Dan Tarullo Gets New Talking Points

On Wednesday, Dan Tarullo, a governor of the Federal Reserve and distinguished law school professor, dismissed breaking up big banks as “more a provocative idea than a proposal” and instead put almost all his eggs in the “creation by Congress of a special resolution procedure for systemically important financial firms”.  He stressed: “We are hopeful that Congress will, in its legislative response to the crisis, include a resolution mechanism and an extension of regulation to all systemically important financial institutions” (full speech).

This put him strikingly at odds with Mervyn King, governor of the Bank of England, who said Tuesday night, quite bluntly,

 “There are those who claim that such proposals [involving breaking up the largest banks] are impractical. It is hard to see why. Existing prudential regulation makes distinctions between different types of banking activities when determining capital requirements. What does seem impractical, however, are the current arrangements. Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.”

Tarullo’s speech actually framed today’s problem just right: “I would suggest … that the reform process cannot be judged a success unless it substantially reduces systemic risk generally and, in particular, the too-big-to-fail problem.”  This is consistent with the tone of King’s remarks (even if less pointed than what Neal Barofsky said).

Tarullo also made some astute comments on how “too big to fail” emerged in its current specific form in the US and threatens us in a general form always.

“First, no matter what its general economic policy principles, a government faced with the possibility of a cascading financial crisis that could bring down its national economy tends to err on the side of intervention. Second, once a government has obviously extended the reach of its safety net, moral hazard problems are compounded, as market actors may expect similarly situated firms to be rescued in the future.” ….

“The fact that the largest financial firms will account for a significantly larger share of total industry assets after the crisis than they did before can only add to the uneasiness of those worried about the too-big-to-fail phenomenon. It is notable that current law provides very little in the way of structural means to limit systemic risk and the too-big-to-fail problem.”….

“I only urge that we all keep the too-big-to-fail problem front and center as the regulatory reform effort moves forward.”

But the “resolution authority” idea the Obama administration is pushing (and Tarullo endorsed) is a theoretical construct that would have no discernible practical effect.  Charles Calomiris hit that particular nail on the head Tuesday in the WSJ – in his second paragraph, he explains that bank failures are hard to handle because “there is no orderly means for transferring control of assets and operations, including the completion of complex transactions with many counterparties perhaps in scores of countries via thousands of affiliates” (emphasis added).

The Bank of England will tell you, for example, that their experience with BCCI – a bank that was closed nearly two decades ago – pointed clearly to the need for cross-border agreement between regulators on exactly how to handle bank failure.

But talk to any dozen or so central bank officials, and they will confirm that we do not have and are not close to having such cross-border agreements.  And there is no sign that the G20 has this issue in its sights.

Still, the Tarullo-King gap – which loomed so large on Wednesday – finds potential closure in the Fed’s proposed “guidance” (read: orders) on executive compensation, announced Thursday. (WSJ; FT versions).

The proposal is obviously flawed, particularly in the quaint notion that there are only 28 financial institutions that can damage the system through excessive risk-taking (has the Fed really forgotten LTCM?)  And the stock market yawned deeply on the announcement – presumably believing that the Fed cannot currently organize a regulatory tightening along any dimensions.

But the proposal is actually quite brilliant and – given the logic of our politics, including Mr. Bernanke’s impending re-confirmation hearing – is likely to have real impact.

For the first time, the appropriate regulators have recognized that excessive risk-taking generates a large negative externality, i.e., a spillover that has pernicious effects on the rest of the economy, and that this can be dealt with in a reasonable manner. 

Attacking compensation is not the only way (nor ultimately the likely best way) to address this externality, but it does get everyone thinking along the right lines.

And the bottom line is clear: if your financial institution is big relative to the system, you will be at a systematic disadvantage relative to the smaller firms due to the way pay is regulated; “talent” (or, if you prefer, excessive risk-takers) will move from large firms to small.

My read of the Fed’s current intentions is that they do not intend the differential tax on size to be too great, so dangerously big firms could still survive.  But once Capitol Hill understands the opportunity created by these compensation rules, all things are possible – think about the transparency and accountability implications for the Fed and the banks in question.

And remember two things: the midterm elections at the end of next year still lack an obvious and appealing theme, and the big banks are completely unable to cut back voluntarily on their compensation practices, their lobbying, or their egregious public behavior and obnoxious remarks (e.g., the latest AIG example).

The Fed’s press release quotes Dan Tarullo as saying, “In customizing the implementation of our compensation principles to the specific activities and risks of banking organizations, we advance our goal of an effective, efficient regulatory system.”

My translation: Now it gets interesting.

By Simon Johnson

45 thoughts on “Dan Tarullo Gets New Talking Points

  1. The Fed’s press release quotes Dan Tarullo as saying, “…we advance our goal of an effective, efficient regulatory system.”

    May I suggest the double-entry book-keeping framework of rules, which was refined into practice 670 years ago, and 100 years later documented for posterity by Luca Pacioli. About 400 years after Pacioli the language was refined to support the far greater complexities of the Industrial Revolution.

    One would have expected that software, refined into practice 40 years ago, would have further refined the language. The reverse happened: software developers abandoned the 630 years of refinement, leaving a worthless skeleton of the whole that is at best a single entry book-keeping method.

    My translation: “There is not chance of creating ‘an effective, efficient regulatory system’ without a return to the time tested framework of book-keeping rules that the software community abandoned 40 years ago.

    What’s more, the software version ought to be running circles around the paper version that is translated into the automated, high speed code. There will be no other solution to regulatory legislation that is fair and equitable.

  2. “… the need for cross-border agreement between regulators on exactly how to handle bank failure.”

    Re: cross-border bankruptcy in general, some tools do exist. In 1997 UNCITRAL (UN Commission on International Trade Law) came up with a model law for countries to incorporate into their domestic legislation. The US adopted the model law in 2005 as chapter 15 of our Bankruptcy Code. Japan, the UK, & Australia also have it, though major EU countries don’t seem to have embraced it. How useful the model law may be as a basis for dealing with the peculiar problems of managing cross-border bank failures, I can’t say.


  3. I’ve decided to become “Johnny One-Note”, in the
    hopes that eventually my plaintive wail will be
    heard by _someone_, perhaps even by Messr J or

    Instead of constant reaction to, and criticism of,
    what others suggest, I would like for reasonable,
    liberal, sensible, non-attached economomists — and
    others!! — to join in working out what a financial
    system should be, what it should consist of, and
    what it should not consist of.

    My two contributions, basically in the nature of
    observations which I hope no one will disagree
    with, are:
    1. Money is IMPORTANT. Ergo it should not be a
    2. Whatever is done with, or to, money should serve
    a useful social purpose. If such a socially useful
    purpose can not be found, then it is “playing” and
    should, according to principle 1 just above, be

    There is lots to be against. But what do we

    Best wishes,

    Alan McConnell, in Silver Spring, MD

  4. On the question of breaking the banks and separating commercial/ deposit from riskier banking, I wonder whether it would be possible to force the riskier activites to go private — that is to say, to become partnerships rather than corporations with shareholders.

    Before Goldman went public, it was far less levered. The partners had a real incentive to control risk. It seems to me that turning these banks back into partnerships would overcome the problem of compensation that is currently being hashed out — not very well — at the governmental level. Although it would not solve the problem of counterparties and debt-holders, it would at least resolve the issues related to equity holders. It was also resolve the issue of size, to a certain extent, since it would be hard for these banks to grow beyond a certain size.

    Large deposit-taking institutions could continue to have shareholders. But they would be strictly regulated.

    What do others think about this idea?

  5. Nothing will save the real economy except taxing and requiring disclosure and mark to market of all OTC derivative contracts. The toxic waste has poisoned investment and made a mockery of corporate disclosure and income tax law. Returning Glass Steagle by itself would solve nothing since the banks could continue lending to investment banks and hedge funds which would continue booking OTC derivative deals and producing essentially the same results: speculative bubbles and inevitable crashes.

  6. Alan, some thoughts on how money is being used as a plaything.

    In the double-entry book-keeping framework money is a common medium value|exchange playing two distinct roles (the reason why book-keeping is double-entry). (1) As cash-value in trade money sets the value of an artifact in trade. In a sound, free market application money is represented by a value that is stable over time. (2) money’s complementary role in book-keeping marks the capital-right to the ownership that is exchanged by the artifact in trade.

    There are a number of ways to corrupt the balance between money as value in trade versus money as a ownership right in exchange.

    As example is when an artifact in trade is a gambling bet there is no value traded and so the transaction would not even post in a proper book-keeping framework. And so when the bogus book-keeper records a gambling bet that pays off, or that loses its bet, the money as the capital-right to ownership is created or destroyed with no complementary increase or decrease in value of an artifact in trade.

    The problem gets even worse for derivatives, because the deal there is a joint venture between a dealer, a broker, an insurer, and bond holders. I see no evidence that the book-keeping is even remotely being treated as the true joint venture that the practice entails.

  7. Alan, the main thing is to write a fair and complete specification for a financial system, and then vigorously criminally prosecute people who deviate from it.
    Many people think that you should nationalize money, make it a utility and regulate the hell out of it.

  8. Yes, and the partners should be natural persons who actually conduct the business. If they want to gamble, at the very least they should only risk their own money, not mine (who wants nothing whatsoever to do with them).

  9. Hi, Yakkis, I’ve admired many of your posts in
    the past. And you’ve formulated my request in
    another way. So let’s get to it! what should
    a “fair and complete” — my words were “socially
    useful” — financial system consist of??

    I throw out a few random thoughts: local banks are
    good. They lend me money when I want to buy a
    house(after first checking me out thoroughly),
    or when I want to open a business or increase my
    existing one. They should be regulated very
    carefully, to make sure that they are keeping
    an inventory of money to pay to those who want
    to withdraw.

    What about insurance? I want to insure my house,
    I want to insure myself against the catastrophe
    of running over a small child while driving . . .
    But should banks be able to insure themselves
    against losses/catastrophes? (Think credit
    default swaps)

    I’m not sure exactly what “nationalize money”
    means. For I’m not sure exactly what “money” is.
    E.g. Milton Friedman’s idea of doing everything
    via monetary policy came a cropper when he discovered
    that he couldn’t develop a way of measuring the
    amount of money. (Specific example: every now
    and then my credit card company, which I pay off
    monthly, never paying them interest, tells me that
    my credit amount has been raised by a thousand $$
    or so. Have they just created money?)

    I don’t know the answers. But I’m sure that I’ve
    formulated the right questions. For the questions
    are specific, and demand thoughtful, nuanced
    answers. And we liberal, thoughtful, unbiassed
    people need to propose these answers, rather
    than simply rant — each in our own fashion —
    against what is happening in society today.

    Best wishes to all,


  10. Actually, I think Dan Palanza (a frequent commentator on this site) is the best person here to explain money in a philosophical way.
    There are even prior questions that should be answered about a financial system, a sort of pre-specification that would go through successive refinements by including details, of what we want the financial system to do (and what useful things will be accomplished in other ways).
    You’ve raised some things: lend money for houses (and presumably businesses, crops, educations etc.), and insure against loss. Some people think the private sector is the best way to do this, some the public and some a combination of both. For example, in many countries higher education is free, whereas in some countries there is no such thing as free public highschool. I think though it’s pretty universal that as far as consumer lending (against homes, cars, etc.) goes, the private sector is almost always involved. Insurance for some things like health is probably best done by establishing a national pool.
    One of the problems frequently raised is that the current scheme requires exponential growth, which over the long term is mathematically impossible to sustain. Debt, population, resources etc. So some people will ask the system to be sustainable; otherwise we will be in the situation we are in now, trying to rebalance things every century or so, always dealing with similar problems, never making progress.
    I am just rambling, but yeah, it’s something that should be discussed in detail.

  11. Far-fetched that many of the extreme concerns are now reality As Flag Is Raised In China Now…

    Read all the other posts that can be found on Investor’s Business Daily in their Hot Topics area and you will know why this article holds great importance as China is calling for “Stress Tests”. The writing is on the wall that a big downturn is in the cards for the financial sectors and a return for a chance for all countries to review very strict laws to ensure from the ability of these banks to pull off any further Ponzi Schemes on any society in the future.


    “Another proposal under consideration is to require that big banks issue contingent capital that could be converted into common equity in times of stress.

    The Fed will also impose stricter reporting requirements for the largest firms, Bernanke said.

    His proposals stop well short of calls made by some prominent central bankers — including former Fed chairman Paul Volcker and Mervyn King, the head of the Bank of England — that governments seriously consider separating commercial banks from their investment-banking activities. Bernanke’s speech read like a laundry list of Fed actions and had a defensive tone to it” (Greg Robb). http://www.marketwatch.com/story/biggest-banks-face-more-rules-feds-bernanke-says-2009-10-23

    They are left intact to remain in the business of conducting high-risk investments as Brokerage Houses and Investment Derivatives earning machines. This is why the Far-fetched Theme of could this all be done at such a high level within our government and corporate world of the loss of true “Ethics and Morals”? That was the actual reason for Our Financial Systems Collapse in the first place, that of the High-risk behaviors being unregulated to put the American Taxpayer holding the bag.

    Make no mistake about the seriousness of these thoughts that maybe true and not as Far-fetched as one may want to think. The Market is poised for now even a deeper correction than the 50% Fibonacci Retracement as previously posted. Hold on To Your Wallet America as You Are about to Feel a Pull on Every Dollar as a Fine Hone Pyramid Scheme tends to feel.

    Read this prior post one more time to see a huge flashing sign of the times to become highly aware of critical signals. A statement made by an article out of Wallstreet Journal October 22, 2009 at 8:00 A.M. ET reflected on, “China Data Drags Asia Lower” by V. Phani Kumar, Rosalind Mathieson and Leslie Shaffer: http://online.wsj.com/article/SB10001424052748704224004574488071676292110.html.

    Important flags were raised by the article from these journalists. The following information was highlighted for you to see why the concerns are raised with, “The data from China showed its economy ‘has taken off, but it is flying on one engine,’ with growth dependent on government-directed investment funded by aggressive bank lending, said RBC Capital Markets economist Brian Jackson” (Kumar, Mathieson, Shaffer).

    Again, all need to review the PBS Video Links to gain a fuller understanding for the reasons for Real Reforms:

    PBS channel under Bill Moyers “America’s Economy reformed”?

    Alternatively, get to get to know the name of Simon Johnson and his website: https://baselinescenario.com/

    The last video link brings home the ugliness why we should all take up our voice of concerns for real reform: http://www.pbs.org/wgbh/pages/frontline/warning/

    This is a continued Theme of Posts based upon A Call to Reforms and as Far-fetched as these thoughts may be, they are spot on!

    James Gornick

  12. Yes, I should have mentioned Mr Palanza, who gave
    a thoughtful reply to my demarche. And if rambling
    is forbidden, “who among us would ‘scape whipping”!

    But IMHO you go far afield when you mention education
    and other government services. I am, in this forum,
    focussing on what a financial sector, which we can
    assume is mostly private for the moment, _should_
    do. What is socially useful for it to do?

    In re exponential growth: presumably you and most
    others here will know Herman Daly’s “Steady State
    Economics”. This is another of my interests, and
    I’ve had E-mail contact with Mr Daly. But the
    question of “steady state capitalism” is a
    different subject, no?


  13. There is encouraging evidence of some movement along multiple dimensions in the political arena. A friend of mine noted that in response to the insurance industry’s (now open and undisguised) efforts to kill any form of health reform that does not involve a mass subsidy to insurers, the House and Senate both introduced an ammendment that would remove the federally-granted anti-trust exemption for insurance companies. That would be a “big deal”, both in the health domain and the finance domain. It might signal that Team Obama has finally grown a… er, spine.

    I am less impressed by the compensation limits (yes, they should happen; but I get the sense it’s grandstanding).

    Finally, I remain unconvinced that addressing TBTF will fix the moral hazard problem. SJ may be right that the administration’s new strategy is to “disincent” size in banking by creating compensation structures that shift the most highly compensated (and talented, if we believe the link holds, which is dubious) people to smaller institutions. (Is this in addition to, or instead of, differential capital ratio requirements and/or an FDIC surchage for larger institutions? I hope it does not replace those other measures.)

    But the issue is this – if there is too much highly leveraged money in the system, everyone knows the Fed cannot _allow_ asset values to fall too fast, or money supply implodes. Much of the Crisis last year was not merely the failure to rescue Lehman’s bondholders. It was a serious question about whether the Fed had actually decided that it would not put a floor under asset prices in general. Hence the long delay in the deployment of QE-like responses – the Fed sterilized its actions in October 08/November 08 even as it delivered targeted interventions to keep our oh-so-precious banks capitalized and the short term paper market functioning.

    Not only did the Fed pick a lousy time (and mechanism) to try to show that it was not serious about offering a universal floor on asset prices, but they ultimately lost the fight anyway after inflicting tremendous damage on everyone except the worst offenders.

    That’s not to say we should not fix the TBTF problem – merely that we should not put all of our reform-eggs into the TBTF basket. In this regard, again, there is some hope – Team Obama seems to “get” the currency valuation issues, the capital asset ratio problem (maybe), and some other issues. But they have explicitly rejected the separate-lines-of-business argument. (Goolsbee’s statements are about as explicit as one can get in politics.)

    Calomiris’ article was thoroughly unconvincing – one has to imagine that there are some _other_ reasons why the Summers Braintrust doesn’t want to deal with this issue. The question is Why?

  14. One more on the team, although Martin Wolf has gone wobbly on me:

    “As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.”

  15. Actually, it’s not necessary to reinvent the wheel. There are working prototypes of superior financial systems in abundance. Banking in North Dakota, microfinance in various places, Ecovillages in places like India, banks in Canada, and in general superior methods of allocating resources all over the world (also many examples of inferior systems). As so many have already pointed out, it’s not going to happen without political change, which means that you Americans will have to elect someone other than a democrat or republican. If not, look forward to a life of servitude.

  16. I’m not so sure how ephemeral this blog is. Things you post here may come back to haunt you decades later.

  17. What I don’t see mentioned here is the politics of this. Clearly breaking up the TBTF is not on Obama’s agenda. That means the U.S. economy will remain beholden to the massive power held by these few institutions. To the degree that the bailout increased the moral hazard, we will likely see a major crisis re-emerge in the next few years. The social and political consequences of this will be severe. I hate to play chicken little, but 2007-08 may have just been the first act of the play.

  18. Did anybody suggest that down-sizing TBTF banks would solve the current problem? I must have missed that. Wasn’t down-sizing a (partial?) fix for impact on the economy in the event of TBTF bank failure?

    Surely the TBTF situation is a product of the operations of the fundamental problem causing factors? However fixing TBTF can mean that another failure will not require trillions of public funds and a bank may be again free to wear own risk and fail?

    Maybe I need correction.

  19. Alan,
    I would like to see your ideals achieved. I presume you are posting these thoughts to fix our own economy?

    A problem scene arises where currencies are freely convertible. Therefore every currency manipulator anywhere may freely interpret what constitutes ‘plaything’ and whether they care. Then again investment bankers and others will seek to manipulate values to act as a base for derivatives and probably short the market to exploit differences.

    We may well have a situation which cries out for correction but the devil is in the details. How are we to bell the cat in the current global market? It may be helpful if you were to enlarge on your suggestions and comment on any G20/IMF/UN/Basel III involvement required.

  20. Yakkis: “One of the problems frequently raised is that the current scheme requires exponential growth, which over the long term is mathematically impossible to sustain.”

    It does not require the exponential growth of credit. When a loan is made and repaid, the money that was created by extending the loan is destroyed. Its creation is only temporary. (Now, temporary can last a long time, as new loans are made. For instance, the U. S. money supply on the banks’ books has shrunk by about 2/3 in the current crisis.) But what about the interest that was paid on the loan? Where did it come from? Well, it could have come from new loans. However, the amount of money being lent tends to stabilize. So where, then, does that money come from? It comes from loan losses. The money that one bank loses on a loan has been spent, and so ends up (for the most part) in (typically other) banks as deposits.

    Under our current system, the growth of money depends, not upon the exponential growth of lending, but on defaults and bankruptcies. Since there are social costs associated with those events, maybe we should rethink things.

  21. First, insofar as the TBTF scenario, it might be useful for the Justice Department to look at issues relating to unfair trade practices (vis a vis the derivatives that turned out to be nearly worthless from one standpoint, that is an absolute — and there are something in excess of 500 trillion worth still floating around to kill us) and antitrust (the big banks had a coordinated conspiracy to defraud the taxpayer and protect (and grow) their dominant positions. This was not a Ponzi scheme, let’s be clear, but as the old saying goes, “follow the money” and voila, the money has ALL flowed to Wall Street, once Glass-Steagall was overturned, and once the investment bankers gained access to the Fed money supply.

    I agree that the talk during the pre-re-regulatory discussions and sound bites has become more interesting, and, of course cutting off many of the most highly paid members of the cabal so that they cannot earn salaries in excess of $500 thousand (wow, big woopdedo) will put the shrew on notice that she may be tamed someday. Even the idea of creating a law to break up the TBTF’s, if they again get the country in trouble by doing risky business, sends a good signal. But, and it’s a big but, I don’t believe that they are cowed. The Treasury and the Fed are looking vaguely pro-active now, but the Barnie Franks and Chris Dodds have been interestingly silent in the last few days, during the speeches and proposed rollouts.

    Without a reinstatement of Glass-Steagall, it remains easy to hide risks, especially since only about 10 to 20 percent of the risky derivatives will be forced to be traded in sunlight.

  22. Check out David Korten’s efforts. I suspect you may like them.

    If you are not familiar with David Korten, here is a tiny bit about him, in his own words: “Many people refer to me as an economist because much of my writing focuses on economic issues. Although I have studied a good deal of economics, I am by training and inclination a student of psychology and behavioral systems. My early academic preparation included a BA in psychology from Stanford University and MBA and Ph.D. degrees from the Stanford Business School.”



  23. Also if there is no value then banks will revalue to MtM rule. Hmmmmm, banks will use ‘profits’ to write down assets and not pay bonuses and not pay dividends and not consume public funds and face reality and eat own garbage!

    I’ll drink to that.

  24. Uncle Billy, an interesting post as usual. Given that we have erased these institutions, what are we to do with the vacant lot?

    Should we be nervous if the only global powers were the corporations and investment banks?

  25. Bayard, if you truly believe that: “This was not a Ponzi scheme, let’s be clear,” It would be helpful to hear your definition of a Ponzi Scheme.

  26. I’m good at breaking things open to see what’s inside; not terribly good with dismantling them and putting them back together.

    Late nite musings. Lite throneroom reading.

    The vacant lot: Lay the new foundation. (Let’s see how far we can push the analogy). IIRC, Paul Krugman is a big fan of Asimov’s Foundation series. Maybe worthwhile to talk to him to see if this informs his thoughts on long-term planning. Before we begin the framework, we need a consensus regarding the shape and dimensions of the final structure. How do we work towards a consensus? Perhaps we need to demoralize the citizens of the most powerful countries — put them through a depression, and maybe even a war. During the depression, folks will clamor for a strong leader who will tell them how to organize, and how to contribute for the good of the whole. This leader will be able to spoon-feed them the consensus. (Not my idea of how to do it; just my idea of what’s happening).

    If you want to engineer consensus on a global scale, you’ve got create a huge common enemy. Global Warming seems to fit that bill, and swine flu. These two threats and others, if needed, will catalyze international cooperation; get everyone rowing together.

    Anything built will probably only need to last 50-100 years as science threatens to obviate many of our meat-based activities like working, eating, etc.

    I just don’t see patching up the old cottage anymore. Its foundation is crumbling to dust.

  27. I agree, there a lot of good ideas in this board and being published, but very little political willpower to do anything that would really help the situation. It looks to me like the people in power are going to top off their tanks at all costs, too bad for the people who don´t have a life boat.

  28. Wendy I agree with your assessment. Do you have a suggestion for those of us that do not have a lifeboat?

  29. dumb question:

    why not get some smart legal minds with real world paper-pushing experience into conclave and let them come up with a system that synchs interest rates and revenues and thus makes the feasting painful???

    preaching manners/consideration/behaviour is just pathetic and makes the preachers look like helpless victims


    “Companies that liberated themselves from the shackles of the TARP are feasting on low-interest rates and other government efforts to prop up markets—and they’re partying like its 2007.”

  30. None of you seems to understand that the system was relatively stable (at least in America) before the explosive growth of OTC derivative contracts. These have made a mockery of accounting rules, tax rules, regulatory rules. They have enabled executive theft through stock options grants and accounting manipulation of stock prices; they are the source of the huge banker bonuses over which the public endlessly obsesses. Try to focus on reforms which actually might happen. Taxing and shining light on OTC derivatives wouldn’t create a perfect society but it just might save us from a complete collapse and an end to any kind of economic and political freedom.

    A tax of 2% on $600 trillion derivative contracts would produce $12 trillion, roughly equal to the principal of our National Debt. Disclosure of derivative bets would make most of them useless for evading tax and regulatory laws. The only reason not to tax and register derivatives is to continue enabling banker fraud.

    paskudnyaks.blogspot.com details proposed legislation.

  31. I think there is another aspect to the problem of TBTF. Ultimately, if a state is unable to control (within its territory) a non-state actor that can threaten it (i.e. massive financial crisis), its soverignty is compromised. We make a great fuss about ‘terrorists’ yet the explicit power of a large institution (e.g. Goldman-Sachs, BOA, etc) quite effectively threatens U.S. capacity to carry out policies designed for its own and the public’s good. That’s compromised soverignty.
    In that context, the limitations on executive pay seem rather frivolour – useful but ineffective.
    We are unlikely to come up with an international system to constrain TBTF institutions ironically, because republicans and doppy-dog dems see it as an infringment on sovereignty!

  32. There is no doubt that a number of economic technical methods are available that can fix things much faster and with less overall pain than what is currently being proposed by our friends in high places.

    But as Wendy points out the political issues are what matters here – and the political points have to be made straight-forward so that the public understands what is at stake.

    In a democracy, the ONLY institution that can be “Too Big To Fail” is our nation. Look, we have CITIES that have gone into bankruptcy. For financial institutions to assert a TBTF status is tantamount to their takeover of our political system. A silent revolution is underway.

  33. Whilst I have great respect and admiration for Mr Johnson, it is clear to me that he missed the forest for the trees in suggesting that compensation limits may have salutary effects on our behemoth financial institutions.

    An organization takes its character from the top down, and the prevailing “tone at the top” of these institutions is one of self-absorbed greed and hunger for power. It is that value system that has lead to the predicament in which we now find ourselves, and that will not change by putting temporary governors on executive compensation that likely can be circumvented, directly or indirectly in some fashion. The same executives with those same amoral value systems are still at the helm.

    Because of the marginal utility of the dollar, at some relatively low level additional salary or bonuses makes little or no change in an executive’s lifestyle. Hence, money becomes increasingly inefficient – probably on a geometric basis – above that point as an incentive. And at that point, additional compensation only becomes a proxy for power, and power is VERY expensive to buy. Thus, we are seeking to have our companies in the hands of those who are power hungry.

    Contrast, if you will, the compensation given to our great generals: what incentive did we have to give Patton, Bradley, Marshall, MacArthur or, more recently, Powell, Schwarzkopf or Petreus? While generals do live as emperors while they are in power, they do not cost our country substantial sums. These men are, however, motivated by their sense of honour, of duty.

    Note, too, that the vast majority of highly successful entrepreneurs who create massive enterprises do not seek to pillage their companies for $100MM compensation packages. That is because they have the unselfish team and service driven value system that nurtures a company, and that dos not create a culture of greed, avarice and hunger for power for self aggrandizement purposes.

    We need to change the culture, or render them less powerful.

    Richard L Wise

  34. Jake, We have a problem taxing derivatives as contracts may be activated globally by parties without an insurable interest. How would you propose to identify contracts, parties and tax liabilities for a contract created in New Delhi or Beijing? Further complications are question of a contract traded to third or subsequent parties and possibly bundling via securitising processes?

    Even if we could solve the administration problems we might find we have initiated a tax revenue source but the original problem is still alive and kicking.

    Then again we would find some places offering a ‘no tax’ business regime. Two guys exchanging a piece of paper would be anonymous in extremis?

    Allowing an investment bank to roll the dice with trading and savings bank funds topped up with taxpayer dollars is the main problem so separating trading and investment banking is as essential and feasible now as it was in the 1930’s. Benefits targeted would be:-
    1. Fix TBTF problem immediately and no public funds required
    2. Choke off lifeblood to the gambling habit

    Other solutions required for
    a. Dark pool sleight of hand tricks (same day registration of off-market deals?)
    b. Foreign dealing evasion (limit legality – tax at registration, Basel III?)
    c. True asset vslues and business health concealed – (restore mark-to-market. Market offer, even zero, is the valuation).

    Note: progressive hits on the problem set are possible and probably more politically acceptable?
    Maybe something like this could be connected with your tax idea?

  35. Actually, power is surprisingly cheap to buy. With campaign contributions under $1B you can pretty much get whatever you want accomplished. $15B would buy you the whole government. $100B would buy off everyone else. So for about $115B, you could own America worth $16T a year.

  36. Obviously the average IQ of the Fed Reserve Governors has dropped dramatically since Alan Blinder left.

    Has it now become “provocative” to want a stable banking system where we don’t have to go through 6+ iterations during crisis time to make sure deposits are stable and safe from robbery of some guys working in the derivatives/CDS department??? I wonder what wealthy suburb Tarullo grew up in???

  37. I advocate:

    1) getting rid of accounting practices that legalize criminality…disallow off balance sheet transactions and SPE’s SPV’s…

    2) Immediate and absolute reinstatement of Glass-Steagall Act, and give all firms 6 months to break up and put up the wall again.

    3) Revoke TARP. Call for an investigation of all TARP recipients, their positions in Lehman CDS’s, and LEH shorts, and a retroactive audit to the day before Lehman was left to fail instead of giving them bank holding status and a 6 billion dollar bridge loan.

    3) AUDIT THE FED per S604
    ( The link below directs you to a site where you can look up contact info for your local elected officials. Just type in your zip code, then your elected officials’ contact info pop’s up and a personalized letter is there for you to copy and paste into a letter for you to either email, fax or mail to your representatives, and senators. I suggest you also take this link, and this info and email it to ALL your contacts—if WE THE PEOPLE don’t use our power to VOTE, we may lose our republic! Our future has been robbed and it is time for justice!

    http://www.ronpaul.com/2009-07-21/ron-paul-ask-your-senators-to-support-audit-the-fed-bill-s-604/ )

    4) prepare to campaign against all senators who do not support auditing the fed…if there isn’t a 2/3 majority, a presidential veto will stick.

    5) Insist that our legislators stop acting as bought and paid for puppets for the privately held federal reserve and the rest of the bank cartel.

    6) Spread the word about our corrupt legislators and insist on their doing their job to represent the US citizens, not just the banking cartel.

    7) Recognize that if we don’t stop the groupthink ideas that we are required to bail out banks, all American’s and all of our heirs will be enslaved to the machine that charges us interest for the whim of their bankheists.

    8) I am for everyone reading The Creature from Jekyll Island.

    9) I am for believing that there are enough good people in our country to require the current criminals legislating to either act right, or to leave and let honest public servants take their place.

  38. Paulson and Bernake could have taken ONE DAY to ask for the authority to unwind the TBTF (blackholebanks) instead, they take THREE WEEKS to lobby for free money for their brother banks to suck in to survive–i watched very carefully, no doubt GS, MS and C were all toasted right along with LEhman–but with their chiefs paulson and bernake’s self dealing for them, and the LEH win on CDS’s and shorts, and bank holding status, the others effective got rid of their biggest competitor and had plenty of blood to get them by until the secret treasury transfusion that occured the Saturday after TARP criminal legislation passed.

    Here it is over a year later and now they are asking for this authority to unwind the TBTF (blackholebanks) only so that in case the public decides to actually object to more bankheists, they will have this one handy–keep an eye out, i am sure there will be something in the legislation to pass more free money to the banksters.

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