The SAFE Banking Act: Break Them Up

By Simon Johnson, co-author of  13 Bankers.

On Wednesday, Senators Sherrod Brown and Ted Kaufman unveiled a “SAFE banking Act” with a clear and powerful purpose: Break up the big banks.

The proposal places hard leverage and size caps on financial institutions. It is well crafted, based on a great deal of hard thinking, and — as reported on the front page of The New York Times this week — the issue has the potential to draw a considerable amount of support.

The idea is simple, in the sense that the largest six banks in the American economy are currently “too big to fail” in the eyes of the credit market (and presumably in the leading minds the Obama administration — which saved all the big banks, without conditions, in March-April 2009).  The bill put forward by Senator Christopher J. Dodd, the chairman of the Banking Committee, has some sensible proposals — and is definitely not an approach that supports “bailouts” — but it does not really confront the problem of the half-dozen megabanks.

In the American political system — where the power of major banks is now so manifest — there is no way to significantly reduce the risks posed by these banks unless they are broken up.

These banks are so powerful that they can confront and defy the government, as seen in the twists and turns of the S.E.C. versus Goldman Sachs case.  They are also powerful enough to threaten a form of extortion: If reform is tough, according to JPMorgan Chase’s chief, Jamie Dimon, credit will contract, the recovery will slow and unemployment will stay high. Given the size of his bank, that’s a credible threat.

The big banks give a lot of money to politicians on both sides of the aisle and they are now digging in hard to defeat reform. Indeed, there are credible reports of various “front” organizations being used for this purpose.

Under such circumstances, the Brown-Kaufman approach might be thought unlikely to succeed.

But consider how the Republicans are already starting to counterattack the Dodd proposals, the ways in which the broader Dodd-White House approach remains vulnerable, and how exactly the Brown-Kaufman approach can help the Democratic leadership as it becomes increasingly hard pressed.

The Republicans are saying: the Dodd bill does not end “too big to fail.”  Most of their reasons are misleading (“it’s all about Fannie and Freddie really,” “there will be a permanent bailout fund,” “the Federal Reserve needs to lose some of its powers,” etc.). But there is no question that this message will seriously confuse people who are only just starting to pay attention.

As the Republicans have astutely spotted, the Dodd-White House proposals will not actually reduce the size or seriously limit the activities of the megabanks — and a broad cross-section of society completely understands that these institutions brought us into the trauma of September 2008, have become even bigger since then, and still have the incentive to take on an excessive amount of risk.

The S.E.C. case against Goldman has created a great opportunity for the Democrats because it exposes details regarding exactly how big banks are mismanaged and why they treat many of their customers in an unreasonable manner.  The electorate now completely understands — even more clearly than a week ago — that the attitudes and compensation structure of the largest banks lie at the heart of our current macroeconomic difficulties.

The Brown-Kaufman bill therefore addresses not just the substantive financial issues of our day but also the tough political situation now facing Democrats.  If their SAFE banking bill can come to the floor of the Senate (for example, as an amendment to the Dodd bill) and be voted on — up or down — then we will really get to see which of our elected representatives support overly big banks and which want to bring them down.

The bill might fail, of course, on that basis — but then anyone who opposes it can be branded as a “too big to fail” fan in November and beyond.  This would be a clear identifier that would cut through the noise and the disinformation. Did this candidate vote for or against the too-big-to-fail banks?  It’s a simple yes or no.

As political logic inserts itself more and more into the economic debate on banking, there is a real possibility that Senators Brown and Kaufman have exactly what the Democrats (and the country) needs.

 This post appeared this morning on the NYT.com’s Economix; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

51 responses to “The SAFE Banking Act: Break Them Up

  1. …..and how exactly the Brown-Kaufman approach can help the Democratic leadership as it becomes increasingly hard pressed.

    That’s rational, but this Democratic leadership seems incapable of seeing any path at all but to try to out-corporatize the Republicans.

    Obama is a corporatist by ideology and a status quo elitist by personality, so he truly doesn’t even understand the concept of a public interest policy. “If a policy doesn’t do whatever it does by way of enabling rackets to extract more rents, then what’s the point of it”, is his pathology. The health racket bill and the jobs bill (tax credits for employers) are typical examples of the result of this mindset.

    Emanuel, meanwhile, is simply a Republican-style gutter thug.

    And most other Democrats fall into one or the other of these categories, while the “progressives” are spineless cowards.

    So add it up and it’s unlikely that even political self-interest will get a real bill out of these people. That Lincoln came up with something quasi-reasonable was only on account of the direct, extreme political duress she’s under. But most Dems aren’t feeling that yet, and won’t feel it until it’s too late.

  2. “These banks are so powerful that they can confront and defy the government, as seen in the twists and turns of the S.E.C. versus Goldman Sachs case. They are also powerful enough to threaten a form of extortion: If reform is tough, according to JPMorgan Chase’s chief, Jamie Dimon, credit will contract, the recovery will slow and unemployment will stay high. Given the size of his bank, that’s a credible threat.”

    Seriously Simon, you already sound like you’ve thrown in the towel. Just what is this magical all encompassing power that these banks have? In order to exist they must have their fiat monopoly money. Without it they wither and die. President Jackson fought the good fight and won and I dare say it can be done again.

    Was it a grand concept by a handful of industrialists back in the early 1900′s who wanted the country to grow exponentially that decided the people should no longer have control over the creation of money thus creating the Federal Reserve in 1913? Wilson admitted after leaving office that it was the worst decision he had ever made.

    No. Banks are not so big and powerful that they cannot be cut down to size and if a little blood is shed along the way so be it. While many may think the idea crazy, the government of, by and for the people should create US Treasury banks as we once had with US Treasury dollars backed by real money, gold and silver just as the founders had envisioned. Then let the people decide where they choose to bank and watch the once big and powerful banks that control all throughout the land either fade away or join in while returning to a sound money system.

    Never again should our country find itself in a position where it literally is being blackmailed by those who control the creation of money and credit. At least in our country, that power belongs to the people through Congress, not a private banking cartel known as the Federal Reserve.

    Simply breaking up these banks will not change a thing as their money and power will still buy favors in the halls of Congress. As many will tell you. Money still talks and B.S. walks. The Keynes experiment has failed. It’s time to move on.

    “And this is good old Gotham,
    The home of the rich and the odd.
    Where Morgan talks only to Goldman,
    And Goldman talks only to God.”

  3. Can groundswell (like this blog) change the balance of power?

    Note the disruptive resurgence of the Liberal Democrats (the severest critics of the banks) in the current UK elections.

    See http://www.guardian.co.uk/business/2010/apr/18/goldman-sachs-regulators-civil-charges

    and

    http://generalelection2010.timesonline.co.uk/#/Predictions

  4. They’re working towards full compliance with Regulation Z, and now Regulation X as outlined through the FDIC. Leverage ratios and reserve requirements also need to be discussed (and asked at next week’s forum). With all the current flurry of reining in the derivatives market, the nuance (and the point) of breaking up the largest “13 bankers” is being lost; several of the news media outlets have their talking heads exspousing arguments for more regulations through governing rules and oversight but missing the truer point regarding TBTF; the point being it’s not just about saving the taxpayer’s pocketbook, it’s about reducing the size, exposure, risk, calamity of these banks having way too much power and control in this country (with or without taxpayer bailouts, bankers creating a rainy day fund for the next crisis).

  5. “The electorate now completely understands … that the attitudes and compensation structure of the largest banks lie at the heart of our current macroeconomic difficulties.”

    Don’t be so sure of that. Gallup’s new poll indicates that Americans “offer greater support when the issue is … framed as regulating ‘Wall Street banks.’ “

  6. Let us never forget the immortal words of Nathaniel Mayer Rothschild, “Let me issue and control a nation’s money and I care not who writes the laws.”

  7. Simon,

    I’m sure you are more aware of the short term costs of breaking up the mega-banks than I (these costs are, we agree, more than outweighed by future benefits).

    To me the big risk of pushing financial reform when times are “good” on the surface is, short term costs can be painted as an effect of reform (the benefit of cheaper fixes to future financial crises and other benefits will likely be too intangible to sway voter opinion).

    This highlights the error of the Obama team’s choice of health care over financial reform.

    The guy who sneezes is often blamed for destroying the house of cards, not the guy who built it.

    Sad to write, but I suspect the best thing that could happen for financial reform is another big crisis.

  8. “They are also powerful enough to threaten a form of extortion: If reform is tough, according to JPMorgan Chase’s chief, Jamie Dimon, credit will contract, the recovery will slow and unemployment will stay high. Given the size of his bank, that’s a credible threat.”

    It seems to me that if reform limits leverage, then credit by definition will contract. Right? That would seem to lead to a slowing of the economy and would certainly not help employment. It just seems to me there’s no reasonable way to expand credit when people keep defaulting. My analysis goes no further than simple addition and subtraction. Take it for waht it is worth.

  9. Lets see, the majority of people did not want TARP as it was written, NAFTA, or other legislation like GLBA and CFMA representing paradigm shifts in how thoroughly the banks and corporations gained power over govt. and hollowed out the middle class. The Supreme Court recently granted Corporations unlimited access to support political campaigns granting them the same rights as individuals without exceptions further empowering organizations over individuals.

    The message I get after 30 years of watching my rights as a citizen diminished, my personal information become fodder for profit of others, my ability to work and maintain the value of my property, earnings over decades decline; is that my power in the voting booth is near meaningless now. The players are bought and paid for before a campaign is even launched limiting my choices. The media is owned by billionaires with agendas of propaganda to maintain their power.

    We’re a banana republic now of a one party system of people working in the interest of those whose wealth is ensures anyone who gains access to the club will be persuaded by a lifetime of wealth/power/influence for them and subsequent generations of their family.

    The public safety/interest/progress is trumped by pathological narcissism which is vastly rewarded. I hold out little hope the future will be bright for anyone except those who have robbed this nation of its intellect, its creativity, its productive endeavors and wealth garnered from decades and decades of labor. The old boy’s club are nothing but a bunch of bullies stealing everyone lunches. What happens when no one has lunches to steal anymore?

    Regulations aren’t adequate, the only way is to restructure the industry globally, slam the door shut on opaque and gamed markets and return banking for the serfs to a utilitarian part of our lives. It won’t happen, its likely too late now anyway as triple digit trillion dollar exposures in debt are set to implode into a cascading event which will require massive deleveraging worldwide including the USA. The printing presses don’t have the capacity to paper over that hole.

  10. I think it is time to regulate the banking sector to protect our democracy. They are too greedy, and out of control. It is just a matter of time to big to fail to happen in our time. The 13 Bankers said it well and we have to listen.

  11. Fannie and Freddie are reportedly (www.zeit.de) guaranteeing more mortgages than ever before, and supporting their use in more and more CDOs. Securitization hasn’t slowed down – it’s building another head of steam. Financial institutions are apparently untroubled by the notion of moral hazard – egads, they’re reveling in it.

  12. Well Mr Dave, given what is happening in Greece, and the resulting likely contagion, I’m afraid that “next” financial crisis (following in an abbreviated time frame, the script laid out by Reinhart & Rogoff) could well happen much sooner than we might have expected.

  13. I hope (in the sense of enacting financial reform) you are right.

    Paraphrasing an old tv ad: a crisis is a terrible thing to waste!

  14. The financial analysis of Mr. Simon Johnson is very sound, but the solution proposed is the wrong one (obviously in my opinion). I agree that the banks should be smaller, but the main problem is that they are so big because of the derivative-enabled extremely high leverage. THE DERIVATIVES SHOULD BE ELIMINATED! Anybody arguing for any other measures including derivative regulation not only is wrong, but may be suspected of having a hidden agenda of perpetuating the system.

  15. At least this bill,as an amendment to the Dodd proposal, will put the fire @ the feet of the Republicans, whose only mantra has been “hell no”. The blame for this whole mess is on both sides of the aisle so it’s like watching a game of “chicken” to see who will blink first. I love the strategy & frankly this is a pretty good start. There are more failing mortgages down the road (a lot more) so this isn’t over by a long shot. Do banks dare to continue down this road while the whole country is watching? I hope so!

  16. I think opponents of these policies need stronger arguments and more effective organization, drawing together the broad spectrum of Americans and indeed world citizens who are adversely effected by these policies.

    To do this:

    1. The enormous cost of these policies must be demonstrated and emphasized in simple and clear terms. The problem needs to be phrased in terms of people’s pocketbooks, their take home pay, their savings and retirement funds, and the profits of the many small and medium sized businesses suffering from these policies. For example,

    http://www.cepr.net/index.php/publications/reports/too-big-to-fail-subsidy/

    There have been efforts in this direction such as Joseph Stiglitz’s recent book Free Fall, some of Simon Johnson’s articles, and so forth, but more, more effective and more concise statements are needed. The murky system of implicit and explicit government guarantees, shadow bailouts using the Federal Reserve, Treasury, Fannie Mae, Freddie Mac, and so forth needs to be effectively exposed. This is a shell game, like three card Monty on a trillion dollar scale, designed to confuse and distract most Americans.

    Something very specific that the Baseline Scenario, its readers, blog posters, and others at other organizations and blogs could do is pool all of the information on the bailouts and subsidies in a single on-line database, something along the lines of Wikipedia or one of the History Commons projects. The giant banks have such resources and armies of highly paid financial experts to create a complex bewildering smokescreen of transactions to hide the true nature, size, and scope of the subsidies, that individuals, even experts like Simon Johnson and Dean Baker simply can’t keep up with the shifting tactics. By pooling people’s efforts and expertise, one could build an easy to read and comprehensive database of the scheme: combining information on the murky Federal Reserve programs, the Treasury, Fannie Mae, Freddie Mac, the FHA, as well as the numerous murky “private” CDO and other mortgage backed securities deals. This would provide powerful backup information for more brief “sound bite” explanations of the problem for the general public and transient blog posts.

    At a more technical level, it may be possible to create and distribute open source software to properly value the questionable securities, using historical financial data on default rates and so forth, to counter the dubious valuations based on the pseudo-scientific models used by the banks. This would also help put a dollar value on the size of the problem; probably somewhere between $500 billion and several trillion dollars in as yet unrealized losses for someone (read the taxpayer).

    2. The use of terms like “investment”, “growth”, “innovation”, and “research and development” to promote and defend these policies needs to be aggressively confronted and debunked. It needs to be made clear that the trillions of dollars spent on housing in the 00′s and goofy telecom and Internet schemes in the 90′s represents trillions of dollars not spent on critical human needs such as energy production, more efficient energy systems, transportation, and so forth. We see the consequences of this in rising energy prices and a declining standard of living. Yet another bubble, whether involving investments in China or blinking gadgets here at home, would represent further disastrous diversion of trillions of dollars from productive activities.

    3. The framing of the problem as one of “deregulation” versus “regulation”, the “free market” versus the “government” needs to be rebutted and avoided. Quite clearly, these are policies of huge government subsidies to a few giant politically connected banks. The fact that these banks have stockholders and the executives are not civil servants (they are in fact paid far more than civil servants and subject to less strict rules) does not mean they are not intimately connected with the government. It is certainly true the policies have been and continue to be promoted with labels such as “free market”, “deregulation”, “private sector” and so forth, but the reality is otherwise. Many businesses and people outside of a small and shrinking charmed circle are suffering from these policies, but are misled by the “free market” rhetoric. The implicit and explicit claims by the banks to represent the “free market” or “private sector” should be aggressively challenged and debunked; they are almost laughably absurd at this point.

    4. The long standing tactic of blaming the failure of policies labeled as “free market” and similar terms (emphasis on labeled), with the failure then used to promote further policies labeled as “free market” or “deregulation”, on the government should be recognized and aggressively countered. Blaming the government for fiascos that follow policies labeled as “free market” is not unusual. It happened after the Savings and Loan fiasco of the 1980′s, the Internet bubble, the Great Depression, the California electricity market “deregulation” fiasco of 2000, and a number of other cases. Rather, this long history of “crying wolf” should be pointed out simply and clearly, that the purported “free market” policies are frequently selective deregulation combined with increases in government subsidies for politically connected firms, and once again that the aggresive use of labels such as “free market” does not mean the policy actually is “free market”. Certainly not in the case of the current Too Big to Fail policies nor the sharp increase in FSLIC guarantees during the Savings and Loan “deregulation” of the 1980′s.

    Drawing a clear distinction between the present policies fraudulently promoted as “free market” or “deregulation” and actual “free market” or “deregulation” policies will enable opponents of these policies to reach out to private citizens, businesses, and organization across the political spectrum, all of whom are suffering greatly from these policies.

    Sincerely,

    John

  17. These sound like serious ideas worth considering. I especially like the first. The sheer volume and complexity of information cast an unhealthy veil over the activities of large banks.

    But here’s what I think is at least a fair question. Supposing there’s U.S. legislation to limit the size and leverage of our largest half-dozen or so banks, how does it get applied say to Royal Bank of Scotland ($3.8t in assets), Deutsche Bank ($2.9t in assets), BNP Paribas ($2.4t in assets), etc.? Wouldn’t the United States be unwise to jump off the cliff all by itself? Wouldn’t we expect capital flight? It looks like a case where international cooperation might be essential.

  18. Re: @ Russ….get it all out man,…I’m listening with you

  19. Re: @ g.h. kiirsch…and those very words still apply

  20. Re: @ Geoffrey Morton-Haworth….the British Empire still believes the United States is their property,period! Somehow,someway – they arranged the marriage of Israel,and the United States? They got us involved in WW1, (another miraculous blunder for the W. Wilson admiinistration) if the unfair “Peace Treaty of (1919) Versailles” wasn’t so austere there in all logical probability would have been no WWll. They (I won’t mention the Civil War,now)methodically are gaming our financial system to move off-shore {(across the ole pond)(outsourcing with a unique twist?)} to threaten the United States banks with less regulation,etc,.etc.,? PS. Fact: AIG set-up its Dirivatives subsidiary (insulated the contagion) long ago in anticipation of the ensuing failures on the horizon of the housing crises – was in collusion with all entities involved,and was set-up to be the fall(designed to fail ring a bell?) guy from day one. Why do you think Greenberg got out when he did,..so as not to be incriminated? No Rocket Scientist need not reply! Funny how the Bank of England still prices Gold & Silver every day like-clockwork setting the value throughout the known financial universe!

  21. Re: @ Beth….the next finacial crises will be the last – we are already on the precipice of financial collapse.

  22. We shouldn’t just demand that the banks be broken up. We should also demand the withdrawal of their bank holding company status which allows them virtually unlimited access to free capital via the Fed 0% interest window with which they can speculate at the taxpayer’s risk and expense while also expanding the Fed balance sheet with the ridiculous scam of borrowing at nothing and investing in longer term treasuries (also done at the taxpayer’s expense).

    If Bernake and Geithner cannot find a less preferential way to treat the leeches at Goldman Sachs, Citibank, et al, all of whom have been deriving the vast majority of their profits from proprietary trading, THEN EVERY CITIZEN SHOULD HAVE THE RIGHT TO CHANGE THEIR INDIVIDUAL TAXPAYER STATUS TO THAT OF A BANK HOLDING COMPANY AND HAVE THE SAME ACCESS TO FREE CAPITAL. Otherwise they are providing the proprietary traders at the banks insanely preferential treatment over the average citizen who trades and invests form himself.

    Don’t let Bernake and Geithner get away with giving GS and friends preferential treatment any longer.

    DEMAND THE RIGHT TO CHANGE YOUR INDIVIDUAL TAXPAYER STATUS TO THAT OF A BANK HOLDING COMPANY AND HAVE ACCESS TO FREE CAPITAL JUST LIKE THE PROPRIETARY TRADERS AT THE SO-CALLED “BANKS”.

  23. Re: @ Chad….Threats are just idle words of frustration,quite easily retracted if certain eminent global events unfold. Extortion will cause friction – thusly creating a fire storm – a “Pyrrhic Victory” for J P Morgan Chase,and cohorts. The “Merging Markets” will slow down. Why? “Mother China” is about too slow down dramatically,which will hit Australia,the Asian Tigers,and Africa,which will have a profound impediment on Europe. What’s left is the greatest innovating country in the world that is wakening to the commoner’s war cry “Too Buy American”. auf Wie der seh’en

  24. Chris, Oakland

    While I agree fully with the importance of a sound currency, I also believe it is impossible – indeed violently destructive to try to back a currency with “gold and silver”.

    The supply of money MUST grow (and shrink) with the level of real economic activity, or drastic inflation or deflation gets forced upon us all. And metal-backed currency grows or shrinks only according to the supply of metal – i.e. mining, not the economy. Should our inflation or deflation be based on mining results only?

    That’s exactly what happened repeatedly in the 18th and early 19th century – repeated economic collapses trigged by money supply errors.

    The “supply of money” we live with today is complicated – and is in fact largely created by the banking process – deposits are lent, borrowers make more deposits and economic activity – all good thing – and more money is lent. It’s the “leveraging” of deposits into loans and more deposits that create our national supply of money.

    None of this is intended to defend banks. All of this would happen even if we had just one state bank. The process described can track fairly well with the levels of economic activity – with a guiding hand to keep the two relatively on track (i.e. the Fed).

    Let me be more clear: I completely and avidly support the policies Simon Johnson proposes. We badly need regulations on BOTH a) the kinds of economic activity banks can engage it – AND b) on their size.

    Sherrod Brown is right on.

    But do forget going back to metal-based money, it’s a thoroughly discredited theory, and I sure Johnson would agree.

  25. Re: @ John F. McGowan….Nice read. PS. The last I heard – the 1200 plus page legislation is about to leave committee to be voted on. Unfortunately,…the same MO used to pass health care is being duplicated here also. A manifested applique’ aberration! Nice?

  26. Dear Simon…..Today our brave President Obama tiptoed through the tulips – without stepping on any tulips. Remarkable? Please for the “Sake of America’s Citizen’s” get out there with Qwak ,and preach that “Gospel” ! Yours truly,..Mr. Earle

  27. I apologise for the misspell Mr.Kwak,…dexterity malfunction? :^(

  28. The Bond Market Will Never Be the Same After Goldman: Michael Lewis

    April 22 (Bloomberg) — “If you happen to be sitting on the Goldman Sachs bond-trading floor life must feel horribly unfair. You did nothing worse than live by the ethical assumptions of your market — any money-making event short of obviously illegal is admirable — and now your own grandfather thinks you’re some kind of monster. Your world feels upside down: What was right is now wrong; what was good is now bad; what once felt like winning now feels like losing.

    You are probably wondering: What next? What will the angry rabble — all those ordinary people who can never really understand your business — now demand that you explain to them, so they can disapprove of you all over again?….

    Soul-Changing

    What begins as an effort to change your business may well end up as an attempt to change your soul.

    Among the many likely consequences of the SEC’s decision to sue Goldman Sachs for fraud is a social upheaval in the bond markets.

    Indeed, the social effects of the SEC’s action will almost certainly be greater than the narrow legal ones. Just as there was a time when people could smoke on airplanes, or drive drunk without guilt, there was a time when a Wall Street bond trader could work with a short seller to create a bond to fail, trick and bribe the ratings companies into blessing the bond, then sell the bond to a slow-witted German without having to worry if anyone would ever know, or care, what he’d just done.

    That just changed.”

    http://www.bloomberg.com/bb/n/aWUolZvh4qmE

  29. “Red is gray and
    Yellow white
    But we decide
    Which is right
    And
    Which is an Illusion”

    Nights in White Satin – Moody Blues

  30. Bill Gilwood

    It depends on what you mean by derivatives. Stock options are also derivatives and have been around for many years. So for that matter are ordinary futures contracts.
    What should eliminated are credit derivatives such as CDOs and CDSs which allow buyers to bet against assets they don’t own. These derivatives multiply the damage resulting from failure of the underlying asset. These instruments are what Warren Buffet called financial weapons of mass destruction.

  31. Re: @ RickK…..first song I tripped on at Amherst,…wow!

  32. Re: @ Dave Lewis….Rahm (three finger)Emanuel,and Hillary (Whitewater) Clinton paraphrased the cliche’ for Obama”s administration

  33. Re: @ RickK….Unfortunately you can’t change these guys,except for a jail cell in San Quinton or perhaps that holding tank in Cuba? I’d like to flush all the “Bond Moguls” down the toilet! I don’t care if we throw the baby out with the bath water. Justice must be served,…!

  34. Simon Johnson wrote:

    “The S.E.C. case against Goldman has created a great opportunity for the Democrats because it exposes details regarding exactly how big banks are mismanaged and why they treat many of their customers in an unreasonable manner. The electorate now completely understands — even more clearly than a week ago — that the attitudes and compensation structure of the largest banks lie at the heart of our current macroeconomic difficulties.”

    Senate Panel: Rating Agencies Traded Fees for Ratings

    by CalculatedRisk on 4/22/2010 07:05:00 PM

    From Kevin G. Hall and Chris Adams at McClatchy Newspapers:
    Senate panel: Ratings agencies rolled over for Wall Street

    “A Senate panel investigating the causes of the nation’s financial crisis on Thursday unveiled evidence that credit-ratings agencies knowingly gave inflated ratings to complex deals backed by shaky U.S. mortgages because of the fees they earned for giving such investment-grade ratings.
    I’m stunned but not surprised …”

    http://www.calculatedriskblog.com/

  35. October 29, 2008

    BRUSSELS — “EU officials are preparing the finishing touches to a draft law that is designed to prevent conflicts of interest between credit rating agencies and their clients.

    Pay would “be determined primarily by the quality, accuracy, thoroughness and integrity of their work.”

    For companies with more than 50 staff members, a four-year time limit would be placed on work with individual clients to prevent relationships from becoming too close. There would then have to be a two-year break before the individual worked with the same client.

    The proposed law would also require credit rating agencies to disclose the methodologies and main assumptions that they use in the rating process.”

    http://www.nytimes.com/2008/10/29/business/worldbusiness/29iht-rating.4.17356324.html

  36. Re-taking control of the money supply does not entail returning to metal based currency.

    It does require removing that control from the banksters and placing it in the hands of a more disinterested institution than the Fed.

  37. I tried to pull up the bill at both Kaufman’s and Brown’s webpage, and the message was that it hadn’t come back from the GPO (Government Printing Office). I will be contacting my senators tomorrow to advocate its passage, noting, of course that we all are interested in eliminating the TBTF’s because the resolution authority would be extremely touchy due to concerns about the offshore operations of the megabanks, as well as slow and difficult. Let’s face it, the FDIC, when it is closing a normal sized bank doesn’t tell anyone until the morning of the takeover. In the case of any resolution authority, it might be several days of transition to takeover and the fallout could be rather stunning, since even several hundred billion dollars might not be enough to staunch the flow of economic blood which could and probably would occur.

    I am 100% behind downsizing all banks to 200 billion or less in assets — and preferably 100. As you have so often said, Simon, there is no good argument for having them larger, even as international entities.

  38. please sign the petition if you want to help take some air out of the politically broken system:

    http://act.boldprogressives.org/cms/sign/petition_breakup/

  39. Moody’s Cooperating After Crisis Commission Subpoena: Source

    April 22 DOW JONES NEWSWIRES

    NEW YORK -(Dow Jones)- “Moody’s Corp. (MCO) has begun to hand over documents to the Financial Crisis Inquiry Commission just one day after the bipartisan panel subpoenaed the rating agency for failing to comply with its previous requests, a person familiar with the matter said.”

    http://tinyurl.com/zbe7f5

  40. I disagree that breaking the banks up will make the markets safer.

    Take the current crisis – almost every bank had similar exposure. Instead of TARP having to prop up a few large players (Citi, BofA, etc), it would instead have to support dozens/hundreds of smaller banks.

    What matters is the exposures to the markets, and not the size of the banks. If 90% of the market is represented by 3 banks vs 100 banks, it will not matter if they have the same risk profiles. All will fail, and will collectively still bring down the system.

    There needs to be a fundamental change in regulators, ratings agencies, and most importantly – the mindset of the American public. The root cause of the crisis was excessive borrowing by those who could not afford it – but it is too politically incorrect for politicians to state that.

  41. perhaps if “we the people” had the sense to only spend as we can afford, and the banks were only authorized to lend on real estate “above the 20% equity” rate, with severe regulation of derivatives and other “exotic” paper, we could solve this. Often the most simple common sense fixes are the best.

  42. Current TBTF banks have prospered by competing in a regulated industry. As a point of reference, compare the growth of the appropriate financial governance sections of the Federal Register with bank capitalization. Adding more one-size-fits-all regulation may create unintended consequences that result in more TBTF financial institutions.

    In practice, the regulated have proven better than the regulators at gaming governance. Hence, Goldman Sachs became known as “Government Sachs” and is viewed as the poster child of capital cronyism. In an era of re-regulation, either policymakers must become more proficient at promulgating regulatory constructs or they need to gain a better understanding of market incentives to increase competition.

  43. “We” – my parents perhaps – have seen it before, that smaller banks topple as fast as a row of domino stones if the system is tumbling down, like in the Great Recession. So, there can’t be good thinking in the Republican proposal to break them up in pieces. There will be too many banks to fail instead of some that are too big to fail. What is the difference?
    But I can tell you this: We, in Europe are regulating the financial system to make our banks safe and reliable and we will not do any business with banks that don’t follow a behavior according to our standards.
    And this does not mean that we’ll not do business in the USA, where our largest banks are active since many years and there will be a huge difference between our reliable banks and the American castles of robber barons and every smart American will learn that by experience in practice.
    So I wonder what the Republican answer can be on that kind of moving free market.
    You know you are not alone in the world and President Obama knows it too. He tries to rescue the American participation in the worlds financial system and that’s the only right thing an American President has to do now. The era of unlimited greed is gone.

  44. I have been watchin a great deal of congressional testimony. the kaufman levin hearings appear to be the best. the others are kind of a joke.

  45. Please do not break them. Let’s waite until history repeats itself. We are just waiting for the second depression to happen in our time. It is better to act now….to save the world.

  46. The essential problem in American business – also banks – is that it is a top-down approach. You, as consumers, have to buy what is offered, while we, Europeans and Asians, offer our customers what you most likely want to buy, a bottom-up approach.

    Someone said that the government want to forbid to have more than one credit-card.
    I want to talk especially to you.

    You can represent various entities, as an entrepreneur, as part of a business-body in a common account, or as a financial controller of your sports-club and, of course you can have several credit-cards as many as you want for all that different entities. There is nothing wrong with that. But if you need to have several credit-cards for your own private use, there is something out of order in your private financial behavior. You know that, we know that and the bank is knowing that too.
    You are a victim.
    For my private practice I have one credit-card and I use it only to pay via the Internet all over the world to enable remote shopping. That’s easy and it costs a small amount for that luxury and furthermore I use almost for free one banker’s card to purchase all the goods I need for my daily life. So, I never see red numbers on my single one private bank account.
    It will not be forbidden to have more credit-cards, but sophisticated regulation will prevent the banks giving more to you than you can afford, to make you a victim of your overspending greed, while you play in the cards of the mighty greedy banks that will turn you, an addicted money-junk, down. At the very end you payed 400% over what you have spent. Being an addicted junk your bank is your dealer and that has to stop, but it isn’t in any bill yet as it has to be, because the government has to protect you by natural law, the base of the Constitution.
    You are still free to bring yourself and your family to hell with as many credit-cards you need to become without any glance of hope and prosperity, a tunnel without a light in sight. That’s why you become endangered species while anyone has the right to live free anyhow, despite the wolves of greed are hunting for your money, all what you have and more, more, more… It is the man-hunt that has to be stopped and we call that “regulation”.
    It will remarkably bring suicide-numbers down, or with other words: it will save American lives and that is a duty of every President and his/her administration.

  47. Wow, Russ. Thanks for adding absolutely nothing to conversation/article and tossing out another “dime-a-dozen” rant about how politicians that don’t agree with you suck.

    How about addressing the issues being discussed here, instead of acting exactly like the politicians you’re labeling?

  48. Simon,

    I hope you are tracking these old threads, I couldn’t locate another easy to find, Contact Us.

    The House version of this proposal has been put forward. http://www.govtrack.us/congress/bill.xpd?bill=h111-5159
    H.R. 5159: Safe, Accountable, Fair, and Efficient Banking Act of 2010

  49. How do I find out who voted for and against Brown-Kaufman SAFE banking act?