Small government, big banks?

One reason I've never really come around to being a small-government conservative is my belief that if we put a tight leash on the feds, that will allow other large institutions--mostly big businesses, but not limited to that--to dominate me instead. Conservatives deploy the language of liberty pretty effectively, but often it's in the service of a corporatist agenda that would wouldn't necessarily feel "free" to most of us. I'm not so much sure that "big government" is as much of a problem as is bigness itself: Outsized institutions of any sort, public or private, can have outsized impacts on our lives.

So I'm intrigued by the question raised by my friend (and occasional nemesis) Steve Hayward over at Power Line. If conservatives want small government, he asks, should they also be in favor of breaking up the big banks? 

So I think I could be persuaded that the big banks should be broken up, though this requires conservatives and pro-market libertarians to set aside their cognitive dissonance over the use of centralized political power to accomplish such an end. Discuss in the comment thread.

Me? I think it's "pro-market" to actually let the market work: When banks get too big to fail, they put taxpayers on the hook for their risk-taking. You obviously can go too far in regulating the markets, but (ahem) you can also go too far in deregulating them, as well. Markets work best when they have some boundaries.

All of which has been said--including by me--a million times before. And there are plenty of other reasons I probably still won't take up the mantle of small-government conservatism: The issues that animate me seem to be ignored by or scoffed at by my conservative friends; even if liberals don't always have the right answers, I feel more comfortable with them because they're actually trying to solve the problems that look like problems to me. But small-government conservatism will be much harder for me to argue against if it doesn't leave me "liberated" to live under the tyranny of Citibank.

Is Goldman Sachs quarterly loss due to 'regulatory uncertainty?'

Maybe. But the New York Times doesn't offer any evidence to back up this assertion:

To improve their profitability, banks have three main options: increase revenues, cut expenses and reduce the shareholder base. But the first method is not working at a time when earnings have been crimped by regulatory uncertainty and economic woes.

The reason I ask the question is that "regulatory uncertainty" is one of those Luntzian phrases—like "death tax," say—that Republicans toss around cavalierly. And it's true that Dodd-Frank regulations are altering the investment banking landscape. But is that the reason Goldman Sachs lost $428 million during the quarter?

Consider the very next paragraph in the Times' article:

Goldman reported a loss of $428 million during the third quarter, compared with a $1.74 billion profit a year ago. The firm was punished by its holdings in stocks and bonds, losing $1.05 billion on its holdings in Industrial and Commercial Bank of China, a strategic investment the firm made in 2006. I.C.B.C. stock fell about 35 percent in the quarter, a paper loss that flowed through to Goldman’s results.

Well, wait. Why is I.C.B.C.'s stock falling so far, so fast? The Times doesn't explain. Fortunately, Bloomberg reported on the story in February:

Chinese banks’ loans to local governments are about 3.5 trillion yuan ($540 billion) more than the national auditor’s estimate, and the industry’s credit outlook could decline, Moody’s Investors Service said.

“The Chinese audit agency could be understating banks’ exposure to local governments,” Yvonne Zhang, a Moody’s analyst in Beijing, said in the report today. The “apparent absence of a clear master plan to deal with this issue” is likely to exacerbate problems and lenders may be left to manage a portion of the souring loans on their own, it said.

The nation’s first assessment of local government debt showed that 79 percent of the liabilities are bank loans and 8 billion yuan is overdue, Auditor General Liu Jiayi said June 27.

The additional 3.5 trillion yuan of loans, which account for about 7 percent of China’s 50.8 trillion yuan in outstanding local-currency loans, aren’t considered by the audit office as real claims on local governments, Moody’s said. That indicates the debt may be poorly documented and at greater risk for defaults, it said.

In other words, Chinese banks like I.C.B.C.—and it's not the only one faced with this problem—got a little credit crazy, made too many loans that may not get repaid and documented the whole process poorly. This is starting to sound familiar, isn't it?

In this scenario, Goldman Sachs is the late-50s woman on the verge of retirement who plans to live off her nest egg—only to find the nest egg has been wiped out because of bad investments. I'll leave it to others to engage in schadenfreude—except to say this: Maybe Goldman Sachs is part of the 99 percent after all!

Instead, I'll note this: Goldman's loss on I.C.B.C. is more than double its overall quarterly loss. Take that off the books, and the bank turns a profit of more than a half-a-billion dollars—not as huge as it's used to doing, no, but still considered a tidy sum in most parts. That Goldman took a loss, in other words, isn't due to "regulatory uncertainty," but to the breaks of the business—and, perhaps, it's own failure to do due diligence. But why blame your own bad business acumen when you can blame the government instead?