Ahh, the '80s. On the floor of the NYSE cocaine was easier to get than a salami sandwich. It was cool to wear suits and ties to discos. Ivan "greed is good" Boesky was feted at Berkeley. Michael Milken earned $500m in a single year, back when $500m was real money. In those days Wall Streeters made obscene profits not on derivatives and hedge funds but on mergers and acquisitions. Merger mania was in the air, and every mom and pop corporation wanted to be the next gigantic diversified multi-national, making and distributing everything from corn dogs to oil rigs under one mighty banner. Synergy was the big word, as though since corn dogs were greasy and oil rigs required greasing it somehow made sense for one company to make both.
At that time the wise men at Columbia University's business school, subway close to Wall Street, argued that would-be conglomerates could diversify and expand far more cheaply and efficiently. Say a particular company caught a tycoon's eye. Instead of paying tens of millions to investment banks and corporate law firms to orchestrate hostile take-overs or extravagant mergers, he could call his broker, pay a small commission, and buy shares. Instead of company A trying to own and run promising business B, usually to the ruination of both, A could take an easily expanded or liquidated stake in B with common stock. It worked for Warren Buffet; why not for Gulf+Western?
Few listened to the wise Columbians. Those swollen behemoths Citibank, Bank of America, AIG and their ilk are the result. Like punctured dirigibles littering the financial landscape, these baggy monsters have no substance yet still threaten to suffocate us all. So far the Obama administration is trying to pump them back up with hundred of billions of injected funds. This won't work for the same reason a dirigible with a big hole can't be reinflated: in both cases, the structure is unsound.
But while it might be possible to patch up a dirigible, Citi and its brethren need the opposite treatment. Instead of putting them together, break them up. Alan Blinder in the NYT says divide them into good and bad banks. That's not going far enough. Sell their subsidiaries, spin off their divisions, slice and dice until nothing is left but a rotten core to be buried somewhere out of sight. De-merge and de-acquisition until the baggy monstrosities have been cut down to reasonable size. Then pass laws to prevent financial institutions from ever inflating themselves to the bursting point again. Obama has Roosevelt on his mind but trust-busting Teddy should take precedence over Franklin right now.