By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown. This post also appears on pbs.org/needtoknow – as part of that new TV program’s coverage of the week’s issues.
There is widespread agreement that the financial crisis which broke out in September 2008 was our most severe in over 50 years. There is also a consensus that, whatever other factors may have been involved, the excessive risk-taking and general mismanagement of huge banks at the center of our economy played a significant role in what happened. (Yes, of course the largest banks themselves deny any responsibility – including most recently using insulting language.)
The financial reform package now on the Senate floor puts surprisingly little constraint on the activities of our largest banks going forward – preferring instead to defer to regulators to tweak the rules down the road (despite the fact that this approach has gone badly over the past 20-30 years).
A growing number of senators insist we should do more to reduce the size and limit the leverage of megabanks (i.e., the amount that banks can borrow), arguing that this would constitute an important additional failsafe – on top of all other efforts to establish “more effective regulation”.
Senator Ted Kaufman (D, DE) has led the charge on this issue, pounding away for months – and giving another powerful speech on the floor of the Senate yesterday.
Yet, astonishingly, it seems increasingly likely there will be no real Senate debate on this issue.
A real debate, in the modern American system, needs a vote on something specific – in this case, an amendment to the main legislation. And Senator Kaufman, with Senator Sherrod Brown (D, OH), to that end has proposed the SAFE Banking Act – with meaningful size and leverage caps – which is ideally suited as a way for senators to show whether or not they support the continued existence of our largest banks in their current (very dangerous) form.
Kaufman has directly taken on and rebutted all the arguments put forward by proponents of big banks – such as Larry Summers of the White House and Hal Scott of Harvard Law School. Kaufman has the facts and most sensible opinion on his side, including the literature summarized in our book (13 Bankers, which he cited yesterday), and other voices (also quoted in his speech yesterday):
- Mervyn King, governor of the Bank of England: “Banks who think they can do everything for everyone all over the world are a recipe for concentrating risk.”
- Alan Greenspan, formerly chair of the Federal Reserve Board: “For years the Federal Reserve had been concerned about the ever larger size of our financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution. A decade ago, citing such evidence, I noted that ‘megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail.’ Regrettably, we did little to address the problem.”
With such strong arguments and powerful evidence on its side, you might think that the completely reasonable and responsible proposals in the SAFE Banking Act would get a vote. But you would be wrong.
The Senate leadership – on both sides of the aisle – has apparently decided that they do not want to give senators (and the public) the opportunity to focus their attention on this key issue. Instead, they would prefer to keep the “debate”, in terms of votes, on issues less likely to infuriate powerful banks.
Our democracy allows great freedom of discussion – and it is encouraging that someone as prominent as Senator Kaufman can take on (and trounce) the biggest banks on the merits of the case.
But how much is this freedom worth if the political power of the megabanks – based on campaign contributions, lobbying efforts, and more general ideological control – can effectively prevent an up-or-down vote in the US Senate on the most pressing issue of financial reform?
This is, of course, partly about the political power of corporations. But corporations are, in this sense, merely a veil – this is really all about which people have what kind of power in our society. To what extent are we really still a democracy – and how far have we already slipped down the road to oligarchy?
The Baseline Scenario 
Financial influence of our lawmakers will continue to be our greatest threat. We need public financing of campaigns in order to assure a democracy and legislation written by the American people and for the American people. Resistant groups are organizing and coming together. The revolution will be completed at the voting booth.
When the subject has refused allegience, and the officer has resigned his office, then the revolution is accomplished.
Henry David Thoreau
This situation will continue until we implement:
– Term limits for elected officials: 6 years for Congress, 12 years for Senate
– Only allow federal campaign donations from American citizens with a max of $5000 per person per election year per candidate; corporations and groups are specifically excluded from donating
– All gifts worth more than $25 must be refused by elected officials
– Prohibit candidates from announcing candidacy before January 1 of the election year
Fascinating. Thanks Simon.
Two links to the book possibly a little much though…
Great idea.
Add any former member of Congress/and or staff cannot become a lobbyist for 5 years.
So we vote the bums out. When the next set of legislators still takes the side of the big banks, we vote them out. We, as voters, continue to do so until Congress gets the message that we are not a bunch of bumbling idiots.
We can read charts and follow informative web sites. We understand that our income has been flat for 10 years while the top 1% of earners have seen their incomes soar. It looks like it will take a while to enact change. When the policy makers will not even address the real issues, we need new policy makers.
Obama had the ideal opportunity to be effective when the banks were weak to facilitate change but instead – he went for business as usual.
As long as the same people: Rubin, Summers, Dodd, Emanuel etc. are at the center of the process – I see no hope for real change. I saw hope once, when the crisis first hit, but TPTB were so focused on their health care bill, they could not see that the damage to the economy should have been addressed first.
Many say they wanted the health bill first to insure a stream of revenue for the next few years. Maybe so – but how does that help small business, employment?
It is time to focus on November.
You may not be able to control or prevent many of the events that are taking place, but you can control your response to them.
http://www.weeklystandard.com/articles/american-oligarchy
American Oligarchy – Don’t expect real reform from the Wall Street Democrats
Yes. This is fundamentally a political problem. But concentrated economic power will always find a way to influence politicians so we need to limit bank size as well.
Make banking boring don’t allow bankers to risk our money and hold the economy hostage
Restore government integrity don’t allow industry to co-opt our representatives
Politicians love really big banks because mega-banks are significantly more efficient and have a much lower cost…of raising contributions.
A senator would need to visit tens or hundreds of medium-sized banks to get the same amount of campaign contributions that they get from one mega-bank.
And each additional backroom campaign contribution visit raises the risk of some unsavory details leaking out to the public.
No, it’s much better (for politicians) to keep mega-banks for the reasons of efficiency, lower costs and lower transparency.
Good one.
The financial reform package now on the Senate floor puts surprisingly little constraint on the activities of our largest banks going forward – preferring instead to defer to regulators to tweak the rules down the road (despite the fact that this approach has gone badly over the past 20-30 years).
It’s simple, despicable, legislative fraud.
After this latest affront, is there still anyone so shameless or impervious to evidence that he’d still claim or hope the Democrats aren’t every bit as corrupt and treasonous as the Republicans?
By now anyone who still reposes any faith in either Washington party is part of the problem. He’s on the side of the gangsters.
Excellent point.
Have the Boards’ of Directors for the “failed and bailed” testified? Criminal penalties should influence behavior.
Reminiscent of “Either you’re with us or you’re against us.”
With Freedom, comes Responsibility. So far, the Senate hearings have produced mostly denials and passing the blame “to the next guy” (testimonies from Robert Rubin and Alan Greenspan in particular).
From “13 Bankers”, p 71 “Reagan made deregulation an ideological crusade.” Perhaps Reagan (and from memory) didn’t directly deregulate the financial sector but his administration laid the foundation that made it easier by the time Bill Clinton came into office (famously asking, are you better off than you were four years ago?). The book “13 Bankers” compliments this blog and visa versa so keep repeating it, and often! (Buy the book or get out of the booth)
You could add Aidar Turner from the FSA to your list
http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2010/0409_at.shtml
I trust there is also the ‘lobbying’ of the central
bankers, even those who fell asleep at the wheel
when it comes to regulation and oversight of the
banks
On this theme of this other oligarchy, this interesting article:
‘Secretive Group of International Bankers to form a World Governmnent ?’
http://www.globalresearch.ca/index.php?context=va&aid=18940
referring to a very strange speech given by
Mr Trichet April, 26 ( following the IMF annual gathering ) in front of the Council of Foreign Relations in New York: ‘Global Governance today’, showing up on the site of the B.I.S, instead of the ECB’s, another oddity
Click to access r100428b.pdf
Let’s put this in the true perspective. This is not a partisan problem. This is a bi-partisan problem. Wall Street owns the Republicans as well. And whatever party is in power that is where the Wall Street money flows. You don’t see any republican demanding or supporting real meaningful financial reform. Come on now, we all know the Weekly Standard is a partisan magazine.
The real problem is our political electoral systems as become a multi-billion dollar business. And with the deregulation of our capitalism system over the last 35 years, it has created a oligarchy system where giant multi-transcontiental corporations and “banks to large to fail” have taken over the government. It is not that government is bad, it is the money that control government that is bad.
The real solution is public financing reforms with limited spending caps on individual candidates and spending caps on the political parties themselves. And add in a certain amount of free television time. Our political electoral process should not be in the business of making money because it completely deviates away from the democratic process set forth by our founding fathers. But good luck trying to find a Congress that would ever be bold enough to make these kind of changes.
President Obama and Health Secretary Kathleen Sebelius are said to be “members” of the Bilderberg Group:
“The Council On Foreign Relations comprises of influential elitists and powerbrokers from all sectors of government, business, academia and the media. It is the public face of the more secretive Bilderberg Group”
Perhaps it is really never too late to admit that some cancers are terminal.
What is truly astonishing to me is that in this venerable economists’ post there is not one mention of excessive credit or loose monetary policy. Amazing.
Increasingly it sounds like we may be doomed to have back-to-back meltdowns before meaningful reforms can be implemented. It appears that 2010 is going to be remembered as the last clear chance to avert catastrophe. So how are the baselinescenario followers changing their investment strategies and preparing for the worst?
A few additions you could think about:
-Limiting how many years a lobbyist can work on the hill to 2 years, with a minimum 12 year gap between 2 year terms. We don’t want lobbyists having more experience than the lawmakers.
-PAC’s must disclose all contributors, and must have a link listing all of those contributors in all advertisements. If we require such things for a ballot initiative, which influences laws, same should go for commercials and ads, which also can directly affect laws and initiatives.
If we want any kind of political change in this country, it is going to have to start by people paying attention to the primaries. Incumbents are almost unbeatable in the general elections and the only way to defeat them is in the primaries.
Sadly, the “divide and conquer” tactics of partisan politics keeps the American people from uniting in any meaningful way. Imagine, for example, if a couple million California republicans registered democrat for the primary, for the sole purpose of defeating Barbara Boxer. One corrupt incumbent would be sent to pasture in a humilliating primary defeat.
Of course, this would mean the dems would have to field a candidate the repubs could at least stomach, and that would require common sense over ideology, which is why it will probably never happen. Which is unfortunate because, if you follow this through to its logical conclusion, what you would end up with are many races pitting a moderate of the incumbent party up against an ideologue of the opposing party.
However we go about it, we need to get rid of the corrupt incumbents if we ever want to see any kind of meaningful change. The government we have now is totally subservient to the oligarchy, nothing we can do will ever change the culture of corruption among incumbent politicians. Our only hope is to replace them, and not with the handpicked whores that the major parties hand us.
Worrying lurch leftwards on this blog over the past few weeks. From being a useful and always almost interesting resource it appears that you chaps might be the ones with the pitchforks. TBTF is a genie that can’t be put back in the bottle. The real and solvable problem is what happens when they fail and where the money comes from to pay for that. Breaking up the banks is a bizarre, impractical, sensationalist and unhelpful agena. Disappointed by what was a terribly written book and disappointed by the populist claptrap being bandied around here lately.
As soon as Public financing is passed your right wing pro corporate supreme court will call it unconstitutional.
Yeah, lots of lefties on this blog. The kind that keep the financial analysts and brokers driving bimmers and porsches. These ‘idiots’ are probably your best friends and their ‘claptrap’ is probably bad for your business.
I agree. It might be as simple as reverting back to 1980 laws governing banks and Wall Street. And add a $100 billion cap on commercial bank size.
Reagan is revered as a god by Republicans and many Libertarians. The two video snippets most often seen on Faux News and their ilk are the “Government is the problem” and “Tear down this wall” speeches. The former is used as the model for “reform” and the latter is used to reinforce the other, i.e. Reagan was a god in every way. Faux News constantly repeats the lie that Reagan won the Cold War, when in truth Gorbachev lost it. Reagan was a player, to be sure, but so was the Pope. See my blog entry “Reagan’s conquest and other fairy tales” and the many updates. http://saucymugwump.blogspot.com/2009/05/reagans-conquest-and-other-fairy-tales.html
http://ftalphaville.ft.com/blog/2010/04/30/217381/we-are-wall-street-we-are-smarter-and-more-vicious-than-dinosaurs/
Go back to CNBC if you do not like it here.
13 Bankers was as well-written as any of the other economic books. I doubt if you even read it. It is a hard read for those of us not in the business, but that’s true of many books.
No genie is too big to be forced back into the bottle. All it would take is a president willing to shut-down the government, i.e. tell Congress that the next bill he will sign is TBTF/Glass-Steagall/etc.
Mr. President, take down this WALL
street!
These BANKSTERS and Wall Street need to be forced to make the US Citizens WHOLE !
Noone disagrees that reform is needed, people inside the industry more than anyone if they are honest with themselves. But honestly the extent to which it’s turning into a witch hunt now is silly. It’s all very well saying “pass this, pass that”, but how, in practical step by step terms are you going to break up the big banks? Tell me that and I’ll listen and apologise. (tip: don’t just say “pass Glass-Steagall II”). On the other hand there are lots of relatively easy, practical, regulatory fixes that can be used to get the industry under control, make it safer, and cheaper to fix when something does go wrong. Banking is a unique business, it needs different rules from every other industry, not persecution.
The book is hard to read because it’s boring and badly written, not because it’s “about economics”, which it isn’t anyway. Plenty of well-written finance books out there which are plenty engaging to read cover to cover.
Senator Kaufman has not signed on to Senator Sanders’ Audit the Fed amendment. Where is he on that?
Economy of scale.
Without addressing the primary issue — purchase of Access Rights via private control of the election process — there is no hope of escaping the Oligarchy. Fundamentally, there is no valid reason for any elected official to spend one minute soliciting funds. They’re supposed to be working for us, not begging for money. So: public financing of elections, open access to public communications via public-owned airwaves, and a real no-lobbying rule for present and former staffers. For a start…
Not going to happen, never was. Obama is running interference in Senate for centrist Dems. The only way, unfortunately, this will happen is for the people to perceive BOTH parties as beholden to Wall Street. Maybe then, something can happen.
Sheila bair’s letter on not selling off derivative trading was disappointing, as well. She wants the taxpayer to backstop 70T in trades for which she KNOWS the banks can’t. Her argument didn’t work for me.
Bloomberg v. Fed: I wouldn’t doubt if the Senate put in an amendment to address the Bloomberg lawsuit in the Fed’s favor. That’s how corrupt I think the Senate has become.
I remain in Black Swan mode and focus on asset preservation, 90% in short-term government/corporate fixed-income, the rest I’ve hedged using risk capital and shorted emerging markets and oil. I figure it will take a couple of years for some of the smoke to clear. I don’t expect most pension funds will be able to achieve historical investment targets anytime soon. The Chinese commercial real estate bubble could play a significant role in the next collapse, causing major trading partners in Europe further grief. My 2-cents.
Term limits make the problem worse.
Term limits, as we’ve seen in all states that have adopted them, have made capture of legislatures by industry lobbyists easier rather than harder. They encourage a revolving door between industry and the legislatures and make it impossible to have career legislators who advocate for the good of the public.
Croak!
Um, so we vote the moderately pro-bank Democrats out in favor of the rabidly pro-bank Republicans. I don’t think that’s going to work out.
Called it.
Croak!
Black Swan mode—That’s a good one(LMAO) I am also playing it ultra-safe. The names I trust and respect have basically said it’s crazy to be in the market now. If I were in the Eurozone, I’d be buying gold like crazy as of a several months ago. As it is, I’ll have to court treasuries and console myself with spirits. When I want a shot of doom and gloom btw, I go to Nouriel Roubini or Max Keiser. Simon and James are sunshine and clear skies by comparison.
This really blows one away. Talk about screwing the public!!!!
Should BP give up on trying to fix the hole in the bottom of the sea that’s spewing black death into the Ocean because it’s extremely difficult and expensive to pull off? This Financial Crisis is pretty much the greatest natural disaster ever unleashed. The Collapse of Lehman was the Deep Horizon toppling into the sea and the obstructionism on Capitol Hill is equivalent to just sitting on the shore and sipping mohitos while waiting for the slick to devastate the shore.
It would seem that the oligarchy has no qualms whatsoever about hanging Civilization as we know it over the Abyss of financial ruin by its ankles, I’m starting to think that sky’s the limit on what these people are willing and capable of doing. 9/11 conspiracies aside, there has been nothing at all in the MSM or on blogs that I have seen yet that connects what is going on in Wall Street to what is going on with the Military Industrial Complex. ‘Cause if Wall Street has captured Washington…then Wall Street also calls the shots with the Military. It astounds me the degree to which “observers” are treating this like just another speed bump in the forward march of capitalism and progress.. This is a runaway train! Cue the AC/DC!
Another amazing thing is that the Truth is out there!! Wall Street, the pharmaceutical industry, the Media (including Hollywood and Big Sports) and the Computer/Internet Collosi are squeezing competition out of every nook and cranny and doing so by every means available, but mostly by sticking to the tried and true weapon of choice…fraud. And if it continues unabatted all that will be left of America are “Corporations” or should we just call them “Entities”, that produce mindless entertainment and pharmaceuticals… If the American Dream is to allow Googaplesoft Procter and Sachs to produce a drugged-up citizenry that sits in rundown post-foreclosed homes and stares at tablets, waving their fingers to bring on the next dose of neural cyber-candy…well you’re on the right track.
So yeah the Genie is out of the bottle all right and it will be exceedingly difficult to put it back. And it might very well take the destruction of the current System of the World to do it. From what I’ve been reading online (Naked Capitalism, Zero Hedge, Baseline Scenario, Big Picture, etc..etc..) and elsewhere, the American system in all its aspects is so rife with fraud and corruption that only a crippling political crisis followed by a massive market meltdown and some form of benevolent Regency will get things back to something resembling the founding fathers’ concept of a right to the enjoyment of life, liberty and the pursuit of happiness…
Wall Street’s Marie Antoinette moment is near at hand. And when it comes it will suck to be them. Or so we hope.
Are we way down the road of oligarchy? I was taught, even in high school political science, that the US has always been an oligarchy we called ” the establishment”. A very flexible oligarchic arrangement that provided the elasticity to surmount negative change. It got really interesting in college where I had a professor who was an ex Oberst in the German Army who really made the case about oligarchy. It is all about control of wealth and it’s use to enhance your own groups power over that wealth and your own power within that group. The result is your own personal wealth is protected so long as that messy, very messy, association described as an oligarchy is held together. Successful oligarchs understand the need to deceive the populace. Oligarchs that survive understand that oligarchy is an association of strong individuals.
It seems to me that survival of a culture ridden with activist views that result in near total polarization pose great dangers for oligarchies. That without a long term successful oligarchic arrangement, the society will fall apart. Societies with serially failed oligarchies will collapse to states where a successful oligarchy emerges.
What better place to study the architecture of Anglo Saxon oligarchic ideas than the Federalist itself. The first item providing safety for any association of ruling cliques is that there be a place for all within the pecking order of the society.
Just who are these bums in the present pecking order of the financial oligarchy? Bluntly, they are avaricious yuppies who are mostly from a middle class background. They were challengers to the old oligarchs they drove out. Now, these same people have obviously overstepped their abilities with the resulting chaos that is emerging. In the end, their self deceptions did them in. Overconfidence and being unable to look squarely at their own deficiencies before the fact. Groups that rule, stay rulers until they fatally self deceive themselves. This time, their own fantasies did them in. To me this was demonstrated in September 2008. They let ideology nearly do them in. They were unable to change views instantly on changed circumstances. This however is a survival test set of decisions. Oligarchies must consistently anticipate danger to their survival far better than the current oligarchs do. After all, the financial system dangers are first and foremost dangers to the oligarchy itself. They were careless, the worst crime of all.
May 4, 2010: 12:21 PM
NEW YORK (CNNMoney.com) — “The past two years of recession have been “difficult,” but “the storm is receding,” President Obama said in a speech to private-sector business leaders Tuesday.”
http://tinyurl.com/32pef6f
5/04/2010 – Calculated Risk
Personal Bankruptcy Filings Up 15% Compared to April 2009
http://www.calculatedriskblog.com/
Maybe we’re just in the eye of the storm?
I agree that it’s a fake debate. The financial regulatory reform is a facade and it’ll actually set up a permanent bailout fund for the big banks. Obama is a Wall Street buddy.
The bill will pass because everyone’s favorite billionaire is defending Goldman Sachs!
Saucy,
1980 is pretty far back. I think Glass-Steagall was repealed in 1998. Anyway, its unlikely that we “go back” to laws of any early point in time. We just need to just enact the right reforms.
Also, any fixed cap is problematical. A percentage of GDP (as suggested by Simon) is much more workable.
“Self deceptions did them in.”
You mean like “Good job! Brownie?”
Check the date on this article. When I read this article in real time, I grew very concerned, because I genuinely liked Obama but genuinely knew banking was wiping the country out. This article and his position in opposition to a high 30% cap for credit cards worried me.
http://nymag.com/news/politics/30634/
Pete,
Even if you work on Wall Street — I dare say *especially* if you work on Wall Street — you should be angry and concerned. Wall Street’s greed has destroyed its reputation as much as the Iraq war destroyed America’s reputation. How do we address that? A slap on the wrist and a few new regulations?
Wall Street has grown to be a big percentage of the economy. I think something like 40% of all profits. And most of that is concentrated in a few big banks.
With its over-arching success Wall Street political power has also grown to the point that it threatens our democracy – ensuring that Wall Street gets preferential treatment in all matters (like bailouts). Regulators are almost completely captured as are politicians. Among other things, Wall Street has evaded all attempts to regulate or control derivatives – the most lucrative part of its business.
Wall Street basically was free to do as it pleased, and the result: mountains of debt that can’t be paid, millions of homes that no one needs, and millions of people out of work. Yet Wall Street has felt little pain – despite being a prime mover. Instead we get denial (well, GS recently said that they “contributed”), obstruction, pointing fingers, and arrogance.
Wall Street now wants to shift blame – but that is ridiculous. Wall Street and Wall Street money is at the heart of all irresponsible actions:
1. Poor people and small-scale speculators responded to opportunities
2. Government regulators weren’t *totally* clueless, they were captured by Wall Street
3. Rating Agencies were also captured.
4. The Fed – also captured (by ideology, if nothing else)
In the boom times, everyone wanted Wall Street’s favor and the $$$ and connections that went with it. Many still do, and that makes it difficult to enact the proper reforms.
The fear of many is that meager reforms and an unchastised Wall Street will crash the economy again. How do you answer that?
PaulG
While I understand your sentiments, but it’s not about changing the players…It is about changing the game. Our form of government is damn near a perfect democracy with one gaping flaw, that negates the positives…that is the ability of special interest groups to rig the game. As long as we refuse to criminalize campaign contributions for the bribes they are, we’re screwed.
Imagine being a US Senator from a media heavy state, mostly urban. You will need to raise anywhere from thirty to forty million dollars to be competitive in a challenged race.
Where that amount of money is needed just to stay in place, you know who gets represented. Pick any two politicians, from anywhere on the spectrum, and you get the same result. The Business Roundtable trumps the AFL-CIO, hands down.
A “throw the bums out” strategy is no more than an employment program for new “bums”…Public financing of all federal campaigns is the only course of action left.
This infuriates me to no end! Everyone needs to flood the email acct @ Whitehouse. If enuf of us stay on it & demand reform, I believe it is still possible. Maybe we also need to flood email acct of our state rep’s too & let them know we’ll vote em’ out if they don’t pass meaningful reform in the Senate. This will invalidate any campaign $$$ they do get. I’m mad as hell about this and I had a feeling this was going to be another whitewash. Our congress sucks, is broken, because it’s not WE the People, BY the People running government!!!
Of course whatever the government trumps up is about as reliable as the ratings. Thanks to creative accounting we don’t really know how many more Enrons or hopeless banks there are.
Roubini is saying the eurozone’s days are numbered. If so, this will have dire consequences for any so-called (anemic at best)’recovery.’ Talk of the China bubble collapse is the final nail. Cheers.
Simon,
It’s time to acknowledge that the debate is not about doing the intelligent thing, which would take reflection and dialogue driven by valid information and free choice. Instead, it’s about wanting to win and avoid losing and all the shenanigans that go along with this model.
The dominance of the “want to win and avoid losing model” at all levels of government, including the Fed, and the corporate and private sectors is what created the mess in the first place.
Read your own book carefully and you’ll get all the confirmation you need.
Given front running, central bank market manipulation and so-called plunge protection teams why anyone would entrust even one unit of currency to these low rent ho’s is a complete and total mystery to me.
Financial reform is not as complicated as our political leaders are making it out to be. Then again, they are politicians and have no understanding whatsoever of business or economics. Financial reform would not entail capping the size of financial institutions, breaking up large banks, etc. After all, this is America, and I don’t think any business owner, whether it be a sole proprietor or a shareholder of a corporation, should be told by the government that their business is too profitable or too big and must be broken up. That is a freedom I don’t think any of us would be willing to give up.
Although most politicians believe our nation’s largest banks are too big, very few of them examine why or how they came to be this way. They ignore the rules and regulations (and there are countless regulations for banks and financial institutions despite Washington and the media cheerleaders saying that there aren’t enough) passed in Washington that not only helped cause this financial disaster, but that made these banks big in the first place, rules and regulations that over time forced smaller banks out of business, completely limited their ability to compete with larger banks, or prevented them from even coming into existence due to the cost of compliance. Since compliance costs are much more easily absorbed by larger banks, they act as a retardant to entry and expansion for smaller banks. I agree that banks like Bank of America and Chase are too big. But the best and most efficient manner to limit their size is to unleash competition on them. The single most important financial reform would be to eliminate the fractional reserve banking system that enables banks to create credit on their demand deposits, which the Fed ultimately enables by providing liquidity via its discount window or by increasing bank reserves so that banks can more easily borrow funds from each other to cover the shortfalls that occur when depositors withdrawal their money. Fractional reserve banking is highly inflationary, and the engine that keeps the party going is the Federal Reserve’s ability to print money with the stroke of a keypad. Credit can only come from legitimate savings and should not be created on balances due to depositors at any time since the money supply ultimately ends up increasing as a result, which acts to lower the purchasing power of dollars already in existence and create economic distortions. Without fractional reserve banking, there would be no need for a central bank, and we could return to a 100% gold standard, which would give our currency intrinsic value (due to the fact that it would be redeemable for gold) and create stability since its value would no longer be subjective. This would promote competition and strengthen our banking system. No longer would banking be an industry that is dependent on non-free market forces like the Fed in order to expand. Interest rates would be set by the market based on the supply and demand for capital, not a small group of lousy economists who think they know better than the market. Banks would ultimately compete on the quality of their loans and the interest rates they offer on savings accounts, which would make room for even the smallest bank to compete against the largest one.
Mark-To-Fantasy Accounting?
I finally got the time to read “13 Bankers.” Great stuff and I loved all of it.
Not to be picky, however, I thought you didn’t end with a strong enough “call to action.” But the book was very readable and informative plus.
I think the President should stand aside and let the pitchforks loose!! Better he grab one himself.
Markovich wrote:
“Check the date on this article. When I read this article in real time, I grew very concerned,”
It’s good you noticed the time, it is always important…. Grasshopper. :-)
beezer wrote”
“I think the President should stand aside and let the pitchforks loose!!”
I agree beezer, we will fight in the shade of the pitchforks.
Any accounting mark is only a bookkeeping entry. An unrealized loss or gain. Most of the real hits inside banking itself involving their direct and indirect holdings of sub prime bottom level tranches involve impairment write downs. For example, a bank may hold the bottom tranche of a MBS that receives the bottom cash flow. Say, that tranch is 5 % of gross asset value requiring 5 % of gross possible cash flow to collect the interest and principle of the assets of that tranche. Assume gross cash flow is reduced to 92 %. Since that 8 % loss of cash flow exceeds 5 %, no part of the bottom tranche is receiving cash flow. That means that the tranche is totally impaired and must be written off. This is not mark to market but a collection valuation. The tranche is still owned and may collect funds in the future. The actual final result has nothing to do with the impairment entry on the books but has everything to do with what collections are received until the entire security cash flow is exhausted by pay off of the security. That happens when the contract is fulfilled or the foreclosed property is sold and the proceeds included in gross collections.
The write off is only tied to the tranche cash flow. Now, given how poor the bottom tranche is, the price paid would be a discount from the 5 % cash flow participation. Let’s say the price actually paid was equal to 1.5 % of the total cash flow to keep it simple. The 3.5 % reduction in purchase price from gross total cash flow of 5% is a yield increase for risk.
As you can see in this very simple example, the tranche is still worthless. But , the investor here is cunning and knows the angles. The investor buys gross total CDS contract coverage of the tranche for a quarter point a year of gross cash flow of the tranche over 30 years.
The tranche is worthless by itself but yields the full 5 % of total cashg flow of the entire MBS security over 30 years. The smart guy paid in say 1 % until the whole thing collapsed. Thus , smart guy investor paid in 2.5 % to receive the full 5 percent he would have received over 30 years. He got it all in three years not 30.
So, while the tranche has an impairment write off, his CDS yielded him a current fortune and he still owns the tranche. Who knows, it might yield something.
Very, very simplified here to point out a bookkeeping entry is just that and has nothing to do with actual disposition of the asset subject to the bookkeeping entry.
Mark to market is plain potential bunkum. First, the mark to market is in a panic market. Secondly, most financial companies have marked to market on the same day or a month or two apart. If all sold on the day marked to market, the real sale value would likely be zero. The assumption is an orderly sale at the market value marked to subject to long term liquidation. In short, one must have a deep appreciation of the market marked to, to understand the financial statements involved.
SO far as I can figure out given the opacity, the bulk of the write down potentials inside big banks involves impairments. That is they either can theoretically collect the cash flow of the tranches they own or they cannot as of the measurement date for impairments. If the big banks did not write off an impaired asset to recoverable value there is accounting fraud involved. Of course, the offsetting CDS protection would go the other way. Then, you have an impairment measurement about collecting the booked CDS contract receivable. This is why AIG was rescued. Without the AIG resue the big players would not have a bookable hedge covering the mortgage tranches they own.
Without the AIG rescue, Jamie Dimon’s fear that even GS would go down in September 2008 would have happened.
Links to info that backs up your claims? I’m not saying they’re necessarily incorrect – I’d just like to view some studies.
“…as we’ve seen in all states that have adopted them…”
All states?
Again, cite sources for this info so I can look at it to make a determination for myself.
Thanks. Really appreciate it.
I wish I had them. I’ve lived in three states with term limits (California, Oregon, and Washington), and this is what I’ve observed. I’ll talk to some people & try to get you some cites tonight.
belly laugh :)
Yo Simon,
I sent you a bumper sticker to your Cambridge office that says “Trust me I’m a banker”
“The Big Secret, of course, is that every living creature within a 100-mile radius of Cooper Union would fail [Obama’s faux call for] ‘scrutiny’–or that scrutiny, or any scrutiny, period. Not just in a 100-mile radius, but wherever there are still signs of economic life beating in these 50 United States, the mere whiff of scrutiny would work like nerve gas on what’s left of the economy. Because in the 21st century, fraud is as American as baseball, apple pie and Chevrolet Volts–fraud’s all we got left, Doc. Scare off the fraud with Obama’s ‘scrutiny,’ and the entire pyramid scheme collapses in a heap of smoldering savings accounts.”
From:
Confessions Of A Wall St. Nihilist: Forget About Goldman Sachs, Our Entire Economy Is Built On Fraud
by Mark Ames
April 30, 2010
Acquainted with “Deep Capture”? Obviously not. Because if you were, you’d know…you’re suggesting band aids (to make it look like something’s being “done”) for a terminally ill patient.
Bless your heart, Pete, but…laughable.
Can’t possibly take you seriously, you are so in denial.
Those making the rules don’t allow anything they don’t like to be discussed. Same thing as in health care. They are really entrenched!
Simon, I knew that the screw would turn in this direction (the direction the screw turns as an elitist is backing his yacht into its berth. Lets face it. It will, in fact, take an actual revolution to cause change (as Obama said) that we can believe in. Otherwise it will go on being the plutocracy as usual. The oil spill is a perfect example. BP is working very hard right now to minimize the risk/damage, but this event will definitely (after all is said and done) have an extremely long lasting effect on a substantial portion of the economies of Louisiana, Mississippi, Alabama, and Florida. BP will not be asked to make up for that, and the tax payers will have to go it alone. Worse than that, unlike the financial crisis, the taxpayers had nothing whatsoever to do with this issue. On Wall Street, the coffers are full, campaigns are coming, and in a 1700 to 2000 page financial reform bill there will be enough positive talking points for both parties to make it seem serious. Remember that, while the average taxpayer is perhaps just a tad more savvy than they were two years ago regarding what Wall Street does and has done and continues to do, but they find most of it confusing such that a majority rely on soundbites on their favorite “polarized” news outlet, to educate them. They are not bankers, not economists, not educated about such things (one true shortfall of our base level education in the country), and, quite frankly have the attention span and curiousity quotient of efts. I don’t mean to demean the populace, but I would guess that about 30% have enough background to get into the financial weeds and dig out answers, and only maybe a quarter of those have enough motivation and interest to do it (which means, by my estimate, perhaps 10% are “up” on things enough), and even fewer are truly motivated to actually call or write the congressman or senator (maybe less and 1% of the populace). TV, in our age, has astutely trained a generation of sheep who accept anyone, with any credential speaking on any TV channel, as being expert in both their opinions and their recommendations. We are dealing with the spoiled and brainwashed American culture here. Most Europeans I know think that the majority of our citizens just don’t live in the real world, and if one just glances at the Neilson ratings for popular shows, this is borne out in spades. It’s sad but true, and is the reason why we have a plutocratic nexis between government and corporate America that is now just as strong as ever. It is hard to imagine, with all of the books that have been published which criticize, and even berate, the corporation supremacy in nearly every area of entrepreneurial endeavor, that so few read and heed what is published, and that so many prefer just to go on with life like theirs nothing they can do about it. This is the way in which America will fall, and why people should be making certain that their kids learn Hindi and Mandarin.
“Breaking up the banks is a bizarre, impractical, sensationalist and unhelpful agena.”
Well then, how about nationalization?
Fake Debate:
Why would this situation be any different than say, invading Iraq? Or invading Grenada?
The US has happily lived in a fantasy world for so long it doesn’t want to know what is real.
And you don’t live in a democracy, you live in a republic. Your founding fathers took great pains to ensure this, so you would do well to understand the difference. Perhaps that confusion is how your republic’s principles became so compromised.
I’m going to avoid responding to the first part of your post because it’s all opinion rather than evidence, and I am not US-based so I cannot specifically comment on the extent to which US regulators and legislators were “captured” by Wall Street, but what I will say is this. Reforms should not be meagre. That much is clear. They need to be effective and wide ranging. However there needs to be acceptance of the fact that unless you want to completely overhaul the fiat money system (which the fringe-lunatic Zerohedge reading crowd will advocate) the banking system is going to threaten the economy again many times. That’s simply due to the fact that it’s the only industry that employs these levels of leverage and is always susceptible to a banking run. But do not fool yourselves, the last 2 years was almost completely down to exceptionally poor asset creation. Most of the regulation that I have so far seen would do little if anything to prevent a recurrence of that.
Derivative reform is a total red herring insofar as it goes beyond central clearing. Clearing is a “good thing” (TM) in almost every way – it reduces systemic risk, simplifies the financial stratosphere and makes the closing down of failed institutions far easier. What does exchange trading of most of these customised products achieve? Nothing nearly as important as that. Just one example of where the populist claptrap is being allowed to run way ahead of the practical recommendations of people that understand markets and client needs.
Well… OK then. But I don’t think that’s what America was built upon. I don’t particularly have any objection though, as I noted above I am not US-based.
“(Yes, of course the largest banks themselves deny any responsibility – including most recently using insulting language.)”
It’s not just insulting language, it’s the undisguised rage. Very unprofessional, shockingly so.
I think they’re losing it. Somebody take the keys to the building. (We bought it, after all).
Forget Congress for a minute–everyone should read that Chase .pdf
Honestly, I know we are on the internet, so a certain amount of stupidity is expected, but posting clips from blogs or rants written by the lunatic fringe doesn’t really help your argument.
Re: @ Wyndtunnel____Really Nice!…WOW!!!
As I said sometime in the last year, regulation will never happen. Congress is too slow and too connected (not sure if I said the last part to you, but I did to others.) Even if there is ever a bill, the bill will be either be too big and will be able to be taken apart by any 2nd year law student, no ribbing intended just a phrase,or not worth the paper it is written on. Teddy Roosevelt is rolling in his grave.
There are other mergers out there that I am watching and wondering if they will happen in communications and air (I am sure they will).
What I am really waiting for, is banks to start pointing at governments, with Greece, Portugal, Spain, etc. to counter with look to your our house of cards.
For those who are rattleing your spears or pitchforks, how many of you are willing to run for office to change things? I can at least say I am an appointed Town Planning Commissioner. I would love to run for The House, but my stance on a few issues right now will not get me elected in what was my party and I do not think a non-religious, Centrist who feels most if not all social issues are up to the consenting adult or adults, will get me elected in my rather socially conservative part of the Mid-west. But, I am looking for people who I feel will do a good job and can get elected and then backing them.
This is the real revolution — become involved in politics and show the World that US Democracy still works.
Brenda Vinall-Mogel
Re: @ Pete D____You Sir, have been walking through the forest with blinder’s on! Breaking up the “Big Banks” will be of their own doing,period. I’d say the “Trap” is being laid as I write – “This Self Fulfilling Prophesy” so to say,that will inevitably happen. The clarity couldn’t be clearer regarding the US Government’s implicit, “Call to Arms” ,too stand-down. They,us…will not be there,”In the Near Years too Follow”,and most importantly be able (even if they,we could) bail out these mutated “Gross (The Pituitary Gland on Steroid’s) Gigantic Freaks of the Financial World” now walking on a,”Highly Volatile Thermal Heated Skating Rink” that says to the gullible, “All is Safe”? Finally,what “13 Bankers” espoused, is its unique residual value as a timely reference too ” Contemporary Common Sense”!
Pete D
Thanks for the thoughtful response. I understand that you are for reform. Thats good. But technical reforms are not enough because the fundamental problem is the capture. The Financial Services industry is not alone in their efforts to capture regulators and influence politicians – they are simply the best at it (in large part because they make the most profit).
I don’t understand how you can make the astute observations that you do, yet be so naive. It strikes me as likely that you are just playing with us. The way you dismiss the regulatory capture issue is just plain idiocy. You don’t want to think about the implications of regulatory capture because you live overseas? Do you live in a magical place where that sort of thing is impossible?
In 2004 the FBI warned about mortgage fraud and the Fed talked about a possible bubble. Many in the industry already knew that the housing market was overheating and there were independent observers that spoke out as well. The industry ignored all warnings out of pure greed. Why? Because their was no effective control and no expectation of accountability.
So, they sold AAA bonds that became junk in a matter of months. Not one or two but *dozens* of bonds worth hundreds of billions of dollars. And when it all blew up, the entire industry got a free pass: how many risk managers, directors and ceo’s where forced to resign?
nice story? If you cant see the bright side of life, polish the dull side,