappropriate? Report it

Mark of the beast It sounds like Max is quite right. The next logical step will be to just allocate a number to each person, and assign them a balance amount (out of thin air of course). They then won't even have to print money anymore. All the interest, transactions . .more etc can then all be done by scanning the number into "the system". And by sheer coincidence, the best place to have such a microchip(or mark/inscription etc. etc.) will be on the forehead or right hand. But thats just coincidence- hey? . .less by Winn on November 17 2009, 08:29 Find this comment inappropriate? Report it

Nationalise banks! Break them up and nationalise banks and make them boring as they are there for you and me, not for the Wall street shareholder. by Troy Ounce on November 17 2009, 09:03 Find this comment inappropriate? Report it

Now is the time to SELL, trust me! I'm a doctor! by Lond Munch on November 17 2009, 10:06 Find this comment inappropriate? Report it

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