Fair points. I can’t tell if P&C is more stable because of it’s inherent business model or because of the historical fact that it’s been regulated so heavily at the state level. I know what I *want* to be true, but that’s not particularly useful, which is why I asked James to comment. (I know what his answer would be in general, but I’d like to see a deeper explanation of it.)

Cheers,
Carson

GM was ruined by its union and provincial management. Unlike multi-national oil companies who understand portfolio management and diversification of political risk, GM for too long had most of its eggs in one basket — the U.S. Only 20% of Exxonmobil’s profits come from the U.S. and I really like it like that. I think the unions ran the company. GM basically became a retirement and health care provider for millions of America workers. Management’s attention was primarily focused for too long on managing its unions.

As for banks, you may have a point although if I am a Freeport McMoRan and I want to develop a new copper mine in the Congo, I am not certain I want to finance it using a medium size domestic U.S. or European bank. If the Chinese or Indians are able to build world class multi-national banks with broad based expertise and syndication, I might be inclined to use one of them instead of a smaller, well regulated U.S. competitor. That is one of the reasons the league tables were so important as a marketing tool.

The risk I think we run is that if banks are required to operate based upon a black swan event, I think we are going to have a very anemic recovery and, going forward, much slower economic growth.

On the other hand, maybe we have turned a corner — we can just print money. Let’s face it, the taxpayers are never going to pay back the debt. As least not half of them, since only 50% of tax filers pay taxes. And that should be just fine with the wealth redistributionists. As for the other half, well who cares about them anyway, since it was only good fortune (parents, genes, what have you) or luck that put them there. It is therefore fair that the top 10% of filers pick up 70% of the personal income tax tab. Right? If we are really concerned about the taxpayers we wouldn’t have ethanol or farm subsidies or the tens of thousand of earmarks we hear about every time there is a new bill.

No offense taken. I don’t want to come across as an apologist for the banks. As I said, I’m a Chesteron guy: “Big Business and Big Government are very much alike. Especially Big Business.”

I agree that devolving powers to the states seems unlikely, but I don’t think it’s entirely out of the realm of possibility, particularly if the current government spending binge ends poorly.

A lot of people have said that the states will be unable to take on the large banks. But, as I look around, the toughest opponent I see to the banks right now is New York AG Andrew Cuomo. He’s the only major player I see actively going after the obvious fraud that the banks and major hedge funds have engaged in.

If Jerry Brown started looking into fraud charges with respect to CalPERS, I think you’d start to see some sweat beads forming on Wall Street.

I’ll admit, there is no small amount of idealism in the position that the states can and should take on the responsibility for preserving the stability of their citizens financial environment. At the same time, I think there just as much idealism in the notion that a single federal bureaucracy will not eventually be captured by the financial industry.

Cheers,
Carson

Use the same measure of size investment banks use to figure out how much to pay when merging – NPV of future Free Cash Flows.

Granted, they are not easily observable and very subjective to “expert” influence in a court case. So, maybe next best alternative would be to use the share of corporate profits as an observable measure of concentration. This would limit the size of the companies/banks and control their leverage.

The justification could be on the basis the long-run economic competitiveness of the nation is ensured if the sources of corporate profits are “diversified” or spread across numerous industries so that no one profit industry can become too powerful to capture the political elites. It further ensures balanced regional development and democratization of economic opportunity.

Damir
Sarajevo, BiH

thanks for posting it.

The longest journey begins with a single step, right?

I agree, Zephyr Teachout: “…Perhaps most importantly, large companies have proven to have disproportionate power over the political process….”, and I agree, James: “… we have increasing recognition of the linkages between Wall Street and the federal government….” That makes now a good time to act. However, is containing the size of financial institutions, helpful as it would be, the place to start? Should we not make some simple regulatory adjustments first [or as we go]?

“Too big to fail” has more than one meaning in the context of the financial crisis. Think of the totality of legal process that surrounds the creation of a single CDO issue. It is a stack of paperwork yards high. Contributors include: (i) the mortgage underwriter, (ii) the mortgage servicer, (iii) the aggregator, (iv) the securities underwriter and his “structured investment vehicle”, (v) the underwriter’s bank, (vi) the rating agency, (vii) the selling group and (viii) the client. Much of this paperwork serves to demonstrate compliance; much of it serves to place liability at a distance.

How effective is it at distancing liability? Think of CNBC’s David Faber’s documentary, House of Cards. Knowing what we do today, were CDOs secured by US RMBS appropriate for a Scandinavian village in the arctic circle seeking complete safety of principal and a fair return on interim investment of its tax receipts? Would a prudent person that is fully informed have ever purchased such an investment? Absolutely not, yet it happened. The layering of disclaimers enveloping those CDOs is so dense that today the villagers are essentially stuck; a mountain of paperwork “too big to fail” blocks any redress they might have expected through the normal workings of securities law.

What makes this significant is that in this case the Prudent Person Principle, the fundamental principle underpinning all securities dealing, has been completely sidestepped. The law has been used to effectively block the exercise of prudence in making the investment. This is toxic to the operation of markets. Markets have responded accordingly by seizing up entirely. The situation demands correction, however, if all we do is limit banks to being no bigger than some safe size consistent with “…real economic and democratic values….” those smaller, safe-sized banks could, theoretically, resume issuance of CDOs as before. What prevents them, of course, is not the law working as intended but a worldwide strike by securities purchasers who have lost all confidence in the operation of that law and refuse to purchase anything that could possibly be toxic or have a toxic tail.

Imagine the same CDO issued in a regulatory environment more reflective of prudent person principles, one in which there were: (i) appropriate underwriting standards for mortgage companies, (ii) guarantees by aggregators in the form of reasonably funded mortgage insurance, (iii) securities underwriters full disclosure of all risks inherent in their SIVs, (iv) ratings for CDOs commensurate to risk [CC instead of AAA], (v) requirements that underwriters and selling group participants retain a certain percentage of each issue and call a market on these until a spontaneous after-market forms. This would return to securities law and regulation an effectiveness formerly intended but undermined by ill-conceived deregulation in the late 1990s. Confidence would return to markets and all financial stitutions, irrespective of size, would funcition more normally once more.

I doubt that limiting the size of banks will, by itself, revive markets.

OK, maybe this would be the 30 year plan, since although its about money its also about networks and friends, and that takes time to break into. But the foundation for all that networking is still the money.
Actually, that relates to an earlier post by James about culture–the one called Pierre Bourdieu, Tim Geithner, and Cultural Capital.

Meanwhile, do 19 large banks have more funds for this than potentially millions of individual citizens–who presumably could be educated as to where their real interests lay?
This is an honest question. I have no idea of the answer.