Antitrust For Banks? Ask Carl Shapiro

The Department of Justice seems to thinking, at least in principle, about potential antitrust action in and around banking.  Assistant Attorney General Christine Varney spoke about this yesterday, but her exact wording is open to interpretation, “”I have to ask if too big to fail is a failure of antitrust enforcement.”  (The press release was uninformative on this point)

More encouraging was the background briefing given to the New York Times, as seen in this paragraph,

“Ms. Varney is expected to say that the Obama administration will be guided by the view that it was a major mistake during the outset of the Great Depression to relax antitrust enforcement, only to try to catch up and become more vigorous later. She will say the mistake enabled many large companies to engage in pricing, wage and collusive practices that harmed consumers and took years to reverse.”

The thinking among antitrust experts has been that there is not much market power, conventionally defined, in financial services.  But this thinking may change, for at least three reasons.

  1. There is definitely less competition now in investment banking (no more Lehman or Bear Stearns).  Banks are bragging that their fees and trading profits will consequently be higher.
  2. Reportedly aggressive action by investment banks, vis-a-vis particular countries/securities, grab headlines.  One way to think about these alleged actions is an exercise of (socially destructive) market power.  Predatory practices are surely easier to get away with in a period of global confusion.
  3. Changes in fees for overdrafts are beginning to attract attention.  This may be a matter for bank regulators rather than antitrust, or even for a financial products consumer protection agency to be named later (remember Joe Stiglitz’s recent testimony), but it does make you ask: what is the market structure that allows banks to do this?

There is an awkwardness to these concerns, of course, because Phase II of Larry Summers’ Recovery Model calls for banks to earn their way back to reasonable capital levels.  Banks know they now have a high level of political cover and are likely to act accordingly.  If the Department of Justice moves towards banks, it will presumably be stalled by Treasury and others.

Still, the legal system has a dynamic of its own.  And Carl Shapiro, Deputy Assistant Attorney General for Economic Analysis, is completely capable of thinking clearly about our new (?) Too Big To Fail economy – e.g., start on p.108 of his book for ideas that begin to be more broadly relevant to the debate on finance today.  With some help, he and his DoJ colleagues can figure out how best to bring public policy to bear.

Post your suggestions for them here.

By Simon Johnson

83 thoughts on “Antitrust For Banks? Ask Carl Shapiro

  1. What is your first priority?

    At the root of my disagreement with Simon Johnson and James Kwak is a question of priority. I think the #1 priority is to turn around the economy as quickly as possible. Cleaning up our banks is “not necessary (or actually sufficient) for a rapid economic recovery”[Simon Johnson] (See note 1). In my view, we should turn around the economy first. The reworking of our financial system and the financial regulations is the second priority. If a house is on fire, put out the fire first and than worry about changes to the fire code and the code’s implementation!

    I am not suggesting we wait until the economy has fully recovered before we address the regulatory shortcomings and structural issues of the financial system. If the current improvement in the economy continues for another quarter, I’ll likely start supporting these efforts!

    Some people worry that we’ll forget and lose the will to affect change as things get better. Most people have suffered huge financial lost during this crisis. Employment recovery will also be long and gradual. Therefore, for many the pain is deep and the hardship will be long. It is very unlikely that people will forget this experience in a few years. I think we have time to do things right. More importantly, I feel very strongly that we should _take the time_ to do things right.

    Some people prefer exacting punishments on the banks and their shareholders. I think human suffering trumps vengeance any day.

    Some people worried about all the bailouts the banks get. Well, just take look at the total cost of this crisis in terms of reduced GDP, lost wages, wealth destruction and etc. We shouldn’t be penny wise and pound foolish.

    What is wrong with the efforts of Simon Johnson and James Kwak?

    We had Lehman failure in mid Sept 08. As a result of the Lehman shock, we’ve been in the deepest recession since the Great Depression. Since I started reading baselinescenario in mid Jan 09, SJ and JK has been pushing for preprivatization of banks, wiping out the investors, forcing bondholders to take losts, breaking the big banks apart, and generally threatening the banks’ survival. SJ and JK were pushing strongly to have these actions take place immediately. SJ and JK were very critical of Geithner for not following their suggestion.

    Do we really think the world can take another Lehman like shock any time in the last 6 months?

    Well here is one of many data points to consider. Larry Summer mentioned around March that the stock market, after correcting for inflation, has dropped to 1970s level! Or put it another way, people are predicting with their money that the world economy is heading toward the deepest and darkest abyss of our collective living memory! Should we shock the economy one more time just to make sure we do deep dive into the abyss?

    What really annoyed me about SJ and JK was given the huge potential negative consequence of their proposal; there was absolutely no serious analysis! It was all blind faith! It was just like Paulson’s handling of Lehman!

    Let’s also look at the impracticality of the efforts being pushed by SJ and JK. The hurdle faced by SJ and JK on their various proposals are:

    1. Legal limits
    2. Political limits
    3. Pro-cyclical proposals which exacerbate the crisis
    4. Higher total cost to society due to deeper recession and longer recovery
    5. Undermining the confidence of investors and the business community
    6. Undermining the public confidence of those working hard to turn the economy around (Treasury, Fed, and FDIC)
    7. Inconsistency with historical experience of financial crisis in US

    The evidences are overwhelming that nothing will get resolve quickly or efficiently with SJ and JK’s proposals. What would happen to the economy if the world had to deal with all these additional fear, uncertainty and doubt?

    Now let’s take a look at whose lives are SJ and JK messing around with. Who are the biggest shareholders in Citibank, BA, etc? The biggest investors are the ordinary folks with their retirement accounts and pension plans. Had we nationalized these banks, then these ordinary folks would have ride down with the market crash but will not get to ride back up during the recovery. This is when real serious wealth transfer happens! Also, should we really wag our righteous finger at the retiree whose retirement fund invested in some index fund that happens to include the financial sector? Please see note 2 further below for how pre-privatization can potentially play out. The article will give those seeking vengeance a hard smack on the head instead!

    At the root of my disagreement with SJ and JK is a question of priority. SJ and JK’s effort to rework our financial regulations and financial structure at the darkest hour of the crisis is about as productive as yelling at the firefighters about fire codes while the house fire is raging out of control. SJ and JK’s priority was completely whacked.

    Fortunately, the economy is improving thanks to the tour de force effort of the Fed, the Treasury, and the FDIC. In time, probably by September if the improvement continues, I will begin to switch focus to the regulation and structure of our financial system. Also, credit to the Obama team, they’ve already started preparing the groundwork for this effort.

    A few posts ago, Simon asked, “Is Everyone Confused yet?” I am not confused because my priority is crystal clear.

    What is your first priority?

    Note 1: Here is some reference information for those interested in why cleaning up our banks is not necessary or sufficient to economic recovery.

    Note 2: Here is one potential way pre-privatization can play out. Guess who has all the downside and who has all the upside in the end? Look at the description of IndyMac in middle of this article.

  2. How appropriate that the entries above were posted by “silly things” because the very very very lengthy reply was certainly silly.

    Without credit for business and individuals, there cannot be an economic turnaround. This may be the single most important aspect to correcting the problems that exist. Obviously, silly things has no need for credit.

    Simon and James, keep pressing to get financial institutions back on track.

    For additional insight see

  3. i think that bank size is a red herring. structure and compensation are much more important, as are enforcing current securities and fraud laws.

  4. I’m starting to agree with q. Can we see an analysis of what exactly caused the S&L crisis and whether there are any parallels with what’s happening now? As far as I’m aware, the benefit of having lots of 4 banks rather than one big bank is that if one fails it doesn’t bring down the system. The problem is we’re not looking at the wonderfully underpriced variable of “correlation.”

    If all banks have the exact same loan portfolio characteristics, having many small ones would be of no extra benefit, because they would be highly correlated and would all fail at the same time. As far as I’m aware (regular readers will know that I’m quite young, so I don’t know firsthand), this is what happened with the S&L crisis.

    Now there would obviously be some incremental benefit in that small local banks in states like Indiana (NYT article today) would have better loan books than those in states like California, but I think we’re all still undervaluing the effect correlation would have on the system. Financial market operators (and anyone who’s watched the markets in the past 9 months) know that correlation spikes when things get bad….and it goes towards 1 when they get really bad. There’s nothing to say that lots of little banks would have borne this crisis any better than having 4 big ones. In fact, lots of tiny little banks all across the country were going bust through the Depression.

    No, it seems like the bigger problem is pro-cyclical regulatory policy, and pro-cyclical market incentives. Going back to me (admittedly stolen) thesis around career risk, traders, risk managers, and CEOs are benchmarked against their competition (in short time horizons) in terms of job security and compensation. This means that in bull markets, he who’s leveraged the most wins. (Obviously he bear markets, he who was most prudent – Dimon – would win, but presumably we are in a bull market more often than a bear market). This doesn’t just apply to investment banks, it applies to ANY PUBLIC BANK. Read the NYTimes article for clarification. ( ). The bank quoted has 246 shareholders, who are all happy to have steady dividends and a conservative balance sheet. Compare that to pre-IPO Goldman Sachs which had a 100 or so partners whose personal fortunes were tied to its balance sheet. Now compare that to post-IPO GS, and any other publicly listed financial entity, who in the years 2004-2007, would compete during December to have the largest font on the front page of the WSJ as their earnings results were announced.

    No, the problem isn’t the number of banks. The problem is the procyclicality of incentives surrounding balance sheet and risk. If we can’t do anything about changing those market incentives (short term profit focus rather than long term balance sheet stability focus), we should at least try and implement countercyclical capital requirements. When correlation goes to 1, the number of banks (or stocks in your portfolio, or mortgages in your ABS, or corporate names in your CDO), doesn’t matter…you’re not diversified and your still FUBAR.

  5. silly things…

    Your retort to SJ and JK presumes that our government is smart enough to know what needs to be done to “turn around the economy.” Since these folks are mostly the same people who presided over the events leading up to the crisis, this is quite a leap of faith, to assume that the finance industry lackeys who now occupy chief positions of government power have any competence whatsoever in managing the crisis. To continue and double down on the policies that got us into the mess only demonstrates to me that they are either incompetent or they’re not really playing for our team. I guess I’m sounding like Buiter here.

    You seem to discount the risk that ballooning deficits, meddling in credit markets through quantitative easing, bailouts, and other strategies of this government won’t make the crisis even worse, or at least prolonged. It appears an attempt to re-inflate the previous bubble. If they are unsuccessful, we have depression anyway, but with an even greater debt burden. If they are successful in bubble-blowing, it looks like the best we can get is stagflation.

    Face it, we’re screwed. Once we just accept that, maybe we can concentrate on rebuilding our institutions so that when the inevitable depression finally works its way through the system, we have a solid foundation to build on. Expanding government and debt willy-nilly is not a foundation.

  6. I think that pursuing anti-trust investigations may well be fruitful.

    Out where I live there are large numbers of small banks operating, and the large banks have not much penetrated into this market area. But if you go from bank to bank, as I have, looking for a better deal on fees, overdraft policies, etc., etc., you find that they are all exactly the same–and the same as what the large banks do.

    Now, of course, it may well be that these practices are indeed optimal in the market. But given that everyone I know thinks the banks are ripping them off and would gladly switch if somebody offered them a better deal, I tend to think collusion is the more likely explanation.

  7. To moderator – please substitute this statement for prior one which was too harsh – thanks.

    Mr. silly,

    Please tell us how you’re going to turn our economy around with the same failed banking system that got us here in the first place? AMAZING!!!

    “Fortunately, the economy is improving thanks to the tour de force effort of the Fed, the Treasury, and the FDIC.”

    Please give us some evidence for this ridiculous statement with some of the “serious analysis” you accuse SJ & JK of not providing.

  8. It is quite alarming to see government policy undertake to support bad banks by raising fees and expenses for good ones. That is destructive policy and springs directly from the decision that certain banks are somehow to be favored by the Fed and Treasury… based, according to specific government statements, solely on size. That is a bizarre situation. The Fed and Treasury are themselves supporting, encouraging and enforcing monopolies. There needs to be a real heart-to-heart here within the US government because policies are working at cross purposes.

  9. Silly Thing–

    You make an elementary mistake by posing a false dichotomy and implying, with utterly no basis, that there is a conflict between taking punative action and expediting recovery for the general economy. The political will may be lacking to rein in the financial services sector, whether as a result of cognitive capture or something more nefarious is for others to speculate.

    But to pretend that somehow there is an issue of misplaced priorities ignores a very real possibility. The best (not the shortest, not the easiest, not the most politically feasible, but the most durable and socially beneficial in the long term) avenue to enduring economic recovery may be to uproot and replace the existing financial services sector. There is a widely accepted argument that there will be no recovery in the general economy as long as the banking system, the shadow banking system and the financial services sector remain dysfunctional. That argument was the basis, last Fall and this Winter, used to justify politically propping up the current situation. It is fair to call it mainstream and conventional thinking.

    If that argument is correct, keeping the existing banking system intact, rather than engaging in an exercise in creative destruction, will retard, rather than expedite economic recovery. You can follow this thought path to the line of discussion that picks apart the Japanese lost decade, etc., if you chose.

    Your citations are interesting, and I’m familiar with them. But they really don’t go to the guts of the matter. Demolishing a straw man argument–here come the pitchforks–is no substitute for thinking through the difficult possibility that, if there can be no recovery until the financial services sector is stabilized, re-engineered and re-regulated, how best to go about that task. The first part–stabilization–appears well underway. A reasonable approach to a second step of re-engineering may be to pursue exemplary punative action addressing the actors who created the situation. Doing so would be a useful tool for building the political consensus to proceed further with the reconstruction of a financial services sector meeting the utility needs of the general economy rather than offering a casino that serves as a playground for the Masters of the Universe.

  10. This appears to be the same material posted yesterday as the first comment on the stress tests, at least that is what happens on my system.

    Do we have a software failure, in my browser or on the server?

  11. In January, Mr. Paul Volcker presented the Group of 30 report, “Financial Reform: A Framework for Financial Stability”. Although it received almost no press coverage, it is perhaps the best overview of the Administration’s thinking on the future regulatory regime. (You will notice the names of Messrs. Geithner and Summers in the G30 membership list.)

    The relevant language is to be found in “Core Recommendation I”:

    “To guard against excessive concentration in national banking systems, with implications
    for effective official oversight, management control, and effective competition,
    nationwide limits on deposit concentration should be considered at a level appropriate
    to individual countries.”


  12. Well spoken apachecadillac.

    It is in everyones best interest to stabilize the financial system, but NOT at the expense, of extreme moral hazard or condoning at worst criminal, or at best abusive behavior by the oligarchs and the predatorclass cronies who own or profit from those oligarchs. FAILED (reckless, if not criminal) financial oligarchs, their managements, and their models FAILED miserably. Expecting the American tax payer to burden all the costs, burdens, pain, suffering, and debt for that failure, and simply excusing, ignoring, apologizing for, or promoting the fiction that propping up these failed oligarchs, managements, and models in necessary to “turn around the economy” is the hieght of hypocrisy, illogical, and deceptive.

    The economy can never truly turn around until these ills, and those who conjured and practiced this ills are redressed. The economy may experience another speculative bubble (which we witness now) but the structural problems and underlying ills, (systemic criminal and/or abusive practices, “regulatory capture”, extreme moral hazard, TBTF monopolization and manipulation of markets, collusion with political leadership) insure the perpetuation of bubble, bust economies benefiting the oligarchs and the predatorclass cronies owning and profiting from those oligachs exclusively, and causing painful and lasting damage to the global financial system in general and poor and middle class taxpayers specifically.

    Avoiding shocks is one thing, excusing or ignoring wanton abuse and criminal behavior is something entirely different.

  13. This antitrust discussion is really misleading.

    Why does the author not publish market share data for these firms? Because the market share leader has probably high teens market share in the relevant categories – debt or equity fund raising, bank loans, M&A, etc. In some categories the market share leader will have low teen or single digit market share.

    Further more, this is a very porous market with domestic and international banks competing for domestic and international mandates.

    All these articles seem to assume our financial service firms operate in a walled garden. How naive. Are you going to impose a breakup globally? Or are you going to impose a new global regulatory framework. Otherwise all you are going to accomplish is neutering our U.S. financial service firms and giving the business to global competitors.

  14. Posted by Tyler Durden at 3:31 PM
    Now that Merrill Lynch has upgraded every single REIT and has a price target of +/- infinity, (conveniently pocketing over $100 million in the process), the company can focus on more pressing issues at hand. And no, not redecorating Thain’s legacy office in the neo-uber-criminal style). Instead, the bank has sent not one, not two, but a whopping six cease and desist order to Zero Hedge.

    Here’s the 6 posts Merrill sent cease and desist orders for. Pass and posts the links on the internets to keep them alive:

  15. I politely beg to differ. Bank size is very important. Risk-management in an extremely large corporate structure is very difficult, as the information diffuses in ways that contribute to a mis-apprehension of risk.

    Consider as well the fact that large financial institutions can, by themselves, precipitate liquidity crises because of cascading and spiraling liquidity demands related to leveraging, and you can see how the highly-touted benefits of economies-of-scale pale in comparison to the systemic risk posed by the entities.

    You must also consider the problem of regulatory capture, which is exacerbated in large corporations which are able to concentrate lobbying power.

    Bank mergers are primarily good for executives and insiders of the merger parties.

  16. To follow up on my comment to Q, I would absolutely agree that the compensation and incentive structure is a huge problem, not to mention the layers of moral hazard we’ve added. And ultimately the shareholders of these companies are to blame for not understanding the risk involved. Maybe if we’d stuck with investing in things we understood, we wouldn’t have had so many Wall Street IPO’s, and the partnerships would have continued.

    However, I do not think that bank size is irrelevant. When the entity is too big for even the executives to understand, what hope have the shareholders?

  17. the situation is similar with large numbers of small banks, especially if the banks are all doing the same kind of business, which is what i would expect from banks. furthermore, the banks would all be in more or less the same macro environment and would be competing with each other; this would drive up the level of risk.

    on the risk management front, micro level risk management would probably be better, i agree, or it would be in principle. if you have a culture where good people do the risk management, you will do better locally. however it might be hard to find those people if there are a lot of banks. large scale risk management would not get done at all.

    regulatory capture is always a problem — i don’t necessarily see that it is worse for large scale corporations. the problem may be the other way in that government may see large corporations as available for capture as policy tools in a crisis; this is probably harder to do with many smaller banks.

    as far as the dynamics of leveraging and deleveraging go, i will have to think through an answer. at the very least: in healthy times, large banks lever and delever individual divisions all the time, moving staff and resources around as necessary; this would be much more painful if there were more, smaller banks.

    but as for whether regulating size is part of the solution, i am quite open minded as to this point. my main point is that people are jumping to a conclusion without thinking through the consequences. i could be convinced but i require a strong argument.

  18. i agree. for these reasons i don’t think that anti-trust legislation is a good tool for placing limits on banking.

  19. Traditional anti-trust seems inappropriate because the market share of the largest bank is in the low teens. That being the case, why are they TBTF? Ignoring GM and the S&L crises, let’s look at FDIC insured banks today. From the FDIC website, Federal Deposit Insurance Act, Section 8(a), we have concerning termination of insurance for future deposits:

    (A) NOTICE TO PRIMARY REGULATOR.–If the Board of Directors determines that–
    (i) an insured depository institution or the directors or trustees of an insured depository institution have engaged or are engaging in unsafe or unsound practices in conducting the business of the depository institution;
    (ii) an insured depository institution is in an unsafe or unsound condition to continue operations as an insured institution; or …

    The problem is that if a bank is TBTF, the Board can’t do that. What we have learned is that a market share in the teens is TBTF and therefore dangerous to the FDIC system.

    Coffee Boy points out that it doesn’t help even if no bank is TBTF, if their activities are all highly correlated. True, but the correlation is not as high as Carson implies. Lehman failed, but Goldman Sachs did not. Of the 19 stress tested, some are in better shape than others. Every bank is going to be a little bit different. Some might even be Black Swans. This would give the FDIC the opportunity to terminate insurance for the tail of the distribution before the mean got out of control with the effect of sending a signal to the remainder of the pack that they may be getting into trouble. (This assumes hard-nosed regulators.) However, if the black swan is TBTF, their hands are tied.

    Maybe, an FDIC employee could chime in.

  20. Don’t we have to avoid the “if all I have is a hammer, everything is a nail” syndrome?

  21. There is an inherent assumption of the validity of TBTF, many of us do not accept that assumption.

    We did not have systemic failure, but a failure of regulation, both governmental and internal, specifically the inability of financial firms to adequately regulate their prop desks.

  22. Very nice link… You should have quoted!

    “The weaknesses in Germany’s banking system have long been a worry for the federal government. In talks with the IMF last year both sides agreed that the country’s fragmented banking system posed huge risks. Yet most of the government’s efforts to get Landesbanken to merge have been stymied by the states, which have proved reluctant to lose control of their wards. ”

    On the other hand, there are only 7 landensbanken it seems, and the problems partially stemmed from public guarantees of debt.

    But I think this article help hammer home a key question: Is it bank size? Implicit guarantees by govt. contributing to moral hazard? Or the fact that economic growth has become dependent on debt expansion as the primary mechanism to sustain the money supply…

  23. I wish I could clear up something that keeps surfacing. You wrote: “…what is the market structure that allows banks to do this?” As if there were actually some real thing that can be called “market”. There are people’s marketing activity but outside of actions of people there is no “market” that exists. “The Market” is not a factual reality but rather a concept in the mind. “The Market” is a concept that may describe financial activities of billions of people, who are essentially unpredictable, hard to understand or comprehend. There is no “structure” but there is constant activity as people adjust their lives to realities of life. “Structure” comes from people’s governments.

    Structure, or limits, of people’s marketing activities originate from government. And, any government is either organized mostly around self-serving economic ideas favoring certain individuals, businesses, religions or political parties and/or organized mostly around economic ideas favoring the “general” welfare. Shouldn’t the question therefore be: “…what is the government structure that allows banks to do this?” For this republic the answer has always been “lack of regulation”.

  24. The trust-busting I’d like to see is in the boardroom. Having a CEO be the Chairman of the Board seems like an inherent conflict of interest. Doesn’t the board set the CEO’s pay package? I’m all for regulation and breaking up of systemically important firms (AIG), but seems like the no-brainer would be to get activist boards who ask a few more questions. Why are there so few activist investors? I can see it if we’re all earning 9% a year…but we’ve just lost 50% of our 401ks! I’m sure there are laws against this but I’m sure Carl Icahn could shake up Citi a heck of alot better than the govt can.

  25. The nation’s economy and our financial system did not get into trouble because depository institutions across the land charged excessive overdraft fees or credit card interest. Nor are high fees at some institutions evidence of a dark, bankerly cabal. Many community banks already use the Joseph Stiglitz “public utility model” in their fee structure and in the convenience of the retail services they offer, whether an ATM or online account access and bill paying. There are tens of thousands of these banks, credit unions and S&Ls.

    We’re in trouble today because certain Wall Street investment banks and federal Government Sponsored Enterprises together spawned $1.7 trillion in bogus securities that depository and other financial institutions around the world bought, mostly “in good faith.” TBTF was largely accidental, not a fiendish plot.

    Obviously, the answer lies in regulating underwriting standards and regulating against concentrations of unproven securities.

  26. I think that a critical part of an economic recovery is having a well-functioning financial system. That requires banks to be well capitalized. The strategy of both administrations has been to keep the banks just capitalized enough to stay afloat – look at the three bailouts of Citigroup, for example – but not capitalized well enough to function normally. They are forced into this position because they have decided to keep the banks afloat in their current form, but they don’t have the cash to do the job properly. I actually think that the most important thing is to do the job properly, and if that means overpaying for assets, that’s not my preferred solution, but that’s a solution. Instead, we’ve gotten this muddling through that has not led to increased availability of credit.

    I think you misunderstand some of the things we have written. I do not want another Lehman shock, and I have never come out and said that bank creditors should be wiped out. I have said that it might be possible to impose some losses on bank creditors – because the regulators have had a lot of time to see what the ripple effects will be – but that the safe option is to keep bank creditors whole.

    I also could not find the quote you attribute to Simon. I searched the two Peterson transcripts for the quotation that you cite, and this is the closest I could find:

    “What’s the role of credit in the recovery? And Mike is, of course, right that in many instances you can—it’s the recovery that helps improve the balance sheets of the banks, rather than the other way around. It’s not always the case but that is
    certainly one way to do it.”

    Simon goes on to say that that is not likely to happen here and now.

    It’s also disingenuous to say that a takeover would harm hardworking ordinary folks who invested in index funds that own some bank stocks. The shareholders of Citigroup have already been wiped out. Back in February the government could have simply bought them all out for $10 billion. The core problem is that there is a big hole on the asset side of banks’ balance sheets, and under the current strategy that will be filled up with taxpayer money. Any strategy, including the current one, shifts wealth around from one group to another. The important question is which strategy will lead to a healthy banking system faster.

    So the point where I disagree with you most strongly is that I don’t think we will have a healthy economic recovery without a healthy banking system, and I don’t think we are getting a healthy banking system anytime soon with the current strategy. Maybe after 24 months of banking profits that are juiced up by cheap money and low competition, but not anytime soon. I think that bank takeovers would be more likely to get us healthy banks faster, because that would enable the government to deal with the toxic asset problem (which is the core problem) once and for all, take the hit, and move on.

  27. Hi apachecadillac,

    By punitive action I assume you mean the proposals suggested by Simon Johnson and James Kwak in the last 6 months? They included: preprivatization of banks, wiping out the investors, forcing bondholders to take lost, breaking the big banks apart, and generally threatening the banks’ survival.

    On one hand, we can speculate on rather there is a conflict between taking “punitive action and expediting recovery for the general economy. ” On the other hand, we can look at a recent event that took place on Sept 08 when the Lehman file for bankruptcy. The Lehman failure triggered the current recession because of systemic risk. However, a key point that we must not ignore is that the systemic risk in our financial system in Sept 08 is *still with us* in May 09! Paulson let Lehman fail because he didn’t account for the systemic risk. Should we repeat Lehman on the blind faith that we won’t go from the Great Recession of 2008 to the Great Depression of 2009?!

    Stabilizing our financial system vs. re-engineer and re-regulate our financial system are two separate tasks. To start with, we do need to stabilize our financial system. However, we don’t need to re-engineer and regulate our entire financial system while we are still in the darkest hour of the crisis. US is no stranger to financial crises. It is a matter of historical fact that cleaning up our financial system was not critical to US getting her self out of past crises. By the way, Simon Johnson himself agrees with this view. Simon wrote the following:

    “I agree with Mike (Mussa) that fixing the financial system is often not necessary (or actually sufficient) for a rapid economic recovery” – Simon Johnson

    Krugman also pointed to the fact that cleaning up the banks didn’t play a role in Japan’s recovery (See link in my original post).

    I would strongly argue that many, including the Obama adminstration, view stabilizing our financial system vs. re-engineer and re-regulate our financial system are two separate tasks. We stabilize the financial system and get the economy to turn the corner first. Once the economy has turned the corner, we can turn our focus to re-engineer and re-regulate the financial system. Of course, we should not wait until the economy has fully recovered.

    The plan from the Obama team is the shortest, easiest and most politically feasible to enduring economic recovery. No one is suggesting we keep the financial system the way it is. The key lies in having the right priority.

    Lastly, it is very important to keep in mind that there is no chance that our financial system will stay the same after this crisis. The Obama team is already laying the groundwork to fix the structure of our financial system. If fact, I strongly suspect, the government will over do it. Historically, the regulatory pendulum always swings both ways to the extreme!

  28. Steve,

    The problem is that the FDIC seems to accept the assumption as near as I can tell. The failure of regulation was to act too slowly.

  29. ….and if you need to, wall off the old boring stuff in a highly regulated sector, and let other entities take higher risk, albeit with lower leverage and their own scratch. In other words, back to the old days of Wall St. before Glass Steagall was repealed.

  30. Silly’:
    You are mistaking the free market with punitive action. The banks took risks (lets assume that they were legal risks that didn’t involve fraud) and those risks didn’t turn out so well. The banks should FAIL. This is not punitive. When you gamble and lose, you should face the consequences for taking the risks. Same with the shareholders, creditors, etc.
    Bailing out the losers without having them suffer the consequences if the root of the problem.
    There are plenty of folks with money that did NOT take risks that would be happy to buy up the assets of the failed banks. But they are at a competitive disadvantage to the bailed out risk takers (now playing with house money). And if that wasn’t bad enough, the non-risk takers are subsidizing their competitors!
    This is not about punishment – it is about doing what is best for the system as a whole. A banking SYSTEM is necessary for a healthy economy. That system should not be confused with individual banks.

  31. I have a much better source for you.

    Tom Keene regularly does hour-long interviews with leaders of industries and leading academics on current subjects. This way you get multiple high quality but diverse views on complex issues. I’ve always believed this is critical to understanding complex subjects. Check out the May 11 interview: Sweeney Sees U.S. Economic Growth Improving `Pretty Quickly’

    As for Meredith, I think in time it be clear that she is a broken clock, right twice a day! She excuses herself by claiming government involvement changes the rule of the game. Well, any analysis that doesn’t take government action into consideration isn’t a very good one!

  32. Is this just a question of aggregate risk? The number and size of the risk takers might be irrelevant if the actual amount at risk (or capital at risk?) is the same.

    The problem is that it is easier for a small number of huge high-risk takers to consolidate political power than a large number of smaller high-risk takers, simply due to the economy of scale (small scale in this case – fewer chefs).

  33. Silly Things, your oft-repeated pitch is to make a practical argument (don’t rock the boat until the economy recovers) on a morally deficient base (we’ll have plenty of time punish the guilty and correct the injustices later). It is rather like the argument for torture— we had to do these morally reprehensible things because the risk of not doing them was too high. And like the torture argument, it suffers from the same cowardly flaw. Are we so meek, so prostrate financially that we must tremble in fear of holding the banks to account?

  34. There may be some point to an anti-trust action but I think the repeal of Glass-Steagall is a larger part of the problem. When the investment banks are selling mortgage backed securities that are originated in a fee based system the incentives for fraud are huge. Everyone from retail loan officers to investment bankers had reason to lie about the creditworthiness of their product.

    The end of capital requirements for securitized mortgages by the SEC in 2004 made disaster almost inevitable. Restoring proper accounting standards is a prerequisite for any sort of successful reform.

  35. Why is the defence of the Free Market now considered to be a Marxist revolutionary position?!! It is INSANE!

    Economics 101: Monopolists and Oligopolists engage in price fixing. Regulation of Monopoly and Oligopoly is the only means to HAVE the free market where the consumer is the beneficiry. Did we all forget “small is beautiful?”

    History 101: When the previous Depression came off the back of the single largest expansion in the money supply in history, the curtailment of which was guaranteed by the revelations of the Pecora Commission and FDR’s Glass-STeagall, why is the guy who exposed the once Land of the Free to Crony or Disaster Capitalism, ole’ boy “Larry”, now masterminding the solution to the problem HE CREATED in killing Glass-Steagall?

    Self-Evidence 101, or Occam’s Raza: Lyndon Larouche and Naomi Klein are the only people who are able to explain this problem simply and Sheeple, this problem IS simple.

    Obama Criticism: I believe that people underestimate the new President’s focus. I believe that when he is compelled to act, it will be decisive. I believe that the creature from Jekkyl Island will be his target. And I believe that he will pull off what FDR and Kennedy were unable to do.

  36. Actually: regulating size is nog sufficient to avoid disaster. If enough non-TBTF-banks take out a CDS ‘insurance’ with another reincarnation of AIG, their risks are lumped together in one place that is again TooBigToFail.

    Alternatively: if all these banks take out their CDS insurances with each other in stead of one ‘AIG’, the risks would not be aggregated in one single company, but the risk in such group of banks could get strongly linked. One of them failing would take the whole bunch down like a nicely set-up line of dominos. And this bunch would again be TooBigToFail.

    You’d need regulation and transparency to avoid such linkage of groups banks into a TBTF-messes.

    (This type of strong linkage could be even worse than the correlated actions of independent banks in crisis-situations as mentioned below by Coffee Boy.)

  37. It seems to be accepted dogma here that the collapse of the economy was caused by the collapse of Lehman Bros.

    In 1987, while it was happening, many blamed the market crash on programmed trading and portfolio insurance. The P/E of the S&P had climbed to 25 or so – the market was substantially overpriced. It was destined to fall – but the details of the triggering process should not be confused with the inevitability of a strong correction. It dropped by about a third in a few months.

    The market is a bit like a tectonic plate. Stress builds up and then a correction occurs. The greater the imbalance, the greater the earthquake.

    Like the crash of 87, the current crash was pretty well inevitable. For years a number of serious writers had pointed out that out system was completely out of balance. They were in effect predicting this collapse. It did no involve clairvoyance about Lehman – Lehman merely was the catalyst that precipitated the collapse. If it had not been Lehman, it would have been something else.

    The relevance is that there is a school of thought here that we must be careful lest we topple one of these investment banks and get anther collapse. I don’t think this follows. Seems to me that the collapse will continue until real estate is correctly priced, consumers are investing and not using credit for consumption purchases, and all the insurance issued without adequate reserves (e.g. credit default swaps) is cleared out, the international trade imbalance is righted and the dollar is correctly valued.

    Am I missing something?

  38. The hilarious fiction that the Lehman collapse caused the great unwinding belies the obvious facts that a Goldman Sachs operator, who was then the Secutary of the Treasury and a COMPETITOR of Lehman collaborated in that collapse, and organized and managed the collapse of Lehman Brothers to the great good fortune of (what a surprise Goldman Sachs). Do you people expect me to believe there was not overt malfeasance and perfidy in this process, and that Goldman Sachs in the end did not benefit wantonly from the nefarious activities of the Seceratary of the Treasury Hank Paulson, and Fed Chairman’s Ben Bernake manipulative collusionary activities? Think again predators.

    Crimes were committed! We are not talking about mistakes, or poor investments, WE ARE TALKING ABOUT CRIMES!!!! Collusion, Fraud, tax evasion, predatory lending, overt deception, market manipulation, and numerous instances of financial malfeasance and perfidy. This is the reality and the horrible FACT all you recondite economic message-force multipliers refuse to admit. CRIMES WERE COMMITTED! We cannot walk away from these horrors. We cannot not tolerate or excuse these crimes no matter what may happen to the socalled markets, – because – whatever turbulence may result is miniscule in comparison to the inevitable distruptions and tumults that will certainly follow as a result of the crimes, and financial malfeasance and perfidy of perpetrated by the financial oligarchs and the predatorclass cronies that profit wantonly from that malfeasance and perfidy of the finance oligarchs.

    We either redress these crimes and nefarious processes, or we don’t. If we don’t then poor and middle class Americans will suffer grieviously for decades, if we do, then the predatorclass cronies and the finance oligarchs will be forced to obey the rule of law, and suffer the consequences for their grievious crimes and abuses.

  39. One problem with the too big to fail doctrine is the socialization of losses. The Landesbanken had that without being very large. :(

    As for the desirability of consolidation, that opinion was given as though it were self-evident. No argument was made for it, other than that it was shared.

  40. All this financial technical blabber seem to forget that the banksters want to earn money, preferably loads of it. They did it in the past, do it today and will do it in the future over the back of the industry, health care, service industry and ultimately the tax payer.

    Over are the days that banks act as a financial serving industry serving the Real Economy and money saving people. This however for the whizkids and pinstripe suited criminals is utterly boring. They’re here to earn big money as much as the financial system allows them and even beyond that. All this (virtual) money is retracted from the Real Economy and causes it to come to a grinding halt.

    It’s utterly cynical that Real Economy companies go broke because of the financial crisis and that the actual perpetrators are being bailed out.

    Investment banking should be categorically seperated from the usual banking system. The risk of the financial derivates should be taken by the company, the board of directors and their shareholders, just as in the Real Economy.

    Only a revolutionary change of mind can achieve this. Bad doctors cause fester wounds.

  41. I agreed under normal conditions that when a business makes a bad decision it should pay for its mistake.

    However, we had a systemic failure. While banks did made mistakes by making bad loans and taking excessive risk, they are not response for the systemic risk in the system as a whole. The responsibility for the systemic failure of our financial system lies with our government. This is caused by poor or inadequate government regulation. To be fair, it is also true that systemic risk is not well understood. Almost no one predicted this problem before the crisis (very few did).

    To really drive the point home, suppose there is no systemic risk. In that case, Lehman’s failure wouldn’t have triggered this recession. Furthermore, we wouldn’t have to take over AIG, Fannie Mae, Freddie Mac and etc. We could have also easily taken a hard-line stand toward Citibank, BofA, etc. If there is no systemic risk, there would be no such thing as “Too big to fail” either. After all, even the biggest company is tiny compare to the US economy.

    Unfortunately, our financial system had systemic risk when Lehman failed and we still do. Lehman clearly demonstrated the failure of a big institution can severely damage the whole system. For the sake of the greater good, we have to set aside temporary the idea of moral hazard because of systemic failure.

    I should also point out many have confused the symptom for the disease when it comes to “too big to fail”. The disease is “systemic risk” and the symptom is “too big to fail”. If we cure systemic risk, we also automatically cured “too big to fail”. Many thinks “too big to fail” is itself the disease. However, curing “too big to fail” will not cure “systemic risk”

  42. Hi James Kwak,

    I have wrote a long reply to you. However, it isn’t showing up. When I tried to resubmit, your website said I am submitting duplicate. Is it getting filtered by your spam system?

  43. Eric,

    To be honest, I am very impressed with the performance of the Obama team. The only thing regrettable is Geithner is deeply misunderstood. At any rate, your lack of confidence in the Obama team is subjective and as such I respect that.

    On the issue of inflation, this is an excellent interview that offered a balanced and thoughtful view. It may even ease your concern a little. The interview is a Bloomberg podcast.

    [audio src="" /]

    Lastly, I do have a big picture view for your consideration may even cheer you up.

    I have never ever seen the level of simultaneous and collaborative efforts by so many nations around the world all working together toward the common goal of turning around this global recession. From this perspective, in my opinion, anyone who doubts the strength of this globally focused human endeavor really should get his head examined!

  44. I am less concerned with actually using anti-trust as threatening its use. Remember that when GM goes into Chapter 11 in June, this will dramatically increase the decline of the misrepresented toxic assets, such that the banks stress tests may suddenly be recognized as being as meaningless as they actually were. Unemployment will shoot up dramatically, and the dislocation in our economy will be accelerated. In their already crippled condition (see IMF analysis on their lending activity) they aren’t adding to any upward economic impetus. So, under threat of DOJ Anti-Trust action, they may decide that they need to work with Tim, Ben and Larry to reshape their business models before they crash and burn. Raising capital in the atmosphere this summer may prove impossible, and the PPIP potential participants may decide that even with government providing most of the funds for investment the TA’s are too risky to invest in. They’d rather wait the let the banks collapse and pick up the scraps for pennies.

  45. Meredith isn’t drinking the “happy juice” over at CNBC but tells it like it is.

  46. You tax what you do not want.

    You do not want “too big to fail” tax too big. It will go away. And you will save us millions of dollars in anti-trust enforcement.

  47. Thanks for posting this, le grain de sable.

    If Meredith is right and consumers don’t spend as many expect them to, that would be huge.

    She makes a strong case for financial institutions being far over-valued.

  48. Silly things,

    I listened to the Roubini segment above and don’t find that much of a different take. He’s also projecting low spending and basically the same problems that Meredith talked about.

    How do you see this as such a “different take!”?

  49. Hi James Kwak,

    Here is why I don’t agree with the following statement.

    “I think that a critical part of an economic recovery is having a well-functioning financial system. That requires banks to be well capitalized.” – James Kwak

    I will look at this from 3 different angles.

    1. Which is the bigger issue: the lack of credit supply or the lack of credit demand?

    I think the much larger issue is the lack of credit demand. This is a part of the larger de-leveraging trend.

    The following interview on Bloomberg On The Economy podcast is an excellent presentation of this complex issue. Here Tom Keen of Bloomberg interviewed Carl Lantz (interest rate strategist) and James Sweeney (global strategist) of Credit Suisse Group Ag.

    [audio src="" /]

    The interview deep dives into money stock, credit supply, credit demand, liquidity preference, inflation, deflation and etc. James, please let me know what you think of the views presented in the interview.

    Are banks tightening lending a serious issue? I do think it is an issue. However, let me put it as follow. I think even if banks stop tighten lending standards, the credit demand problem will continue to persist. In fact, I am not sure even if banks relax lending standards, how strongly borrowing will bounce back.

    Besides, there are other reasons for banks to tighten lending other than the banks’ capital level. Remember community banks also tightened lending and they are perfectly healthy. First, banks always tighten lending during a recession simply because default rate always go up. Second, many big banks felt their survivals were threatened due to uncertainty over solvency, government action and populist anguish. When a bank is faced with survival vs. lending, the choice is obvious.

    At any rate, as shown by Fed’s quarterly survey on bank lending practices, we have signs of improvement in lending. I fully expect this to continue. I just don’t know yet to what degree the borrowers will bounce back.

    2. The significance of bank capitalization level during past US financial crises

    Here James Surowiecki already did an excellent job presenting past US financial crises and what we’ve learned. I know you wrote a response to it.

    I will also call attention to an important comment JS wrote to clarify some of the issues in case some folks missed it.

    It is a matter of historical fact that well capitalized banks were not required for US to emerge from past financial crises.

    3. How important is bank capitalization?

    Bank runs can affect both troubled banks and healthy bank. As long as everyone has confidence in a bank, even if the bank is deeply troubled, there will be no bank run. However, the opposite is also true. When everyone loose confidence in a bank, a perfectly healthy bank will face bank run. Furthermore, if there is no bank run, a bank will not need to make use of most of the capital it has on hand.

    Therefore, public confidence is critical to a bank. If we can rebuild public confidence, a high bank capitalization level is *unimportant* because without bank runs the bank will not need to make use of it’s capital.

    Why do we still have capitalization requirement for banks? One is to instill public confidence. Look there is a pile of money there, never mind the fact that it’ll never be used. The second is to minimize cost to the taxpayers in case a bank gets into deep trouble. This way, FDIC can take over a troubled bank and there will still be some value left instead of just an empty shell. Note that all banks today have historically high Tier 1 and TCE levels. The stress test isn’t use to determine if a bank is currently solvent because by current measurements they are. It is used to determine if a bank will continue to stay solvent (i.e. meeting the capital requirements) in the future if the economy gets much worse.

    Here is where I hope you’ll agree that Geithner’s stress test is brilliant! The additional capital required for the 19 banks — $75 billion. The rebuilding of public confidence in our financial system — priceless! The key value of the stress test is to rebuild public confidence.

    If there is still any doubt about the critical importance of public confidence, please look into the bank holiday of 1933.

    In summary,

    1. The lack of credit demand is a much bigger issue than the lack of credit supply.

    2. Historically, well-capitalized banks were not required for US to emerge from past financial crises.

    3. Public confidence is critical to a bank and not the actual bank capitalization level.

    I will restate #3 in even stronger terms:

    Rebuilding public confidence is a critical ingredient to turning around the current crisis.

  50. Additional suggested reading:

    1. James Kwak, the following quote from Simon is the 1st sentence of the 5th paragraph of the following article.

    “I agree with Mike that fixing the financial system is often not necessary (or actually sufficient) for a rapid economic recovery” – Simon Johnson

    2. Bloomberg On The Economy is an outstanding podcast.

    Tom Keene regularly interviews leading experts in academics and in industry on current economic issues. It is a fantastic way to get high quality and diverse viewpoints. It is a great way to not fall into the trap of groupthink.

    The interview I mentioned above is titled:
    Sweeney Sees U.S. Economic Growth Improving `Pretty Quickly’

    3. Are we repeating Japan’s lost decade during the 90s?

    James Surowiecki:

    John Hempton:

    JS and JH looked at the Japan question from two different angles. Both analyses are excellent.

  51. Just a simple question from a non-economist: Why has Martha Coakley in Massachusetts been able to bring Goldman-Sachs to heel, but nobody in Washington has been able to lift a finger against the oligarchs ?

  52. Many have confused the symptom for the disease when it comes to “too big to fail”.

    The disease is “systemic risk” and the symptom is “too big to fail”. If we cure systemic risk, we’ll also automatically resolve “too big to fail”. It is wrong to think “too big to fail” is itself the disease. Curing “too big to fail” will not cure “systemic risk”

    It is even weaker to argue from political influence point of view that big banks have excessive political influence. The weight of political influence from the financial sector depends only on the size of the financial sector as a whole and not the number of big banks or small banks. This is because the total resource available to lobby for influence depends on the size of the entire financial sector.

  53. To me, the half-way deregulation of the S&Ls, removing restrictions while retaining protections, was the handwriting on the wall. I was only surprised that the crisis developed so quickly.

  54. You are right that financial crises are caused by build up of extreme imbalances over a long period of time. Lehman is really only the “trigger event” that causes the current crisis to get out of control and the economy to free-fall. For the government, the key is to focus on is how to *managing the situation * so that things *doesn’t get out of control* again.

    This is precisely why, after learning the lessons of the Lehman failure, the government has to take over AIG, Fannie Mae, Freddie Mac, bailout banks, and etc. Lehman’s failure triggered the crisis because of systemic risk. However, the systemic risk in our financial system last September is still with us today. We cannot afford to take the risk of turning a deep recession into a great depression.

  55. Roubini previously forecast much worse condition for the economy and a L shape recovery. However, now he has acknowledged the significant improvement due to the collective efforts by governments around the world. He now forecast a U shape recovery. This is a huge improvement from a L shape recovery.

    Meredith hasn’t acknowledged the significant improvements in the economy. Instead she is lamenting government action has changed the rule of the game and made things difficult to predict. Any analysis that doesn’t take government action into consideration isn’t a very good one. Furthermore all the actions the government took isn’t even news! We know this stuff for the last 6 months.

    Yeah, so far my opinion of her is she is a broken clock that is right twice a day.

  56. Let’s stick to the subject. To what you said is Roubini’s “different take” [with an exclamation point] on the video that you provided.

    Both Meredith and Roubini see bad times for the rest of this year and for very little spending and growth next year. Meredith refers to 2011 and Roubini doesn’t.

    If you meant to talk about how Roubini has a different take than he had earlier, then that’s irrelevant to the subject at hand (Meredith’s video).

    As for your comment “Any analysis that doesn’t take government action into consideration isn’t a very good one,” you’re off base. Sometimes (such as now), we truly don’t have a lot of confidence in what the government is going to do during the next six month. You may claim that you know, but that doesn’t make it fact.

    You apparently fail to realize that building in a lot of uncertainty about what the government will do can be part of very effective analysis.

    Roubini’s also video expressed much uncertainty about what the government will do. He says the government hasn’t done what he wanted it to do and he’s concerned about what it will actually do…which he also sees as uncertainty.

    Overall, the two outlooks seem far more similar than being “different takes” to the subject at hand (which was the video of Meredith to which you replied).

  57. Read this and weep silly things.

    The oligarchs and the predatorclass cronies profiting from the oligarchs are in bed with the Fed, Treasury, the regulatory agencies and tragically the Obama government, and the taxpayers are being rutlessly abused. The oligarchs are able to influence the government because of their imponderable illgotten wealth some of which is used influence (or bribe in my mind) the appropriate politicians.

    TBTF oligarchs are dire threats to the future of America’s poor and middle class, and must be disbanded, and the predatorclass cronies who manage those oligarchs must be held accountable for their crimes.

    There is no way to restore confidence in a system that in systemically corrupt and criminal.

  58. This whole Oligarch thing is getting really tiresome. Can someone with a brain please tell me exactly how the oligarchs (by which I assume you mean Wall St) pose “dire threats to the future of America’s poor and middle class”.

    If you are referencing the terrible income disparity in America, please educate us on how Wall St caused this disparity……

  59. You are still confusing banks with a banking system. Let the bad ones fail, and the good ones will vulture up the pieces. Problem solved – the system remains viable, but the diseased parts are disposed of. This will, of course, have adverse consequences, but so does propping up institutions that deserve to be culled. However, if the bad banks are allowed to die, the system becomes healthy. What we have now is the healthy parts of the economy suffering to support the bad banks.
    If there is going to be a great deal of carnage either way, kill off the bad banks and get the system healthy.

  60. Sheesh, touchy-touchy!

    It is matter of fact that Roubini saw fundamental improvement to long term outlook and changed his forecast. Meredith didn’t.

    Fine by me if you don’t think that is different.

  61. By the way, Lehman was “vulture up” shortly after it went bankrupt. We still ended up with the current crisis.

  62. Silly Things,
    I think the nut is in this line of yours, “For the sake of the greater good, we have to set aside temporary the idea of moral hazard because of systemic failure.”

    Its an ends justify the means argument. I respect the measured approach and the maturity to recognize that the greatest suffering from a systemic collapse will be borne by those not only least responsible but also least able to withstand severe economic turmoil. But ends justifying the means is such a slippery slope that it should only be used where future events can be accurately predicted. Any series of events involving politics and economics is by definition extremely unpredictable. So we should stick with what we know works in the here and now.

    Of course the government should mitigate the damage, FDIC insurance etc., but we should have let the market render justice on solvency and the department of justice on fraud.

  63. Tired of hearing about oligarchs? Let’s mix it up. Frauds. Crooks. Preening failures. Parasites. Losers sucking Federal tit.

  64. John – The entire theory of antitrust law is that limits on firm’s practices (whethe they be raising prices, reducing output or otherwise acting in a predatory manner) comes from competition.

  65. Once again, Simon’s thoughts are rather impenetrable from an antitrust perspective. As a member of the antitrust bar, I read the Varney quote as nothing other than a message to people like me that we shouldn’t expect that DOJ will rubber stamp a deal just because we can argue that the parties to a merger have been hit hard by the recession. While that argument is perhaps more credible from banks, the fact is that absolutely every company considering a merger deal right now is planning to make this argument. Varney is saying that I shouldn’t expect that to win the day, which is both obviously and pretty clearly correct.

    As for the Shapiro cite, I don’t follow. Switching costs for bank customers, at least retail customers, are almost zero. Perhaps not so much for investment banking, but deposit accounts, credit cards, consumer loans, mortgages, etc. can be switched really easily.

  66. The level of risk that particular institutions took was (and is) not sustainable. Eventually the bubble pops. However, not every institution took on that much risk.

    So Mr. Genius Silly Things:
    If the status quo is so crucial to maintain in this crisis, at what point do you pull resources because if you stop supporting these institutions the unthinkable might happen! Your argument appears circular. Please provide an exit strategy.

    FYI I have studied systemic risk, and actually apply it to the real world.
    BTW which investment bank do you work for again?

  67. The major blows to conservatism, culminating in the election and programs of Obama, have been fourfold: the failure of military force to achieve U.S. foreign policy objectives; the inanity of trying to substitute will for intellect, as in the denial of global warming, the use of religious criteria in the selection of public officials, the neglect of management and expertise in government; a continued preoccupation with abortion; and fiscal incontinence in the form of massive budget deficits, the Medicare drug plan, excessive foreign borrowing, and asset-price inflation.

  68. Well, Silly Things,

    Your assumption, that I’m starting with Johnson and Kwak, is not correct. I’m starting with an early 19th century English Chancellor in Equity who lamented that the corporation did not have a neck by which to be hung or a body to be flogged. I agree that penalties imposed on the derelict corpses of hideously mismanaged financial institutions would be born by a variety of difficult to identify but generally blameless stakeholders and so doesn’t serve much purpose.

    If one wishes to be punative, cut through the corporate veil and go for the individual human actors responsible for the policies and decisions that led to the current mess. If one wishes to address the role of organizations too big to fail in the general economy, begin by recognizing that anything too important to fail is too significant to be left in private hands, and requires nationalization.

    A regime of punative pursuit of formerly esteemed corporate leaders is in no way inconsistent with maintaining a stable financial services sector. It may actually facilitate it. The burden of proof should, perhaps, be on those arguing against social justice rather than on those who support it.

    To date, we have exhausted the public appetite for further support of distressed financial institutions. One way of reviving it might be with high profile criminal proceedings against the leaders who brought those institutions into their current distressed condition. Further, if you accept the argument that the dollar and our financial markets are a significant ‘public good’ that the United States provides to (and collects a rent for from) the rest of the world, then some exemplary demonstations that involve blood on the knife would be far more persuasive to our customer/clients than endless lectures on corporate governance and nepotism.

    Those are two arguments in favor of a punative approach. I’d be curious what the arguments against it might be.

  69. You mean outside of the millions of lost jobs, lost homes, lost retirements, lost wealth, lost access to college for our children, lost bargaining power, radically diminshed standards of living, and lost hope as direct result of the finance oligarchs deciet, collusion, and lawlessness Steve? You’re kidding right?

    The wildly expanding disparity between thehaves and thehavenots (which the predatorclass and the finance oligarchs perpetuate and institionalize) is the least of our problems and threats. From your lofty perch, all may be well in the land of Oz, but from our lowly perspective the oligarchs malfeasance, perfidy, and criminal conduct have wreaked havoc on our lives today and our childrens future.

  70. This whole Oligarch thing is getting really tiresome. Can someone with a brain please tell me exactly how the oligarchs (by which I assume you mean Wall St) pose “dire threats to the future of America’s poor and middle class”.

    Another word than “oligarchy” springs to mind :

    A Plutocracy is a government controlled by a minuscule proportion of extremely wealthy individuals found in most societies. In many forms of government, those in power benefit financially, sometimes enough to belong to the aforementioned wealthy class.

    Classically, a plutocracy was an oligarchy, which is to say a government controlled by the wealthy few. Usually this meant that these ‘plutocrats’ controlled the executive, legislative and judicial aspects of government, the armed forces, and most of the natural resources. To a certain degree, there are still some situations in which private corporations and wealthy individuals may exert such strong influence on governments, that the effect can arguably be compared to a plutocracy.

    If there are no forms of control within the society, the plutocracy can easily collapse into a kleptocracy, “reign of thieves”, where the powerholders attempt to confiscate as much public funds as possible as their private property. A kleptocratic state is usually thoroughly corrupt, has very little production and its economy is unstable


    Zaibatsu (literally plutocrats or financial clique) is a Japanese term referring to industrial and financial business conglomerates in the Empire of Japan, whose influence and size allowed for control over significant parts of the Japanese economy from the Meiji period until the end of the Pacific War.
    They had their origins in the activities of the seisho (‘political merchants’), who made their fortunes by exploiting business links with the newly restored Meiji government. The five major zaibatsu (Mitsubishi, Mitsui, Okura, Sumitomo, Yasuda) controlled much of Japanese industry and trade up to World War II.The zaibatsu were the heart of economic and industrial activity within the Empire of Japan, and held great influence over Japanese national and foreign policies.By the start of World War II, the Big Four zaibatsu alone had direct control over more than 30% of Japan’s mining, chemical, metals industries and almost 50% control of the machinery and equipment market, a significant part of the foreign commercial merchant fleet and 60% of the commercial stock exchange.

    The zaibatsu were viewed with suspicion by both the right and left of the political spectrum in the 1920s and 1930s. Although the world was in the throes of a worldwide economic depression, the zaibatsu were prospering through currency speculation, maintenance of low labor costs and on military procurement.

    In 1948 a decree limited the influence of the traditional zaibatsu families, and prevented members of these families from continuing to hold official positions in zaibatsu companies. The influence of the zaibatsu therefore declined. They are now more usually known in Japan as keiretsu.

    In William Gibson’s Sprawl trilogy, ‘Zaibatsu’ is the generic term used for the megacorporations prevalent in the futuristic world in which the plot is set.

    A similar use is also made in Robert Asprin’s The Cold Cash War, where megacorporations of this name, dominating the world, are not specifically Japanese.

    Lewis Shiner’s 1984 novel “Frontera”, anticipating the dissolution of the USSR, depicted the transformation of what were at the time of writing state-owned Soviet companies such as Aeroflot into “Zaibatsu” – the term being used in the broad sense of “a big privately-owned corporation”.

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