Senator: Which Part Of “Too Big To Fail” Do You Not Understand?

By Simon Johnson

When a company wants to fend off a hostile takeover, its board may seek to put in place so-called “poison pill” defenses – i.e., measures that will make the firm less desirable if purchased, but which ideally will not encumber its operations if it stays independent.

Large complex cross-border financial institutions run with exactly such a structure in place, but it has the effect of making it very expensive for the government to takeover or shut down such firms, i.e., to push them into any form of bankruptcy.

To understand this more clearly you can,

  1. Look at the situation of Citigroup today, or
  2. Read this new speech by Senator Ted Kaufman.

The Citigroup situation is simple.  They would like to downsize slightly, and are under some pressure to do so.  It is hard to sell assets at a decent price in this environment, so why don’t they just spin off companies – e.g., quickly create five companies in which each original shareholder gets a commensurate stake?

The answer is that Citi’s debt is generally cross-guaranteed across various parts of the company.  US and foreign creditors have a claim on the whole thing, more or less (including the international parts), and you can’t break it apart without upsetting them.  The cross-border dimensions make everything that much more knotty.

Senator Kaufman explains what this means – essentially the “resolution authority” proposed in the Dodd legislation is meaningless.  How would any administration put a huge bank into any kind of “resolution” (a FDIC-type bank closure, scaled up to big banks) when it knows that doing so would trigger default across all the complex pieces of this multinational empire?

You could do it if you are willing to accept the costs – and if you understand there are big drawbacks to providing an unconditional bailout of the 2009 variety.  But will a future administration be willing to take that decision?  The Obama administration was not – and big finance will only become bigger and more complex as we move forward.

If you look into the eyes of the decision-makers from spring 2009, they honestly believe that taking over Citi or Bank of America would have caused greater financial trouble and a worse recession.  You can argue about their true motivation all you want; this is irrelevant.  The point is that the structures in place last year remain unchanged today.  If a megabank shut-down under pressure was impossible for our policymakers last year, how exactly will the situation change after the Dodd bill passes – remembering that our current policymakers or a close facsimile will run this country for the indefinite future?

Senator Kaufman is strong too what this all means.  By all accounts, this Senator is not a person who came to the boom-bust-bailout debate with strong preconceived notions, just someone who has listened carefully to the arguments on all sides.  And, unlike most politicians, this Senator does not need to raise money.

Banks that are “too big to fail” are simply too big.  Making them smaller may not be sufficient to prevent major crises in the future – Senator Kaufman sensibly also supports a long list of related reforms, including for derivatives markets (see his other speeches on this topic: first, second) – but rolling back our biggest and most dangerous banks certainly is necessary.  And there is simply no evidence that banks on today’s modern scale convey any benefits to society.

Massive banks cannot be controlled, at least not in the US context; we are not Canada.  “Smart regulation” in this context is an oxymoron.  Our regulators have been captured by the ideology of finance for 20 years; the big banks industry are not about to let them out on parole now.

For a long while, the Obama administration insisted that size caps for banks were not on the table.  Then, in January, the president himself announced the Volcker Rules – which include a size cap for banks.  We’ve argued this cap should be even tighter – big banks can get smaller in an orderly fashion and regulators can help - but still any cap would be a step in the right direction.

Yet there is no size cap in Senator Dodd’s bill.

Given that this White House has shown it can achieve considerable things, when it applies itself, why not pursue the Volcker Rules in full?

The White House is clearly not afraid of the business lobby – Deputy Secretary Neal Wolin took on the Chamber of Commerce this week regarding the Consumer Protection Agency for Financial Products; his tone was strong and his arguments were telling.

Yet the White House, Senator Dodd, and perhaps even Barney Frank are all stuck on one issue – they can’t contemplate making our biggest banks smaller (or even limiting their size). 

It’s as if a very clever political poisoned pill has been put into place.  If you act against the big banks they will …. What exactly?  Threaten to prolong the recession?  Help your opponents get elected?  Run ads against everything you believe in?

Whatever the reason, write it down and think about it.  How do you feel about a small set of big financial firms having this kind of power?  How is that good for the rest of the business community, let alone regular citizens and our democracy?

This administration is perfectly capable of taking on the big banks.  All that is missing is a little clarity of thought and a fair amount of political courage.  Or they can just call up Senator Kaufman.

59 responses to “Senator: Which Part Of “Too Big To Fail” Do You Not Understand?

  1. “This administration is perfectly capable of taking on the big banks. All that is missing is a little clarity of thought and a fair amount of political courage.”

    Yeah, President Obama will take on the banks. He just needs to ask Jamie Dimon for permission first. That’s where his “clarity of thought” and “political courage” comes from.

  2. Let’s be fair here. Yes President Obama could have shown much more toughness with the big banks, but he had a piled high plate just getting healthcare done. And I don’t think you would have seen a prosecution like this under the Bush Justice Department. The Bush Justice Department/regulatory policy was “do whatever you want so long as the unwashed villagers don’t get restless”.
    http://www.bloomberg.com/apps/news?pid=20601087&sid=anW3hAG0Zw5k

  3. It feels like 1910 instead of 2010. There is no accountability to society; only laissez-faire notion that what benefits these few well connected titans of banking. As Senator Kaufman stated, “…during the last 30 years, that division was methodically disassembled by a deregulatory mindset, leading to the reckless Wall Street behavior that caused the greatest financial crisis and economic downturn since the 1930s…It is time to follow in the footsteps of those great senators who made the tough decision in the 1930s to pass the Glass Steagall Act and other landmark reform bills, which paved the way for almost 60 years without a major financial meltdown. Once again, we must ensure that government guarantees of commercial bank deposits do not enable financial institutions to engage in the risky activities of investment banks. “

  4. ”Kaufman quite simply wants to put an end to “too big to fail” banks: “We need to break up these institutions before they fail, not stand by with a plan waiting to catch them when they do fail.”….. He believes strongly in the need for a “Glass-Steagall for the 21st century,” the need to radically clean up the over-the-counter derivatives market, the need to make the shadow banking world far more transparent, and the need to better address “the fundamental conflicts of interest on Wall Street” that lead to securities fraud…….”

    Can you believe there is a Senator that is actually in touch with reality(?). What part of “yes” does the rest of the body politics understand, in the Senate and for the country.

  5. End the favored derivatives status in the Bankruptcy Reform Act of 2005, “One of the most important changes in the Reform Act is that it broadens the class of parties protected by the Bankruptcy Code’s financial transactions provisions. Specifically, protected parties now include all “financial participants,” which is essentially defined to include most clearing organizations as well as any entity which, on any day during the 15-months immediately preceding the commencement of the case under the Bankruptcy Code has had securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements or master netting agreements involving non-affiliates with a total gross dollar value of not less than $1 billion in notional or actual principal amount outstanding or had gross mark-to-market positions of not less than $100 million (aggregated across counterparties).”

    http://goliath.ecnext.com/coms2/gi_0199-4233041/2005-Bankruptcy-Code-Amendments-Affecting.html

    This will discourage wild speculation and will stop asset stripping of companies before they file for bankruptcy.

    ” But it turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don’t just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, “the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors.” As the article notes, ironically, this provision which Wall Street pushed for and got to protect investment banks actually ended up hastening the collapse of Lehman and Bear Stearns last year.”

    http://www.talkingpointsmemo.com/archives/2009/03/im_sure_the_knowledgeable_people.php

  6. Clearly, the markets now govern the US.

  7. “… they [regulators] honestly believe that taking over Citi or Bank of America would have caused greater financial trouble and a worse recession.”

    I don’t agree with that assessment. I think the calculus went more like this:
    1) “We can’t nationalize the banking system (or even the large percentage of it that is occupied by a large bank) because that would be Socialism, and Socialism is Bad for America(TM).”
    2) “Could we even do that? I don’t think we have that kind of authority.”

    Response to #2: “Why is Citi different from Fannie Mae?”
    Response to #1: “The nuts are going to call you Socialist AND Fascist no matter what you do.”

  8. What can say about folks who say “Fascist, Communist and Socialist” to describe people they don’t agree with; namely those folks are pretty ignorant (lumping together three dynamically different political philosophies together) and don’t know what they are talking about and have propensity to cherry pick the facts to back up their limited understanding of reality. The best way to avoid a train wreck is set up conditions in which it will never happen — ever! FannieMae/FreddieMac is that train wreck and the repercussions of leaving there would derail the whole mortgage system. Citibank et al. is a different train wreck and a train that should have been never built to being with — and is begging to be disassembled. Too big to fail means it is too big to exist!

  9. cryptozoologist

    what i propose is that the banks have a period of time equal to the amount of time that a typical subprime mortgage holder had to secure refinancing. say 4 years or so. if they fail, we begin to reposess the bank, cross guarantees be damned.

  10. The situation in the US today is very remniscent of the ‘Trusts’ at the turn of the 20th century: Oil, Steel, Banking, etc. And even the media seems to be highly concentrated in ownership of a handful of corporations.

    Obama is no Roosevelt, Teddy or Franklin Delano. It is hard what to make of him.

    http://jessescrossroadscafe.blogspot.com/2010/03/bombshell-whistleblower-steps-forward.html

  11. “Help your opponents get elected?”
    this is exactly what the deal is Simon. By passing legislation that reigns in big banks, they will shift their contributions to republicans. Obama thinks he can “pass legislation” that smacks the banks on the hands. That makes him look good in the public and doesn’t push the banks too much to move their contributions to the other side.
    But look at it this way. If Obama went gangbusters and passed legislation you say is good, he would lose the next election and a pro banking candidate would be elected and repeal any changes. and probably make things even worse by repealing even more restrictions and then letting the TBTF’s fail and crash the world in the name of laisse-faire.

  12. Agreed that smallifying the big financial institutions is important.

    But how to deal with the more important issue–that the financial sector is too large?

    If you want less of something, tax it…

  13. If the banks must get smaller, and the banks themselves won’t do it, and the government won’t do it, then who? We, as individuals, could choose to take our business elsewhere as much as possible (and we should), but as you say, these are complex multinational organizations with a lot of businesses that are completely beyond the reach of individuals. If their reach is international, can the regulators of other countries bring pressure on them?

  14. I agree completely with your general sentiments on Bush, believe it or not, but you are wrong about that particular case.

    The investigation into muni derivatives dates back at least to 2006, when the FBI raided the offices of a few derivative advisory firms. A lot of the evidence in the case comes from an agreement brokered by B of A and the DOJ in 2007 to name names; without that, they probably would have had little evidence as to how widespread the problem was.

    This stuff is only coming out now because it has taken a long time to make such an involved case. I guess they started poking around into individual transactions and found a massive web. All I’m saying here is do not attribute that to Obama. You are talking about a massive, multi-year investigation, and ironically a lot of the pressure to crack down on this came from the IRS of all places, which did not want to give up the rebates it was due for arbitrage from all these bond issuers.

    The SEC just let JP Morgan off the hook in a pay-to-play arrangement with Phil Angelides (then CA state treasurer, now chair of the Financial Crisis Inquiry Commission). Believe me, things are not getting better under new management.

  15. Due to cross guarantees and credit default swaps the big banks will “fail” if they are broken up. A reading of any big bank Annual Report will demonstrate the interconnectivity. There is an Achilles Heel though if the Obama arrow shooter understands the courage required and acquires the courage.

    The methodology would be to put only the bank holding company into reorganization. Doing this requires political and legal excuses, err .. chicanery. This requires indictment of key holding company officers all at once. Allege that the BHC is under Rico and seize it . At this point, ways must be thought out where the creditors of the BHC only emerge as shareholders of the BHC. All cross guarantees are intact. This must be done to all BHC’s under attack at the same time.

    The power problem is destruction of political power of the banking elites. All this TBTF stuff is mincing around the political problem. These TBTF banks have massive CDS’s between themselves that could be cancelled out by court action if all were seized at the same time and every major bank officer were under arrest with bails even they cannot meet or restrictions that keep them from their employment. For starters, the conservator’s fire these people immediately. They have only their own money and their stock and other assets were just seized under RICO.

    A political coup against the financial oligarchs.

    Does Obama have the nerve or even the ability to undertake such a coup? Nope, as far as I can see.
    Does the political system itself have the will power to back Obama? I doubt it. It would be very messy about ” liberty” and ” rights”.

    So, the banksters were smart enough to consolidate their power so long as they band together and have the money to buy off Congress. Deny them their personal money and the banksters are finished.

    All this seems quite unpalatable to me. If the economic big wig guru’s are right, another crisis surely awaits us quite soon. Add a crisis like the recent on on top of the effects of the recent crisis and the financial system is dead including the TBTF banks.

    So the problem is really a failure of political will if Obama sees privately that the economic big wigs forsee the future correctly.

    Must Obama be the modern economic equivalent of General Frederick Funston in his handling of the aftermath of the San Francisco Earthquake of 1906?

    What are the hard realities here? Are we bleeding to death as a people from the acts of the banksters? If yes, political triage is needed. If not, we go on as before with some scapegoat guilty taking the fall for the others.

    Is the hard reality here that complexity nullifies sufficient personal effort that personal effort is no longer worth the effort to salvage the polity? Specifically, Joseph Tainter and Jared Diamond might be describing present US political reality? It all ain’t worth the political effort, so do your own thing?

    Vice President John Nance Garner made a pithy comment about the Vice Presidency. That same comment must surely apply to the present Congress of the United States. The have lost the ability to smell danger if the bigwig economic guru’s consensus is correct.

  16. JerryJ: “Must Obama be the modern economic equivalent of General Frederick Funston in his handling of the aftermath of the San Francisco Earthquake of 1906?”

    How about FDR?

    “The economic royalists hate me, and I welcome their hatred. The economic royalists have met their master.”

    Or to quote George W. Bush, “Bring ‘em on.”

    Not only is it the right policy position, it strikes me as a political slam-dunk. ??

  17. Certainly, Obama could take on the financial oligarchy. He must desire to do so and be fearless about doing it. I am trying to point out the problem is political. Is his party owned by the financial systems employee oligarchy?

    He has all the executive tools he needs to simply put the bank employees into jail and confiscate their wealth. It need not stick legally at the end of the game : he needs time to simply destroy the employee banker personal power. It is a question of ruthlessness. Certainly, the bank employees will and are fighting to the death.

    Professor’s of constitutional law might not have the temperament of an Octavian. I would have thought he would prepare for bigwig banker incarceration from his first day even though he needed to aid them before busting them. He is not that kind of person in my view.

  18. Prof. Johnson, an excellent post but unfortunately you understate how difficult it actually would be to “nationalize” a large multi-national bank. The reason is this: is it a mistake to think of these firms as single entities. They are, in fact, collections of thousands of different legal entities chartered and regulated in different jurisdictions with different regulatory regimes. Sure, you could wind up the bank and the parent holding company and the non-bank affiliates in the US but what about the non-US operations? What about guarantees to non-US affiliates? Would the American people support making Japanese depositors in the Japanese a affiliate of a US bank whole in the event that the parent was seized?

    The point that I am making is that winding down one of these firms in a way that wouldn’t cause financial chaos is extremely difficult that is something akin to getting a chain gang of prisoners to all change their uniforms at the same time.

    My proposal would be this (and I think someone may have mentioned this): make it too expensive to be TBTF. You could accomplish this through a marginal capital charge. That is: the capital charge would increase on each incremental dollar of assets a bank takes on. For assets above, say, $100B you would impose a 20% capital charge. The ultimate goal would be either to force banks to dismantle themselves so as to get to a size where they would be profitable AND non-TBTF or in the event that a TBTF bank remained, that it would be so over-capitalized as to make it extremely safe.

    But lest we forget, banks are now going to be allowed to measure capital based upon their own internal models. Most banks are going to come out of their Basel II “parallel” runs soon and thus be even more thinly capitalized than they were before the crisis.

  19. It will be interesting to see how the Republicans participate. If they work to water down the legislation in exchange for political contributions then they run the risk of losing the support of moderate voters.

    From the NYTimes: “Mr. Obama also took aim at Republicans. Citing news accounts of a January meeting between the House Republican leader, John A. Boehner of Ohio, and Jamie Dimon, chief executive of JPMorgan Chase, Mr. Obama said Mr. Boehner had “made thwarting reform a key part of his party’s pitch for campaign contributions.” And he said that opponents of a consumer agency had begun a multimillion-dollar advertising campaign.”

    “You might call this ‘air support’ for the army of lobbyists already arm-twisting members of the committee to reject these reforms and block this consumer agency,” Mr. Obama said. “Perhaps that’s why, after months of working with Democrats, Republicans walked away from this proposal.”

    And it also will be entertaining to watch the US work with the EU to coordinate financial rules, regulations and laws. Certainly there are plenty of examples of why this is necessary – Switzerland withholding tax evasion information, the Greek (PIGS) debt crisis, Lehman Brothers Repo 105 and the near global, economic meltdown. If the EU and US allow their banks to intertwine then they also must intertwine their regulatory, legal and accounting frameworks. Hopefully world leaders will be able to focus on getting this right, but EU President Barroso is concerned.

    From the AP: “Jose Manuel Barroso, the European Commission’s president, said he saw “warning signals” that leaders of the Group of 20 major global economies could water down pledges to overhaul the financial system and prevent a repeat of a crisis that has curtailed economic growth and trade.”

    “We see that since the crisis, since it is not as acute as it was before, there is not the same commitment there was from all the parties to keep the emphasis on financial reform, supervision and establishing this level playing field,” he told reporters.”

    President Obama faces the same issue in the US as senior Senators and House members retire or are voted out of office and we lose their memories of what it was like to have Hank Paulson and Ben Bernanke rush to them hats-in-hand with the news of a global, economic meltdown.

  20. Simon,

    I have two very basic (potentially just factual) questions about the Volker rules: (1) How much would it cost to make too big banks smaller? (2) Who would pay?

    If taxpayers would be on the hook for the short-term costs of restructuring insolvent TBTF banks maybe this cost could explain some of the political reluctance? My sense is that breaking up and selling off bits of TBTF banks would make the insolvency clear to see, and so capital would need to be injected (from somewhere) to make it work. Love to hear your thoughts on this.

  21. Bill Gilwood

    Look who Obama appointed as his economic team – Summers, Geithner etc. – all key culprits in causing the present situation. Obama’s just their errand boy and frontman.

  22. That may be the case. Certainly , huge numbers of people believe Obama is a bought dog. However, there is very little the banksters can do to compel Obama to continue to be a bought dog and huge amounts of power for Obama to turn on the banksters. I do not believe him to be a bought dog. He is convinced that saving the nation requires him to save the banking system and that means saving the banksters as excess baggage. There is a terrific article about the effectiveness of Geithner in the current Atlantic totled ” Inside Man” by Joshua Green.

    Obama has his own survival agenda that would transcend anything the banksters desire. If he is in bed with them it is for convienience. He is a politician reared on Saul Alinski and experienced in Chicago style politics. A good proof is Rahm Emanuel who would never join a bought dog unless it was strategic. The last guy to hitch his star to a bought dog would be Rahm Emanuel.

    Obama gets pushed too far down the political survival road by the banksters he will be a very rabid biter.

    Such alliances are very necessary and tricky in backroom politics.

  23. Spin off every f..ing brokerage house, insurance company, and bank they ‘merged’ with in the 1990′s, then prohibit cross state banking. Maybe add a gallows on the side, for the peeps ya’ know.

  24. postmodernprimate

    “Yeah, President Obama will take on the banks. He just needs to ask Jamie Dimon for permission first.”

    Obama ♥’s Jamie Dimon. He’s soooooo SAVVY.

  25. JerryJ wrote:

    “Certainly, Obama could take on the financial oligarchy. He must desire to do so and be fearless about doing it. I am trying to point out the problem is political. Is his party owned by the financial systems employee oligarchy?

    October 2008 – independent.co.uk – excerpt

    “….he (Obama) has already surpassed all expectations by raising more than $600-million…”

    http://tinyurl.com/59z8xl

  26. While you are waiting for Simon’s response, I’ll add my two-cent with your indulgence.

    TBTF wrote:

    “How much would it cost to make too big banks smaller?”

    How much is it worth to avoid a financial apocalypse?

  27. “This administration is perfectly capable of taking on the big banks. All that is missing is a little clarity of thought and a fair amount of political courage.”

    I am stunned by the resilience of the belief that Obama and his retainers are good faith actors, expressed by informed and intelligent people.

    There are anecdotes about scientists that, confronted with irreproducible results presented by a peer, were unable to track down the fault in the original experiment until they brought in a stage magician – a person literate in the art of deception and sleight of hand, and not predisposed to assume that both parties were acting in accordance with the principles of sound science.

    As in: the scientists were dealing with a fraud.

    That is the situation with Obama. Here we have a fundamentally dishonest, unprincipled man, a bold, two-faced liar, every bit as corrupt as Bush. Whether it is the gap between policy positions professed during the campagin and policy decisions as implemented, or the aiding and abetting of past and present torturers, or the attempts to construct a permanent framework for rendition and inifinite detention, or assasination by drone, or the bad faith closed door negotiations at the beginning of the health insurance bailout initiative, or the collusion in Fannie/Freddie/Fed mortgage laundering, or the late night Executive Order abrogation of congressional privileges to prop of the Hyde Amendment, Obama has shown over and over again that he cannot be trusted.

    Yet, here we are again with the Incompetence And Cowardice Dodge employed to explain perfectly reasonable corporatist actions.

    Follow the money. The rest will follow.

  28. b. wrote:

    “Follow the money.”

    I agree.

  29. At a time when our economy is only showing the faintest signs of slight recovery, it is time to act decisively. I agree with you and Senator Kaufmann. But then I also agree with much of what Senator Sanders has said, along the same lines. We do have a few honest and earnest men on Capitol Hill, but very, very few. The rest are enamoured with power and afraid to cross those powerful interests that might threaten their careers in the coming elections. If you care more about having your job than doing it, you are already lost. And so are we. Time for men of real courage, care, conviction, and moral fortitude to step to the front. We need a Teddy Roosevelt reincarnation. Maybe Ted Kaufmann is it. But can he capture the argument enough to challenge the vested power structure. Me thinks not, but am certainly hoping to be proven wrong. Hope springs eternal, but I may have to wait that long for it to be realized. Every crisis seems to find a savior waiting in the wings. Ted, be him!!!!

  30. Friday, Mar. 26, 2010 5:44PM EDT – Globe and Mail – excerpt

    It’s the moment bond vigilantes have been waiting for.

    Washington — “Three times this week, the U.S. government was forced to pay sharply higher rates on tens of billions worth of Treasuries to entice buyers – an ominous sign that global investors may be losing faith in the United States’ ability to manage its swelling debt load.

    If it keeps up, the trend could lead to higher interest rates on everything from home mortgages and car loans to other forms of credit. It would also make it costlier for the U.S. government to finance its massive borrowing.”

    http://tinyurl.com/yhnsvwn

    * This subject is likely to influence or alter many future investment decisions (including my personal retirement funds).

  31. I’m sorry—I DON’T BELIEVE YOU. The Justice Department under W. Bush did ZERO prosecution on these types of crimes. The SEC and the FBI can dig up all the evidence and info. they want. If you have lawyers in the Justice Department who don’t want to prosecute because the Administration and the Republican lackeys put out the word on the grapevine that:

    Job security at Republican Justice Department = let things fly

    Then all that evidence the FBI and SEC doesn’t mean squat—under President Obama they NOW KNOW those cases have a much better chance of being prosecuted, and we see it in ACTION here. To bad we have eight years of “W” Bush or “the decisionmaker” and hi anti-regulation lawyer friends to make up for now.

  32. The size cap is going to be financial reform’s version of the public option from health care reform. Obama and others will say they want it, and it will poll well, but somehow it will never appear in any bill voted on by the Senate, and Obama will never apply any pressure to make such a vote happen.

  33. I just say; “Balls” Sorry, I’m a Carpenter not an MIT or better yet a Cal Tech Prof.

  34. I agree the long term costs of TBTF are likely very large. I just wonder if there can be anything to a non-capture based argument that politicians are worried about the political problems from short-term costs to taxpayers of getting rid of TBTF, and so want to leave really dealing with TBTF in a substantive way for the next administration, and then the next one, and the one after that…

  35. John Steinsvold

    An Alternative to Capitalism (which we desperately need here in the USA)

    The following link takes you to an essay titled: “Home of the Brave?” which was published by the Athenaeum Library of Philosophy:

    http://evans-experientialism.freewebspace.com/steinsvold.htm

    John Steinsvold

  36. Thank you, John. I read your article, which is even more true than when it was published over four years ago. And, of course, if you read between the lines, you understand what the problem is. We are like gambling addicts at a casino. The manipulators of our greed (even greedier than we are) now have us by the short ones. But perhaps the parasite(s) are about to kill the host(s). We are nearly at an end. If many more of us drive over the cliff in search of the best American Dream money can buy (like all of those who are being foreclosed for having invested in an overpriced home with a subprime mortgage and now are standing in lines at soup kitchens). There are more every day who bought what the oligarchs are and were selling and, sadly, will have nothing because of it.

    Yes, what you describe is Utopia. Yes, it is completely logical to understand that the old saw is correct always: Money can’t buy happiness. But, by God, it can stave off a whole lot of misery, especially, and unfortunately, for all of the children caught in their parent’s traps. Home of the Brave? Not!! Most of those I see everyday sold their gonads a long time ago. Sadly that’s the key pound of flesh our plutocrats sought and got. As a society we would rather watch our Reality TV, play our games, electronic and otherwise, have endless multitasking days controlled by our electronic world, and give up virtually all of our freedom and peace of mind in the process.

    I’m 64. I grew up in the Father Knows Best and Leave It To Beaver era, when education required paying attention, when mom stayed at home, when we enjoyed real family dinners, read books, got real exercise, and watched Ed Sullivan on Sunday evenings as a family. We even played real board games together. It was a time when, if the teacher paddled you for misbehaving, your parent did it again when you got home and didn’t threaten to sue the School Board.

    Face it, those days are gone. We live in a global interconnected world where money and power count more than personal security, time together, vacations with family on sunny beaches, hikes in the woods on a cool crips fall day.

    No, now we watch the stock market going up and wish we had a couple of dollars to ride up with the big guyes, but buying our next meal consumes that. We are not in an economic recovery. We are involved in economic discovery, finding out just how bad things can get if you’re not working for Goldman Sachs or in Congress, or on K Street. Our world in this country continues to deteriorate and we have the gall to wonder why. They got us by the short ones. We don’t want to be associated with the Tea Party Mad Hatters, but we need to find an honest man. Keep lighting lamps for us to see, John. Don’t give up.

  37. Ted, I wish I could agree with your view of the world, but my experience tells me different. The SEC, if it found violations in any market (a sizeable “if” these days) during W’s term, would have brought appropriate enforcement actions. It would have been a civil, not a criminal case (SEC, despite the movies, has no criminal prosecution authority), but it would have been brought and DOJ would have been left twisting in the wind. In my experience, DOJ would have acted in response or simultaneously. Most of those folks are pros regardless of politics.

    The bigger problem is the SEC and DOJ don’t know the markets, especially the muni markets, and were not generally aware of the raping and pillaging that occurred when school boards were sold toxic securities wrapped in CDS’s, etc. I’m not sure they know now. These folks need a serious education, even if it is provided by disguised witnesses who saw the atrocities that occurred and will continue to occur. I know. I spent 27 years in SEC enforcement and am proud to say, working with criminal authorities, sent a number of overpaid execs to bunk with Bubba for a few years and recovered over a billion dollars for investors.

    Sure there is capture, but it occurs from the top down. And when the top knows they cannot keep a lid on the story (as was always the case at the SEC), they authorized the case. No leaks were necessary because the potential alone (coupled with the leaky USAO in the SDNY) kept those folks honest.

    No, the problem was and still is that most of the stock market regulators just don’t get it and they don’t get much help from the financial community in terms of tips, assistance or insight. Self regulation is a joke and self preservation is the rule of the markets. Don’t expect a bunch of government attorneys, accountants and analysts to keep thse folks in check under the best of circumstances. And a 30 year tradition of deregulation and dismissal of the most effective regulators is not the best of circumstances. And I’m disappointed to say that there is little reason to believe that things have changed under this administration.

  38. With the Supreme Court packed with the extreme Right Wing they gave big business their ultimate prize – - Unlimited campaign contributions are now political speech.
    The reality, very very difficult to survive politically if the big banks can insure you will not be re-elected if you push too hard for reform. They will simply find a decent candidate to run against you and insure sufficient funding for the campaign to win.
    Politically the President and his advisors need to be thinking of how to expand the Supreme Court in order to get more moderate or left wing members in the majority. For the foreseeable future we will be living under the Roberts, Alito, Thomas etc. form of right wing extremism.

  39. Mr. Coffman,
    Let me review just 2 sentences from your comment directly above.

    “In my experience, DOJ would have acted in response or simultaneously. Most of those folks are pros regardless of politics.”

    I’ll let anyone of average intelligence make their judgments on the accuracy of that comment.

    You do realize of course it was lawyers in the DOJ who signed off on murder and torture at Abu Ghraib and Guantanamo??
    http://harpers.org/archive/2008/01/hbc-90002226

    Did you also know Attorney General Alberto Gonzales fired SEVEN United States Attorneys for NO REASON AT ALL???
    http://www.nytimes.com/2007/05/03/washington/03attorneys.html?ex=1335844800&en=f7f495103ddadb4d&ei=5090&partner=rssuserland&emc=rss

    Ya, those folks in the Republican DOJ were “pros”. I like you Mr. Coffman, but you better start reading the paper more. Don’t make me regret defending the SEC many times here in comments.

  40. Brad Thrasher

    Google “Technocracy” and you will find many like minded folks. God and money Professor. If we didn’t have them, we would invent them. Whoops my bad, we already did.

  41. Brad Thrasher

    Oh and to any of God’s people reading this, I don’t have any problem with God. My beef is with you.

    As for doing away with money and everybody would just do the right thing well…are we talkin’ human beings or did I miss something?

  42. markets.aurelius

    One wonders if Phi’s just putting the blowtorch on these guys so he can shake them down later, doesn’t one?

  43. Senator Kaufman will end up a gladiator if people do not start to stand up and support him. As you say, Simon, Senator Kaufman did not come into the arena with a preconceived notion or prejudice. He simply “listened” and observed the evidence. Unfortunately there has been great resistance in getting that ecidence out to a public arena let alone the political arena. There are many professionals out there who have a far better understanding of what is wrong and what might be done better, let alone direct dialogue on truthful comprehensions, corrections and potential directions that will not lead us to the brink of dissolution, economic bankruptcy and perhaps even violent squirmishes and outright war threats on the global scene. As it is we are on the brink of a demographic schism among our domestic poltical factions that is threatening to rip the seems of American continuity of purpose. All this and we stand here with too little and much too late retrospective arguments about whether “corruption” was a “part” of the picture?????
    Complacency and manipulation has created a propaganda market that has been misleading us with asymmetrical information and outright strategic misinformation. If you consider the tactic of a “poison pill” tactic in corporate structure, consider the “think tank” congress that we have creating poison wells and political market consensus tailored to tactical results of fear, disillusion and crisis manipulation as opportunity for domination. There is certainly more than just Kaufman”s corruption “discovery” at the foundation of our problems. But the real people aren’t talking because the new normalization process is comprehensively another version of “QUALITATIVE AND QUANTITATIVE EASING” among a staus quo of transitional destruction called laisez faire establishment in Washington DC.

  44. Business as usual! At this rate we should all know what happened by 2025 or at least after the statutes of limitation provides ground cover to the principal players. Senator Kaufman deserves a groundswell of support but he will not get it when it is considered a liberal fringe to uncover and attack corrupt standards of practice that “everyone is doing anyway.”

  45. Ted, there is an obvious difference between DOJ career staff and politically appointed men and women of the evening. All of the folks you refer to were political appointees. U.S. attorneys are political appointees. Citing their firings as an example underscores my point. Many of those folks were fired for doing their jobs. And there are hundreds, if not thousands AUSAs and DOJ attorneys who work hard to do the right thing. I know, I helped send folks to jail on W’s watch by working with some of these folks.

    All this is not to say that W’s DOJ wasn’t a cesspool. It was in many respects and some of those you refer to should be in jail. Some SEC commissioners were hostile to the work we did in enforcement. But we did our jobs, well in most cases, and presented them with case recommendations they couldn’t turn down. The same was true at DOJ.

    I like you Ted. Just use a smaller brush at times.

  46. There is little reason that breaking up TBTF banks should cost any more that maintaining TBTF banks. Break them into their component financial parts (investment bank, commercial bank, futures merchant, insurance, etc.) and spin them off to shareholders (except investment banks shouldn’t be more than 30% publicly owned). The primary cost would be in legal fees, most of which would be incurred anyway in attempts to preserve TBTF status. There would be some one-time costs in terms of real estate, etc. The odds are much of this cost to shareholders would be offset by increases in value of the component parts. One byproduct of TBTF is too big to manage effectively and too big to provide an appropriate return to investors.

  47. ANNOUNCEMENT: Yves Smith, the proprietor of Naked Capitalism, will appear at Corrente, Sunday, March 28 from 2-4PM EST, as we discuss her new book, ECONned. NC is a terrific blog everybody should read, and Yves has been covering the financial crisis since its inception (unlike so many of the “political” blogs).

  48. The only stupid questions are those that remain unspoken.

  49. Heading Off the Next Financial Crisis

    March 22, 2010 – New York Times Magazine – excerpt

    “The boldest proposal along these lines would be to break up the banks. Some outsiders, like Simon Johnson, a former chief economist at the International Monetary Fund, argue that today’s huge banks are powerful enough to resist any effort at strong regulation. Their size alone could make it especially hard for the government to seize a troubled bank and wind it down in an orderly fashion. One middle-ground option would be to give regulators the authority to split up a big bank that began to have problems well before it would need to be seized.

    The flaw in this approach is that size is not the same as risk. Lehman and A.I.G. were not the country’s largest financial firms. The well-regulated Canadian financial sector is far more concentrated than the underregulated American financial sector. Canada has 4 of the 50 biggest banks in the world. The United States, with an economy 10 times as large as Canada’s, has 5 of the top 50.”

    http://tinyurl.com/y9j4cmo

  50. We’d be better off it were 1910: No central bank, and no debt based money.

  51. Not the markets, but the megabanks who own the markets

  52. One problem:
    What we have now IS a fascist financial empire. It is what it is and has nothing to do with name-calling, although the same cannot be said about the socialist and communist claims. Whether I agree with someone or not doesn’t change the harsh reality of the political crisis the US faces – The Republican and Democratic parties are THE SAME PROBLEM.
    To solve the political problem we need to eliminate the debt/commodity based money system we now have and regroup from there.

  53. raya sunshine

    Redleg, I’d like to hear more about the debt-commodity based money system we have now.

    All I know is that lending is almost infinite, increasing the amount of funds in circulation from a small base. Like when there was the gold standard and there started to be too much paper money to be redeemed in gold.

    Regarding commodities, I oppose the kind of futures speculation that increases their price above that of the producers’ cost. From what I read, speculators buy up most of the supply of a good in commodity futures purchases, then charge whatever they please when the supply hits the market.

    (By the way, this process causes the swings in gasoline prices that have absolutely nothing to do with changes in supply and demand.)

    But back to the big financial institutions. Redleg, what exactly do you mean about the debt-commodity based money system we have now? Am I approaching it?

  54. Peter Donner

    Love the tenor of your commentary on too big to fail, and the specific argument on limiting big finance balance sheets as a percent of GDP.

    The con is large scale finance is needed to underwrite corporate bond issues.

    According to this argument, Goldman needs a balance sheet of $700 billion so it can underwrite corporate bond issues. Without a large balance sheet, underwriters would not be able to finance corporate America, capital would be more expensive, and growth would slow, and we would be less prosperous as a result.

    Is there a compelling counter-argument?

  55. Debt-Commodity currency includes gold/silver/etc. backed currency, and the debt backed Federal Reserve Notes we currently use.
    Non debt backed currency includes coins and US Notes (not issued since the 1960′s if I remember correctly).

    Direct issue of money by Congress saves taxpayers money by eliminating the interest and fees paid by issuing Treasuries, interest which we are paying to China and pension funds, and fees to banks.

    Gold backed money IS fiat money – the US standard maker, Congress per the Constitution, declares the value of the currency i.e. the amt of gold the dollar represents (if any). Assigning a commodity to back the currency is done by fiat.

    A better explanation here:
    http://economicedge.blogspot.com/2010/01/fallacy-of-gold-backed-money_02.html

  56. raya sunshine

    The federal gov’t sells treasuries to pay for the budget deficit. How do commercial banks make “interest” in this transaction? The taxpayer pays interest to the holder of the notes. The amount of this interest is, arguably, not a huge factor in the federal budget.

    China buys much of this debt in order to manipulate its currency downward to keep the price of its exports low. Japan does the same, owning dollar reserves in almost the same quantity as China.

    Thank you, Redleg, for offering an explanation for our commodity/debt backed currency. I read your reference and only question how banks make money off the issue of debt by the federal government. I imagine they are paid to issue the debt, but is this a sizable or even significant part of their revenues?

    Thanks again! -Raya

  57. “Is there a compelling counter-argument?”

    Maybe. how about a new system? how about a different paradigm than the one that has provided essentially zero momentum for the evolution of humanity in the past 2000 years.