Gerry Corrigan’s Case For Large Integrated Financial Groups

Increasingly, leading bankers repeat versions of the argument made recently by E. Gerald Corrigan in his Dolan Lecture at Fairfield UniversityCorrigan, former President of the New York Fed and a senior executive at Goldman Sachs for more than a decade, makes three main points.

  1. “Large Integrated Financial Groups” – at or around their current size – offer unique functions that cannot otherwise be provided.  The economy needs these Groups.
  2. Breaking up such Groups would be extremely complex and almost certainly very disruptive.
  3. An “Enhanced Resolution Authority” can mitigate the problems that are likely to occur in the future, when one or more Group fails.

These assertions are all completely wrong.

Gerry Corrigan’s first claim (p.4), that Large Groups are indispensable, is completely at odds with the data.  The current size of our biggest financial firms is a recent phenomenon.  In 1998, when Corrigan already worked there, Goldman Sachs was roughly ¼ of its current size and was regarded a top international investment bank. 

More generally, in the mid-1990s today’s big six “Large Integrated Financial Groups” added together had assets worth less than 20 percent of GDP – with no bank being larger than 4 percent of GDP (including off-balance sheet liabilities).  Today, these six are over 60 percent of GDP combined and still growing.

What has changed for the better in the functioning of our financial system, in how it assists the real economy, or in how it facilitates government fiscal policy since the mid-1990s?

The financial system worked fine (not great, but fine) in the mid-1990s.  It should be rolled back to that level.  Hard size caps, as a percent of GDP, are the way to achieve this (e.g., no high-rolling investment bank can exceed 2% of GDP; no boring commercial bank can be bigger than 4% of GDP).

Corrigan’s second claim, that breaking up banks would be hard to do, is based on assessing a “straw man” proposal – that the government dictate the microstructure of any bank downsizing.  But no one serious has put forward such an idea.

A hard size cap for total assets would operate just as the hard cap (10%) on share of total retail deposits was envisaged by the Riegle-Neal Act.  The bank itself is responsible for complying with this regulation, subject to supervision by the authorities. 

If any bank complies with any regulation in a way that reduces shareholder value, its shareholders are going to be very upset.  Goldman Sachs is filled to the brim with smart people; they can figure this out.

Corrigan’s final claim, that an Enhanced Resolution Authority can deal with the manifest problems of Too Big To Fail, is simply wishful thinking.

It is a fantasy to think that any national Resolution Authority would make a difference.  All banking experts, when pressed, agree that you need to have a cross-border Resolution Authority in order to deal with the failure of a Large International Integrated Financial Group.  Show me the G20 process in place or any other international initiative that can achieve this faster than in 20 years.  (I made this point recently to leading financial officials; one of the most influential people present said, in effect, “it will never happen”.)

At moments in his speech, Corrigan is brutally honest.

“First; it is inevitable that at some point in the future, asset price bubbles, financial shocks and seriously troubled financial institutions will again occur.” (p.6)

“Unfortunately, events – and not only those associated with the current crisis – have graphically illustrated that the threat associated with financially driven systemic risk has not diminished but has sharply increased [since 1987]” (p.7)

But if you combine that blunt assessment with his policy prescription, what do you get?  Our top bankers are publicly and blatantly proposing the recipe for repeated debilitating bailouts.  This is an anti-growth and anti-jobs agenda.

By Simon Johnson

41 responses to “Gerry Corrigan’s Case For Large Integrated Financial Groups

  1. So what do you propose we do? They have more “money”

  2. …just having caught up with your previous posting and a few of the side bar links, oh my goodness your analytics are kind of awesome, Simon ;-)… have a little theory about how to get out of the financial mess – its kind of built on the notion of “burning down the village in order to save it…” but like other examples in history, good intentions can go way wrong…incidentally, back in 2008 Goldman Sach was pushing California bonds while the “golden state” was edging off the cliff with their sinking credit.

  3. Alex Turnbull

    One thing that occurred to me is that standardizing loan and financial data in xbrl, fpml or similar might make “failure” less of a problem if processing the data and analyzing assets that need to be liquidated was faster.

    It could be that banks could be much smaller because their death would have less of an impact on the continuity of market operations.

    A centralized clearinghouse for loans as well as CDS etc would make this much easier.

  4. - “Large Integrated Financial Groups” – at or around their current size – offer unique functions that cannot otherwise be provided. The [[economy needs these Groups]] _Feudal Lords of Finance need these functions_. -

  5. If they grow enough, they could found a TransGalactic Empire, that could be highly profitable…

    OK, more seriously, why not a hard cap on the total size of all the derivatives each of the individual investment banks and hedge funds play with? Besides limits on leverage? After of course, not just certifying each and every derivative concept used, but also certifying the financial institution as abilitated to use it… withing said caps…

  6. “your analytics are kind of awesome” – quite.

    In the UK we’ve spent £130 billion on this. So why arent the public up in arms?

    A small number of us are lucky enoug to live in the most democratic countries in the world. Even in these countries, we’ll make incorrect judgements all the time, but at least we can say, in general, that we get what we deserve – if we want to ban minerets in the belief that it will protect our heritage, let’s pay the conesquences. If the quality we want from our leader is that they’re good looking, or seem like someone we could enjoy a beer with, we’ll get what we deserve.

    No social system can allow us to rise above our own collective intelligence.

    The problem with the financial crisis is that its so obscured, a large majority of those even with degrees in economics Dont Get It (“Where did all the money go?) or at the very least didnt see it coming.

    How can we expect public opinion to work through the democratic system to create at least SOME pressure for reform, to attempt to conteract a fantastically skillful, organised and funded lobby going the other way?

    Simon, please, spell out the costs per ordinary american and british citizen!

  7. forget about CDS:
    this just in on Marketwatch:

    ¨Paul Volcker said that he hadn’t seen “a shred of evidence” that recent innovation in financial markets had provided any benefit to the economy. Speaking at The Wall Street Journal’s Future of Finance Initiative, the former chairman of the U.S. Federal Reserve said credit default swaps and collateralized debt obligations “took us right to the brink of disaster.”

    Volcker said suggestions for reform, such as strengthening boards, didn’t go far enough and that the chances of a board member understanding complex financial products was virtually nil.

    Dismissing recent innovation in derivatives, Volcker said, “The most important financial innovation I’ve seen in the last 25 years is the automatic teller machine.¨

    Rumor has it that GS et al. are busy setting up a CO2 derivatives market. More of the same: trading profits and fees for them, costs for us.

    Like with the FDA, we should PROHIBIT products that do not deliver a service, i.e. a proven (!) good. So no more CDS, CDO-squared, etc.

    From Mr Corrigan himself (above): ¨“Unfortunately, events – and not only those associated with the current crisis – have graphically illustrated that the threat associated with financially driven systemic risk has not diminished but has sharply increased [since 1987]” (p.7)¨

    So, he admits to financial weapons of mass destruction!!!
    Instead of sending more soldiers to Afghanistan, let us send an army of Attorney Generals to Wall Street. Those weapons are still fully loaded.

  8. Will the real ‘Wrong Way’ Corrigan please stand up? C. Boyden Gray noted that he didn’t understand why U. S. antitrust laws did not apply in the case of TBTFs. Makes one wonder if there is anyone at Justice 1. smart enough to understand the threat and 2. smart enough to battle the “smart people” at Goldman Sachs and 3. independent enough to ignore L. Summers et al.

  9. “1.“Large Integrated Financial Groups” – at or around their current size – offer unique functions that cannot otherwise be provided. The economy needs these Groups.”

    The economy may need large dollar financial transactions. It is far less obvious that the entities themselves need to be large or integrated. Most of the employees and most of the transactions and dollar volume at the big money center banks are devoted to doing lots of lots of ordinary sized bank commercial banking, providing ordinary brokerage services to ordinary customers, and so on, and the convenience factor of having one entity do it all is modest (particularly for sophisticated clients for MBA trained CFOs and big accounting firms at their disposal).

    It is just as possible to have large dollar deals handled at arms length with piecemeal involvement of smaller financial institutions providing financing on a deal by deal basis. Big public offerings of securities and big excess casualty insurance coverage deals, for example, are typically financed through many (often dozens) of major financial institutions in consortiums put together by investment banks and insurance brokers, respectively, with the assistance of attorneys. This makes big deals more administratively complex than little deals, but on a percentage basis, the costs aren’t that different from the administrative costs in a single entity investment or insurance contract.

    The flip side of this is that large institutions that simply do lots of small deals are basically harmless. As long as the market has enough players to be competitive, it really doesn’t matter that much if you have twenty consumer credit card issuers or two hundred. The part that needs to be integrated (processing) is surprisingly easy to segregate from the part were there are few economies of scale to integration (underwriting and collection of bad debts).

    The only real harm from scale in commodity banking comes more from geographic scope than from scale. Big banks were a problem because they made it possible for localized housing collapses in places like California and Florida to hurt economies in Ohio and Tennessee that didn’t contribute at all to the financial crisis.

    “2.Breaking up such Groups would be extremely complex and almost certainly very disruptive.”

    The evidence we saw from the collapses of AIG, Lehman and Bear Sterns reinforces the intuition that it actually isn’t that hard to break large integrated financial groups into natural pieces. Many divisions of those firms went on with business as usual, and were transferred or conceptually separated en masse from their problem divisions. The elements that were trouble had small numbers of employees largely segregated from the larger enterprise engaging in huge dollar transactions. Large financial companies look more like GE in the height of its days as a conglomerate with a lot of more or less independent firms operating under common indirect management, than they do like a genuinely integrated firms.

    Dividing large financial companies based on size alone a la the Bell breakup would be a mess. But, spinning off already nearly autonomous divisions that share a marquee and central management is easy and nearly seemless.

    This kind of entity spin off would be distruptive, but no more disruptive than the mergers that have been common place over the past couple of decades.

    “3.An “Enhanced Resolution Authority” can mitigate the problems that are likely to occur in the future, when one or more Group fails.”

    Enhanced Resolution Authority isn’t a bad idea, and can be used to salvage value in indusries far removed from the commercial banking setting where the FDIC uses it now.

    Capital requirements aren’t the only reason that the FDIC has been the most deft responder to the financial crisis. The FDIC’s resolution of troubled banks is far better than that of the bankruptcy process for the public purse and those involved with the impacted entities. A powerful government regulator with a clear mandate is in a better position to make swift, loss controlling dispositions of failed institutions than the slower, party driven, banruptcy process.

    Basically, the concept is to hold small players (like depositors and trade creditors) harmless, and to sell a going concern to another industry player as intact as possible as soon as possible to get a good price. The improved price that flows from the reduced disruption that comes from a quick sale makes up for the fact that big long term creditors are the only ones taking any hit. Empirically, they gain more from the good price than they lose from not sharing their losses with small and short term players.

    The basic limitation of the Enhanced Resolution Authority is that it only works when the underlying business is a turnkey operation that usually makes an operating profit but is servicing more long term, other division, or extraordinary situation debt than it can handle. It puts 600 pound gorillas in cages but it doesn’t can’t solve the kind of slow erosion of an industry that we saw in textiles or that we are seeing now in newspapers.

  10. Just as the ‘give us $700 billion or the economy gets it” was pure(and classic) extortion, the too ‘complex to unwind’ whine is a page ripped right from Mafia 101. I’ll take my chances with Paul Volcker getting in there and clean-sweeping them all, though its been 10 whole years since Goldman went public, so must be terribly difficult… Of course the fact that Obama has used the former FED chairmen as a confidence shield rather than an actual policy maker says all we need to know.

  11. Carol comments: “Like with the FDA, we should PROHIBIT products that do not deliver a service, i.e. a proven (!) good. So no more CDS, CDO-squared, etc.”

    Nice post, Carol.

    Perhaps you are not aware that if today’s double-entry book-keeping standards were typical of the standards in practice 40-50 years ago, CDS, and CDO transactions would not exist because they would not legally post to a formal double-entry framework of rules. Clearly banks today do not use that framework of rules today.

    By “deliver a service” you imply a product that supplies real value in the marketplace trade. Neither a CDS or a CDO has marketplace value. If and when value materializes can only be known when the bet, whatever its gain [loss] may be, comes to fruition.

    Call this category of transaction an insurance scheme or call it a gambling scheme, it is not a trading of goods and services that has value commensurate with the price paid in exchange.

    What is worse, economists, in turn, doing their probability studies, include such fictitious numbers in their reports, making bad records worse.

    The financial system has been failing on a regular basis ever since the underlying value in trade of 50 years ago lost its place in our commercial culture.

    Nonetheless, today’s financial leaders remain in love with the giant numbers concocted by Ponzi Schemes of the day, that is rooted in faulty data systems.

    Somehow, the leadership believes that the numbers will one day come to work on the side of balancing a history of erroneous data. Rest assured that as much as Geithner and Bernanke seem to favor maintaining hope in the Ponzi Scheme, as financial policy, Ponzi victums will continue to experience marketplace failures.

    Book-keeping reporting the trade of goods and services reports the activity of a social science. If we don’t learn the facts by reporting its truths in our book-keeping, we will learn those truths in failure of cultures.

  12. Why waste time analyzing nonsense? Where is that guy with a shoe?

  13. The title of a collection of bleak Western short stories published a quarter of a century ago–written before the Sagebrush Rebellion–offers the key to recognising the reality of the current situation. The title is “We Are Not In This Together”. Otherwise, a bunch of admittedly brittle short stories doesn’t give much insight into the current economic crisis, except maybe as a predictor of the possible future mindset of post-Palin populism.

    But, why do you expect those you refer to as the feudal lords of finance to give a damn about growth or jobs creation? Did the mid-20th cenury denizens of the City of London particularly lament the collapse of British industry in the Midlands, Yorkshire, around Liverpool or in the Lowlands?

  14. A very nice comment “…collective intelligence…”
    Surely Americans must recognize that this factor will inhibit Americans dealing with their own ideological prejudices and ignorance in order to deal with the real and objective conditions of America where power has been captured by the oligarchs.

  15. “the feudal lords of finance” is an apt expression of banksters having no committment to the country that allows them to practice their fine art of screwing the peasants.

  16. InterGalactic empires?

    In a cautionary omen that went unheeded, LTCM disappeared into a deformation in space time called Black-Scholes from which nothing not even light can escape.

    Read all about it at Brooksley Born and the Trolls.

    http://tippygolden.wordpress.com/brooksley-born-and-the-trolls/
    __________

    Sigh … Apologies for shameless self-promotion. But word-smithing can be hard work and it’s nice when someone actually reads my stuff.
    ___________

    As for Jake Chase’s comment: 1% tax on the $600 trillion notational amount in derivatives could retire the US National debt and make income taxes unnecessary. Now that is interesting.

  17. Is it legally possible to declare CDOs and CDS’s etc. null and void, or simply outlaw them (same result)? Could this be done by executive order/rules changes or would it require legislation?

  18. markets.aurelius

    Was Gerry sober when he made that speech? This is just one more example of a once-stellar economist and banker selling his soul to Mammon. And who can blame him? He’s rich, living in a fog, and, for the past decade, a sock puppet for management at GS. He’s pathetic. As they all are. There is nothing they believe in. Other than defending and growing their own wealth. There is no reason to believe them. Ever.

    All of your points are spot on. For reasons no one outside the Beltway or living beyond Manhattan can understand, a bloated sot like Gerry is taken seriously, and his arguments are given a regard far in excess of anything they warrant. Particularly as the very institution he is so ready and willing to defend laid waste everything we came to know, leaving destitution and destruction at every turn in its wake.

  19. If there was a case for Larger Integrated Financial Groups they would not have to fight so much for special considerations like Basel II that allows them to use their own internal risk-measures to determine capital requirements.

    I would eliminate all regulatory benefits given to the larger banks, including capital requirements based on risk, and, if they then survive, then they have perhaps proved their case. But as is they haven’t… just the opposite.

  20. Speaking of large financial institutions, I have a question:

    Is there any legal requirement that the US Government “guarantee” the crap debt on the Fed’s balance sheet??

    If not, I say let them absorb their own da#n losses.

  21. Yes but Jerry Brown’s sister, in the public finance division at GS bailed out of Countrywide with Henry Cisneros before TSHTF.

    So at least they are golden.

  22. Mr. Johnson, I just want to say thank you for sharing your thoughts with us members of the great unwashed via this blog, in your media appearances, and by testifying before our elected representatives.

    Your thinking makes so much sense that it’s hard to believe you’re offered a chance to bend the ear of major officials. But I’ll take your word for it. ;)

    BTW Bloomberg has a great piece up by Walden, Mildenberg and Davidson on corporate governance problems at banks not TBTF but big enough to get taxpayer money.

    http://www.bloomberg.com/apps/news?pid=20601109&sid=aukpiXHglqP4&pos=10

  23. Clear the debt from the system and let the derivatives implode. Then let the derivative parties clog up the courts suing each other. I’ll bet that the legal fees would be prohibitive for most of them, and even if not it’d take years to resolve. Perhaps even enough time for the economy to sort itself out in the meantime.

  24. I have had this gut feeling since last year that letting the Fed be the “bad bank” IS the plan, with the US gov’t refuting the “bad” assets that were purchased illegally…

  25. ————————–
    “Large Integrated Financial Groups” – at or around their current size – offer unique functions that cannot otherwise be provided. The economy needs these Groups.
    ————————–

    What unique functions that cannot otherwise be provided? List them. Explain why a competitive environment where there are numerous banks, investment banks, wealth management firms, broker/dealers, etc. cannot provide the services that the same firms, operating as divisions of a smaller number of huge financial conglomerates, can provide.

  26. Simon, just one more wonderful cogent argument against mega financial oligarchs. I am impressed, as I read the early part about GDP, that the recent run up in the NYSE and other exchanges is primarilly because the financials here (with the assistance of the FED) are continuing the path of immense leveraging and hedging. With the economy barely ticking (realistically I think that without the finance markets the GDP would be in negative growth without a doubt) this spells future peril writ large.

    Consider the fact that the huge TARP and FED investments have allowed those with the highest level of (now failing) toxic assets to essentially ignore them. It really is time for a new round of (independently conducted) Stress Tests. No wonder so many smaller banks are failing. They can’t do the kind of interbank lending that continues between the largest firms. This is kind of like a very large boil that is infecting the areas around it, but when it pops, it may well turn out to be fatal for all.

    If we could reconduct the Stress Tests independently (the old assumptions are fully out of date), and they were fully public and transparent, we would find a very scary scenario brewing. It may already be too late to get salvation, but only to make the catastrophe a 7.5 on the financial Richter Scale instead of the 10. Without real reform and real action, damage control will prove to be completely out of the question. It will make Japan’s Lost Decade seem like a joy ride.

  27. Dan: “By “deliver a service” you imply a product that supplies real value in the marketplace trade. ”

    I did not want to imply that. In a previous post I wrote explicitly “deliver a service for society”, and that fees for bonus banksters do not constitute a service for society.

    Full disclosure: in another post I tried to express my horror about the financialization of society: daily Dow movements in the evening news; people basing their self worth on a three digit number, also known as fico score; in 2007 about 40% of S&P profit was just paper profit from financial ‘services’ companies; etc.
    Hence, I am not so much interested in value in marketplace trading (in fact, I believe the marketplace should be about long term investing, instead of millisecond intraday trading).

    And yes, I agree with you, Paul Volcker and others, that CDS, CDO, CDO-squared and other innovations have neither real, positive, marketplace value, nor do they deliver a service for society at large, but rather pose a threat.

  28. Bill,
    As part of the Financial Modernization Act (Gramm Leach Bliley, abolishing Glass – Steagall act), it was explicitly stated that an anti-gambling act was not applicable. People have read that to suggest that the bill’s authors knew that many derivatives are speculative gambles.

    (1) get rid of that ‘Modernization’ act
    (2) apply existing anti-gambling law(s)
    (3) prohibit not-a-service-for-society, dangerous products

  29. yes it is a world upside down, in which thieves want to prescribe what kind of locks we are allowed to install on doors.

    Unfortunately, they have the ears of congress and White House. So let’s debunk their arguments.

  30. 1 kings: “Of course the fact that Obama has used the former FED chairmen as a confidence shield rather than an actual policy maker says all we need to know.”

    Indeed! and it may be even worse, as I’ve read that on Nov. 5 last year, i.e. straight after the change election victory, several pro-reform economists were sidelined and Wall Street friends were put in charge of transition team.

    In addition to Marketwatch quote above, Times online has an even better write-up of Volckers’ appearance at a cosy banksters + regulators event in UK:

    “Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.

    On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”

    As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).

    “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” ”

    Let’s hope that the White House finally starts to listen to Volcker, and others like him.

    http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6949387.ece?print=yes&randnum=1260363484051

  31. “As long as the market has enough players to be competitive, it really doesn’t matter that much if you have twenty consumer credit card issuers or two hundred.”

    What makes you think that the market is sufficiently competitive? If, say, the 80-20 rule applies, then if we have 20 companies, only 4 of them handle 80% of the business. That is not enough competition. But if 40 of them handle 80% of the business, it is.

    Look at the current situation. The big credit card issuers are able to borrow at near zero rates, yet they are squeezing their customers and upping their rates. Sure, times are tough, and defaults are up, but isn’t a major reason that they are doing so, at least to the degree that they are, the fact they have so many toxic assets? It is said that demand for credit is down. If that is so, why are they not lowering their rates? Is the credit card market behaving anything like a free market with sufficient competition?

  32. Carol, I do believe that you and I are in complete agreement. In every formal book-keeping transaction something of value is being traded for a payment in exchange.

    You said: “I did not want to imply that. In a previous post I wrote explicitly “deliver a service for society”, and that fees for bonus banksters do not constitute a service for society.”

    To “deliver a service to society” is certainly a value in trade. I agree completely with your horror about the financialization of society. I feel its pain every day of my life.

    You Said: “Hence, I am not so much interested in value in marketplace trading (in fact, I believe the marketplace should be about long term investing, instead of millisecond intraday trading).”

    I agree with you. But do know that if you want long term investing to return, just as I do, then financial system regulation must put a time limit on how soon a contract to purchase can be resold. If we bought stock or bonds that could not be sold for two weeks, say, you would quickly see the situation that you abhor disappear. Who would dare to own junk that could not be dumped for two weeks?

    You said: “And yes, I agree with you, Paul Volcker and others, that CDS, CDO, CDO-squared and other innovations have neither real, positive, marketplace value, nor do they deliver a service for society at large, but rather pose a threat.”

    These derivatives, I believe, are blatantly illegal. Our return to a formal double-entry book-keeping framework of rules would expose their illegality. There is a lot of talk on this blog about regulation. Do know that sane regulation will continue to be impossible in a computer age, unless we return to the level of double-entry book-keeping that was in wide practice in industrial settings 50 years ago. Formal book-keeping language is part and parcel to a legitimate marketplace.

  33. the whole thing is kind of silly. All you need to do is look athis former places of work and you know his position before he says anything. It’s like listening to the arguments of a lobbist.
    What bothers me the most is that these folsk actually get respected for their views. does anyone here believe he woul have gottn his positions without having a specific mindset.

  34. Only one way-the twelve gage.

  35. Reference Baseline’s critique by Simon Johnson “For Large Integrated Financial Groups.”

    If the history of the Soviet Union proved one thing, it is that nothing is “too big to fail (TBTF).” In the recently published “We’re All Screwed,” I argue that structurally flawed one-size-fits-all, SOX-type fosters oligopolies not competition.

    If Citigroup’s one-size-fits-all financial supermarket did not provide a net benefit, can the SEC govern with a one-size-fits-all regulatory regime? Recent events have demonstrated that trying to cross-regulate with non-correlative information results in a dysfunctional, discontinuous governance.

    If there is complexity, there is uncertainty. Capital market governance must move beyond risk management to include uncertainty. This requires a “Gaulian Division” by segmenting governance regimes by cash flow into:

    1. Predictable: (GSA) money market (break-the-buck) instruments,
    2. Probable: (33-34 Act) earnings-driven issues and,
    3. Uncertain: (EntEX) event-driven issues (reference: http://www.findarticles.com/p/articles/mi_m2751/is_77/ai_n6353167/print ).

    Stephen A. Boyko

    Aiken, SC
    n2keco@bellsouth.net

    Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of SFO articles on capital market governance.

  36. “It is a fantasy to think that any national Resolution Authority would make a
    difference. All banking experts, when pressed, agree that you need to have a cross-border Resolution Authority in order to deal with the failure of a Large International Integrated Financial Group. Show me the G20 process in place or any other international initiative that can achieve this faster than in 20 years.”

    I commented on this issue in a previous baseline post, which I repeat here:

    There can be no regulatory reform of international banks without international agreement. Obtaining international agreement is a slippery slope in the best of times, and is subject to a changing political climate. For example, in the UK – the Conservative Party is predicted to win the next general election; the latest polls give them a double digit lead over the governing Labour Party. Should they win, they propose changes that would effectively dismantle the
    current UK regulatory system that was created in 1997.

    The US taxpayer should not have to depend on solutions which have built-in seeds of their own destruction.

    http://www.telegraph.co.uk/news/election-2010/6737808/ICM-poll-puts-Conservatives-back-on-course-for-general-election-majority.html

    http://www.conservatives.com/~/media/Files/Downloadable%20Files/PlanforSoundBanking.ashx?dl=true

  37. Thanks Carol for adding more of Volcker’s truly heroic efforts. He is the ‘old school’ of Responsible Republican financers, and with his Working Group are at least trying to save our country. Sadly, most of Congress has either doubled-down on ignorance or completely captured by L O F’s.(Lords of Finance is a great term.) Ron Paul, Bernie Sanders, and that Grayson dude and their ‘Audit the Fed’ is the only chance we got at the moment.

  38. markets.aurelius

    Excellent insight.

  39. Young Economist

    Greece cannot avoid sovereign debt default because Greece has both large fiscal and current account deficit with more than 100% public and external debts.

    There are two solutions. First is the currency depreciation that would reduce the external imbalance; however, this solution cannot occur under EURO currency.

    Therefore, Greece has only one choice that is to reduce fiscal deficit by reducing government spending and increasing tax. There is no other solution that other European countries to support Greece because if they decide to help Greece, their people will face the economic stagnation like Greece.

    The credit rating agency also fail to indicate the default risk of Greece sovereign debt. If we look at deficit and debt level, Greece rating should be junk and if we look at the exchange rate policy using EURO currency, we also know Greece must reduce the fiscal deficit if Greece have not done that, all rating agency should rate Greece as junk not A or BBB like this.

    And if Greece decide to have the ongoing large fiscal deficits, European countries must act something before Greece will cause gigantic debt default that may harm all European countries or may end EURO currency.

  40. anti_fascist_freedom_fighter

    There can’t be $650 trillion in actual dollar bills that make up the derivatives mess. They couldn’t find a place to store all those notes. So the entire problem was created by millions of Gen-x nerds sitting in front of 6 computer monitors for 18 hours a day creating data trades, sort of like playing world of warcraft with invented money. The only place all that “invented money” exists must be on all the computer hard drives, all around the planet.

    I suggest we do what the Luddites tried to do: Let’s turn off all the electricity for a week, and go an a rampage smashing every single computer, every network hub, every single hard drive and every single back-up disk and system on the planet. Poof. $650 trillion in funny money gone, just like that. Problem solved. Who’s got their bib overalls, their pitchforks, and their hammers ready to join me?

  41. Another bag of wind blowing hot air for whoever will pay him; absolutely zero credibility among the living.