I reviewed Too Big To Fail – favourably – in the FT today:

For 19 years, the curse of Barbarians at the Gate, Bryan Burrough and John Helyar’s groundbreaking book about the leveraged buy-out of RJR Nabisco, has hung over the publishing industry. Every time there is a tumultuous financial collapse or scandal, journalists scurry to write proposals for books, promising to recount it Barbarians-style.

The finished products are often letdowns, for various reasons. One is that to reproduce the level of human and financial detail in Barbarians – the thoughts that ran through the minds of the executives and bankers as they struggled over the deals, the culture clashes, the petty rivalries – requires an enormous amount of work. When the authors fake it or use shortcuts, it shows.

More important, few stories have the scale and the range of larger-than-life characters – from Henry Kravis of Kohlberg Kravis Roberts to Ross Johnson of RJR Nabisco – of Barbarians. Even events that appear dramatic at the time, such as the collapse of the hedge fund Long-Term Capital Management in 1998, lack an enduring grandeur.

With Too Big to Fail, however, Andrew Ross Sorkin has broken the Barbarians curse. Weighing in at 600 pages (and immediately dubbed by cynics “Too Big to Read” or just “Too Big”), Ross Sorkin’s densely detailed and astonishing narrative of the epic financial crisis of 2008 is an extraordinary achievement that will be hard to surpass as the definitive account.

You can read the rest of the review here.

My FT column this week is about how to restructure banks:

When the history of the global financial crisis is written, it may record that Neelie Kroes, the European Union’s competition commissioner was the only politician willing to respond in a logical manner.

By insisting on the break-up of the ING Group into its banking and insurance divisions – and on it divesting its US direct savings arm – Ms Kroes set a welcome precedent this week. She made a troublesome too-big-to-fail institution shrink.

The US, meanwhile, is joining the UK and others in proceeding in the opposite direction. Rather than making the Citigroups and Deutsche Banks of the world get smaller, they are bolstering them and preparing to deal with them next time they sink.

As Terry Smith, chief executive of the broker Tullett Prebon and a former banking analyst, puts it, this is “like the designer of the Titanic arguing that the provision of extra lifeboats would solve the problem”.Along with Ms Kroes, central bankers including Mervyn King of the Bank of England and Paul Volcker and Alan Greenspan, formerly of the US Federal Reserve, and now, improbably, John Reed, an architect of Citigroup, I prefer the simpler, sterner approach.

My colleague John Kay has described this as splitting banks into utilities and casinos – or deposit-taking banks that need to be backed by governments and investment banks indulging in proprietary trading that do not.

I think a more logical division would be a three-way split into utilities, casinos and people who visit casinos to gamble. That means retail banks, investment banks and asset managers, including private equity and hedge funds.

It may sound like a three-way split rather than a two-way one is a fine distinction. Yet it matters because this mix of businesses is what many too-big-to-fail institutions contain, with all the conflicts of interest and systemic problems it creates.

You can read the rest of the column here and comment below.

Good for the European Commission. The news that ING, the financial services group, is now breaking up its banking and insurance divisions – and being forced to sell ING Direct USA – is one of the first times that a  banking group has been properly humbled for its role in the financial crisis.

So far, national governments have largely avoided actually making banks smaller as the price for needed to be bailed out. Indeed, the trend has been in the other direction – Hank Paulson, the US Treasury secretary last year, pushed for deals such as Bank of America taking over Merrill Lynch.

There has been a spate of central bankers and former central bankers arguing for banks to be divided up to avoid the mingling of deposit-taking and “casino” activities such as hedge fund management.

The list of splitters (maybe in honour of Jonathan Swift they should be called “Little-Endians” as opposed to the government “Big-Endians” who favour keeping banks together and regulating them more tightly) now includes quite a roster of names.

Mervyn King, the governor of the Bank of England, has  joined Paul Volcker and Alan Greenspan, two former chairmen of the Federal Reserve, in favouring banks being broken up.

That has led to a chorus from Treasury ministers (and even other central bankers) saying that dividing up banks is too tricky and the end of financial stability can be achieved by other means.

However, the EU competition authorities have ventured where national governments have been too timid in demanding that an effective price is paid for state aid. They deserve a pat on the back, I think.

My FT column this week returns to Goldman Sachs:

A decade ago, when Goldman Sachs was a private partnership, it had $6.5bn in equity and its 220 partners, most of whose money was tied up in the firm until they retired, took good care of their pot of gold.

The bank’s trading and principal investing division – the part that took the most risks with partners’ capital – was balanced with its fee-based investment banking and asset management divisions. Trading contributed about a third of its revenues in the two years leading up to its 1999 initial public offering.

After it sold shares in the IPO to outside investors – pension and mutual funds hold about 80 per cent of its equity – it steadily increased its appetite for risk. Its fixed income and currency division has become dominant, bringing in two-thirds of Goldman’s revenues in 2006 and 2007 (and 78 per cent in the first nine months of this year).

In last year’s crisis, the US government made clear that it stands behind Goldman and other big investment banks. It received a $10bn (€6.7bn, £6.0bn) capital injection from the Treasury (since returned) and $21bn of its debt is backed by the Federal Deposit Insurance Corporation. It is now a financial holding company whose regulator and lender of last resort is the Federal Reserve.

So, if Goldman Sachs took on more risk when its equity was held by outsiders than with its partners’ own money, what can we expect now that the government implicitly accepts that it is “too big to fail”? Goldman has an even bigger incentive to risk other people’s money.

You can read the rest here and comment below.