TOO BIG TO BE COMPETENT?

TOO BIG TO BE COMPETENT? I posted here that banks can be too big to fail because they are too interrelated with other financial institutions (counterparties to their transactions) for us to undergo the pain of unwinding their transactions. Lehman Brothers illustrated those problems. But I have also been posting, beginning here in October 2008, about the backoffice problems that the banks were having with the paperwork on the complicated (and toxic) securities they had created. It is now almost three years later, and banks are still having problems with paperwork. There is a concept in economics of economies of scale—a company can have lower costs per unit if it is bigger. There is also the concept of diseconomies of scale—the bigger the company the higher the costs. Mortgages have traditionally been a business where smaller banks were perceived to have an advantage because local details were important. The largest banks have demonstrated that they are too large and too centralized to carry out the basic functions of the mortgage business (for example, keeping track of the documents).

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