Economist Kaufman calls for breakup of banks

NEW YORK Mon Nov 26, 2012 4:45pm GMT

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NEW YORK (Reuters) - Another financial guru is calling for a breakup of the big banks as a step toward simplifying the worrisome global economy.

Dr. Henry Kaufman, president of consulting firm Henry Kaufman & Company, Inc. and former economist at the Federal Reserve Bank of New York, said that big banks have become too complex to manage efficiently and government reforms have been counterproductive.

"They're too complex. They're too diverse," Kaufman said in reference to banks that, along with traditional deposit functions, also have investment banking and wealth management divisions. Kaufman spoke with Reuters TV for the Reuters Global Investment 2013 Outlook Summit.

Kaufman said financial conglomerates such as JP Morgan Chase & Co. (JPM.N), Goldman Sachs (GS.N), and Citigroup (C.N) are too massive and could be regulated more successfully if certain units operated independently.

"Spin off investment banking. No financial conglomerate should have a mutual fund operation in it. No financial conglomerate should have wealth management in it," Kaufman said.

Politicians and regulators have resisted calls from some investors and economists to split up conglomerates that were assembled over two decades by executives such as former Citigroup Chief Executive Officer Sanford "Sandy" Weill.

These universal banks offered customers everything from checking accounts and insurance to derivatives trading and merger advice. The financial crisis, sparked by the Lehman Brothers debacle in September 2008, is calling that into question.

Kaufman said the Dodd-Frank reform law, which the U.S. government adopted in 2010 to avoid a repeat of the financial crisis, "goes in the wrong direction" because it upholds the condition of "too big to fail" in which a bank's pitfalls have wider systemic consequences.

Kaufman also said the state of the global economy is "unprecedented" given the high debt overhang in the United States, the euro zone debt crisis, and economic slowdown in China and Japan.

"We are in a sort of no-man's land when it comes to economic and financial policy," Kaufman said, adding that the United States is in better shape than Europe and the Far East but is still looking at "modest" economic growth.

Kaufman earned the sobriquet Dr. Doom in the 1970s - long before Nouriel Roubini acquired the title in recent years. Like Roubini, Kaufman was prescient in his warnings about excessive debt in the financial system.

Kaufman said the "fiscal cliff" of roughly $600 billion in spending cuts and tax increases set to begin in January has created "a high element of uncertainty". Even a compromise between President Barack Obama and Congress to cushion the impact "at best, will have a neutral impact on economic activity".

U.S. Federal Reserve Chairman Ben Bernanke said last week that 2013 could be "very good year" for the U.S. economy if a deal is reached, but uncertainty over the outcome of the negotiations has already damaged growth. Bernanke also repeated that a failure to reach a deal could lead to recession.

On Bernanke's performance as Fed Chairman, Kaufman said the Fed had overall failed to anticipate the magnitude of the financial crisis and "did very little to ward off financial excesses in that period from 2000-2008". He said he would give Bernanke "poor ratings" over that period for these slips.

He added, however, that Bernanke's attempts to boost the economy through bond-buying plans have strengthened the recovery by eliminating pressures on the housing and automotive sectors.

"I think he has done quite well since we went into the economic contraction and hit the danger points in the fourth quarter of 2008," Kaufman said, and added that the extended purchases of mortgage securities and ongoing low interest rates on government bonds known as QE3 is "still very much in order."

Kaufman returned to the notion of "too big to fail" banks as a top concern that, he said, touches on the "economic freedom" of the United States.

"Big financial conglomerates will breed more concentration of economic power, and that's the last thing we need," he said.

To see the Reuters TV interview with Kaufman click here: reut.rs/Tphd3N

(Reporting by Sam Forgione; Editing by Andrew Hay)