The conventional wisdom these days is that American banks, on government life support, are destined to lose their dominant place in the global financial universe. Nothing could be further from the truth. In fact, many of these institutions are currently gaming the U.S. administration's new "public-private partnership" program to buy and sell toxic assets to their own advantage. Citigroup, for example, has been one of the most active buyers of toxic assets such as Residential Mortgage-Backed Securities (RMBS). These products are probably marked at inflated levels of 80 cents on the dollar on Citigroup's balance sheets, yet Citigroup can buy them at, say, 20 cents on the dollar in the secondary market. Thus, when it has to eventually sell them back to the government at, say, 60 cents on the dollar, it stands a chance to turn a nice profit at the expense of taxpayers.
The executives who run these major American banks remain well aware of the Golden Rule: those who own the gold, rule. Once they survive this episode of economic stagnation and stay intact in their current form, these banks can and will rule the world. True, they have lost their place at the top of the market-capitalization-league charts, but the Chinese banks that have taken their place are mainly local, immature players, unable to handle complex transactions. Despite their heft, they can't handle cross-border finance in any major volume. The European banks also don't stand much of a chance because they don't have access to generous American-style bailout packages to help them regain their footing.
Even now, in their weakened state, the U.S. banks control the majority of global capital flows, which are well over $11.2 trillion, having grown more than 11,000 percent since 1990. By the end of 2007 (the latest available statistics), banks accounted for 80 percent of the capital outflows and inflows, and American banks in particular are dominant. The U.S. banks hold 31 percent, or $61 trillion, of the world's $196 trillion in financial stock. By comparison, all of Latin America had a mere $5.9 trillion, and China and India combined had only $21 trillion (Europe was in second place with $52 trillion). Global wealth distribution, ironically in a global banking economy, is lopsided.
This enormous wealth is concentrated in fewer hands as a result of the crisis. The biggest American banks have consolidated by snapping up the assets of failed competitors like Bear, Lehman, Merrill and Wachovia. The survivors will be unstoppable now. Back in 2008, the top 10 firms underwriting global debt, equity and equity-related securities controlled 59 percent of that business. They were (in descending order) JPMorgan, Barclays Capital, Citigroup, Deutsche Bank, Merrill Lynch, Goldman Sachs, Morgan Stanley, RBS, Credit Suisse and UBS. Emerging from this crisis, it is very likely that the top five firms will now control 60 percent of worldwide capital.
Of course, Chinese banks like ICBC are trying to grab market share. Deutsche Bank recently issued a report predicting that China could own 18 percent of the global banking business by 2018. While anything is possible, the fact that Chinese banks have almost no presence in the corporate bond and derivatives markets make those projections about cross-border strength very unlikely. They will also be reluctant to buy large foreign banks to increase market share since they have been badly burned by their recent purchases of minority stakes in U.S. banks. Even if they did decide to swallow one up, they have no idea how to manage the talent that resides in a large multinational bank.
The question now is not whether the U.S. financial giants will lead but whether they will lead us into another financial Armageddon. Regulatory efforts so far have been weak at best. The lack of transparency in accounting continues. Toxic write-downs might be dragged out over years if Treasury Secretary Tim Geithner's public-private investment program fails to restore confidence in the credit markets. Most worrisome is that Obama's economic team is laden with policymakers who got the world into this mess in the first place. Larry Summers was instrumental in the repeal of Glass-Steagall during the Clinton administration, and Ben Bernanke and Geithner did nothing to stop the credit bubble from growing out of control on their watch during the Bush years. The biggest reason European nations have called for a stronger international regulatory authority is because they greatly fear the U.S. multinational banks' powerful hold not only on global finance, but also on lawmakers in Washington. It's clear that U.S. regulators are not up to the task of reining in financiers given the revolving door between public service and private enterprise.
If the Obama administration wants the U.S. to keep its position as the world's top dealmaker, it should appoint high-ranking economic officials with more credibility for bringing about needed change and reform and support European calls for a stronger international regulatory authority. To do anything less is to risk another financial debacle.