Small is Beautiful? Maybe. But Big is Bad.

March 28th, 2009

At least this headline holds true for banks. Steve Randy Waldman, as so often, gives us cogency–in this case on why big banks are a problem. My favorite part (and my emphasis):

Scale breeds agency problems. Earning an extra five basis points on $100B in assets amounts to $50M in extra income a year, a fraction of which can make a manager very wealthy in an eat-what-you-kill bank. Making that same five basis points on a $100M portfolio earns a small bank 50K, a fraction of which amounts to a nice bonus, but not a lifestyle change.

For both managers, the downside if something goes wrong is the same: they lose their jobs.

For the managers, big is good. For the rest of us, not so much.

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