Break Up The Banks

By Simon Johnson, co-author of 13 Bankers, as discussed on the Today show this morning with Matt Lauer and Erin Burnett

The biggest banks in the United States have become too big – from a social perspective.  There are obviously private benefits to running banks with between $1 trillion and $2.5 trillion in total assets (as reflected in today’s earnings report), but there are three major social costs that the case of Goldman Sachs now makes quite clear.

1)      The megabanks have little incentive to behave well, in terms of obeying the law.  There is fraud at the heart of Wall Street, but these banks have deep pockets and suing them is a daunting task – as the SEC is about to find out.  The complexity of their transactions serves as an effective shield; good luck explaining to a jury exactly how fraud was perpetrated.  These banks have powerful friends in high places – including President Obama who still apparently thinks Lloyd Blankfein is a “savvy businessman”; and Treasury Secretary Geithner, who is ever deferential.

2)      The people who run big banks brutally crush regular people and their families on a routine basis.  You can see this in two dimensions

A. They are not inclined to treat their customers properly.  They have market power in particular segments (e.g., new issues or specific over-the-counter derivatives) and there are significant barriers to entry, so while behaving badly undermines the value of the franchise, it does not destroy the business.  Talk to some Goldman customers (off-the-record; they don’t want to bite the hand that hurts them).  Lloyd Blankfein still claims that the client comes first for Goldman; most of their clients are surprised to hear that.

B. Small investors also lose out.  Who do you think really bears the losses when John Paulson is allowed to (secretly, according to the SEC) design securities that will fail – and then pockets the gains?

3)      Underpinning all this power is the ultimate threat: Too Big To Fail.  If a big bank is pushed too hard, its failure can bring down the financial system.  This usually means protection when the system looks shaky, but it can also protect big banks from serious prosecution – if their defenders, like Jamie Dimon, can make the case that this would undermine system stability and slow the creation fo credit.  (This is startlingly parallel to the arguments made by Nicolas Biddle against Andrew Jackson during the 1830s; see chapter 1 of 13 Bankers).

In turn, this puts competitors at a major disadvantage, because the bigger banks can borrow on better terms.  The extent of protection provided to management and boards in 2008-09 was excessive, but what really matters is the protection perceived and expected by creditors going forward.  And this is all about whether you can credibly threaten the creditors with losses.  This, in turn, is about a simple calculus – if a firm is in trouble, will it be saved?

There are simply no social benefits to having banks with over $100 billion in total assets.  Think clearly about this – and if you dispute this point, read 13 Bankers; it was written for you.

62 thoughts on “Break Up The Banks

  1. My response to Tyler Cowen’s critique in the Huffington Post:

    I really am trying to look at this objectively, but this piece seems like a lot of fluff and not a useful contribution to the near-term debate.

    While the banking sector *may* have undue influence as long as the government needs debt financing, the key question *for now* is how to limit moral hazard in the banking system that we’ve already got.

    The key (as it has always been) is the credible threat of bankruptcy. As Elizabeth Warren said, “Capitalism without bankruptcy is like Christianity without Hell.”

    In reviewing 13 Bankers, I wished you had addressed these questions: 1) Do you agree that there are no social benefits to having large banks? 2) Would breaking up the largest banks (and limiting the growth of new ones) make it easier for these institutions to fail?

  2. How are they ever going to get a conviction when the story is so complicated? They need someone to say “Look. Goldman built a house of gasoline soaked charcoal and sold it as made of cinderblocks. They then took out an insurance policy and cashed in big once the house caught fire and burned down.”

    Is there anything being discussed for the financial reform legislation that would criminalize or otherwise prevent this and Goldman’s other shenanigans?

  3. I would agree with the RESTRUCTURING vs. REREGULATING of the investment sector. As we know, this would require international cooperation in accounting rules, national mandates and international laws of finance. Basel II is an utter complete failure. Evidently, doing whatever it takes by international leaders including our own, doesn’t include doing anything meaningful or substantive. The urgency is now gone and the political will is absent.

    The roots are the GLBA and CFMA which are failures by any measure and a mere 11 years old. Without those 2 pieces of legislation, SIVs could not have existed. One only needs to see the vast concentration of wealth off the backs of the commoners since their passage.

    Brooksley Born needs a broader audience as she saw the dangers (as many of us did) before their passage. Rather than assignment to a toothless paper tiger of the FCIC, she should be long meeting with the President and Finance/banking committees.

    What passes for finance reform under Dodd is not nearly adequate to readdress the imbalances in this economy. There is but one way to stop the massive robbery and that is to slam shut the mechanisms that allow scumbags to ‘innovate’.

    The political ‘leaders’ are just as complicit, Dodd present and accounted for during the last cycle of deregulation. In the world of unintended consequences, rather than playing more games, he and those who have enjoyed near lifetime appointments in positions of power should be humbled and work diligently to correct past mistakes. Unfortunately, they suffer the same disconnection and narcissism as Wall Street which are merely extended through them.

    They fool only themselves if they believe the public is clueless and ignorant that govt was hijacked by elite, contemptuous scoundrels who value nothing and no one other than themselves. Currently without more strident structural changes, this is nothing but political theater. There is no shame because there are no consequences. Hope for that, at least for this observer, is long gone.

  4. Exactly right.

    Breaking up the rackets is not the only thing we need to do, but it is the most important thing, which then enables the others. (Banning speculative derivatives, imposing and enforcing strong leverage requirements, a Tobin tax, and others.)

    Smash the rackets and all things become possible. Leave them in place and everything else is doomed to failure.

  5. Here is the direct video of Republican Senator Mitch McConnell of Kentucky, telling you why he loves private meetings with hedge funds. He won’t have time to see you if your an unemployed Kentuckian though, he’s very busy.

  6. Simon, I’m afraid of this all this outrage about GS will rush the passage of the current bill without the Volcker Rule.

    in HCR, my sticking point was a national exchange with OPM managing some of it to keep some of the cost down (we got a state exchange). In FR, in my humble opinion, if the banks are not broken up and the Volcker not included — THERE IS NO NEED TO DO ANYTHING ELSE.

    Please keep the light on this…President Obama, after the Mass elections came out with Paul V and said he supported it. LET’S HOLD HIS FEET TO THE FIRE.

  7. I was working in investment banking for several years before the crash, albeit in Canada, where we did not have a sub-prime market nor a meltdown of that sector. I did however work on several securitizations of mortgage portfolio’s here in Canada, and was required on two occasions see to it that they were rated by Moody’s. So, while I do not have experience in US securitizations of residential mortgage portfolios, I do with Canadian commercial portfolios. The point is…the math is the same, so I know what I’m speaking of.

    I have read the complaint by the SEC against GS&Co. I just want to assure people that despite the so-called ‘complexity’ of the financial gymnastics of securitizations, do not despair. Any jury will be able to look at the actions of the parties, independent of the math, and determine that a) Paulson did in fact choose the mortgages that went into the portfolio, and chose them based on a criteria of imminent failure, b) GS&Co duped another portfolio selection company into representing that they in fact had chosen the portfolio, independently of any third party with an adverse agenda, c) GS&Co assisted Paulson is setting up and paying out the Credit Default Swap when the portfolio failed, 7 months into the deal and d) represented (falsely) that Paulson was an equity player in the transaction, when clearly it was not. All these factors allowed two large institutional investors to buy the mortgage bonds based upon GS&Co’s prospectus, which contained both material omissions and misstatements of facts. The net result was to transfer nearly one billion dollars from two institutions to one hedge fund in seven months, all through the coffers of GS&Co. It is impossible that the left hand and right hands did not know what each was doing. Impossible.

    This is not a one-off transaction, either. I know GS&Co, having worked on several transactions with them. When they have a formula that works (when they get the math and the marketing right), they grind it out as many times as they can as quickly as they can, just like all investment banks. Reinventing the wheel is costly. When you find one that rolls, you ride it for as long as you can until the next structure comes along.

    Don’t be fooled by GS&Co’s claim that they, too were losers on the deal. They made far more on these transactions than they lost to set them up. It’s just paying their dues in order to sweep the table at the end of the hand. This will come out, because it’s a public company (unlike Paulson, unfortunately).

    Bottom line: the facts of the deception, manipulation and outright fraud are obvious and easy to understand, regardless of the complex mathematics behind the transaction. There are no doubt complex engineering drawings behind the faulty gas pedal problems with Toyota, but ultimately that didn’t stand in the way regulators ability to judge the evidence of the firm’s deceitful and manipulative conduct – as we see yesterday with the levying of a $13M fine. The facts of GS&Co’s actions perpetrating this one fraud will come out very clearly, and this will be known as the first card to fall in this very elaborate house of cards upon which our financial system, on both sides of the border, has been constructed.

  8. Go back to rule number one…

    “The biggest banks in the United States have become too big – from a social perspective. There are obviously private benefits to running banks with between $1 trillion and $2.5 trillion in total assets (as reflected in today’s earnings report), but there are three major social costs that the case of Goldman Sachs now makes quite clear” (Johnson).

    Not so, if you follow the recent decision of our Supreme Court of The United States; and the Powers they gave to Corporations–for the ability to provide the avenues for campaign war packs. Wow, candidates running from the smallest to the largest of offices; to the presidency with the green light of corporate world elite. This is why your idea of TO BIG TO BRAKE FOLKS UP WILL NOT HAPPEN TILL WE GO TO THE ROOT OF THE CONSTITUTIONAL LAW.

    This is huge professor Johnson, you must admit. It remains one of the greatest of obstacles for the disfranchisement of the voter as well as: the invitation to invite the ethics and moral decay of business behavior that detours rewards of humanity of human conditions and tends to lean more in the Coase (Oppression) Theorem realm of mathematical portabilities.

    Far-fetched, Not Anymore as you and James Kwak are lending voices of reason for more to learn and take the one thing you own most, your VOTE and use it wisely during these coming elections…


  9. Our banking woes began at the repeal of the Glass-Steagall Act. One needs to follow its repeal which was initiated by Sen. Phil Gramm when he co-authored the Gramm Leach Bliley Act and bank regulations went out the window. He made a lot of $$ as a result of that Act.
    We need to have Regulations in our banking systems. I think the events of the past few years proves it.

  10. How do any you respond to Paul Krugman’s (an economist I very much respect) claims in recent NYT op ed pieces that breaking up the banks won’t solve the problems, and his use of the historical example of the Great Depression where there weren’t the same handful of mega-banks but many, many smaller ones and the entire system still completely collapsed? It seems to me that though he has a point on that, he seems to be failing to focus on many of the other indirect ways that the current system is dangerous(i.e. the big banks lobbying, campaign contributions, and revolving door influence, that banks ostensibly would not have if banks were smaller, and hence, less powerful individually. Anyones comments here would be appreciated — Christian Jardine

  11. I have heard the argument that if a big bank was broken into ten small banks the small banks would still make the decision about the toxic deratives.

    This is a bogus assertion. You are assuming that all ten CEOs COOs and Boards made the same decision. The probability of this occuring is near six sigma. It isn’t going to happen. The real decision most likely would be about one sigma or 60%. That means there are four banks that would not have to be bailed out. My real feeling is that it would probably go the other way and 6 banks would decide not to delve into the toxic assets leaving the remaining four to sink.

  12. Spitzer: Goldman suit no coincidence

    April 19, 2010 – Politico

    “Former New York Gov. Eliot Spitzer said on Monday there are “no coincidences” in the Securities and Exchange Commission filing a lawsuit against Goldman Sachs just as Democrats are about to bring up financial regulatory reform in the Senate.

    The SEC, which announced the civil suit Friday, is forbidden by law from acting in concert with the White House in choosing which cases it prosecutes and when to do so.

    Asked about the timing of the SEC action during an interview Monday on CNBC, Spitzer, who prosecuted securities fraud as the state’s attorney general, said that “there’s no question the SEC is desperate to prove that it can enforce the law, desperate to bring in the great white whale.”

    “This was not a coincidence,” asserted the former Democratic governor, who resigned after an affair with a prostitute became public. “There are no coincidences in this world. None.”

    “It could be both a witch hunt and legitimate exercise of regulatory authority,” he added. ”

    Asked during his regular briefing Monday whether the administration knew the charges against Goldman Sachs were coming, White House press secretary Robert Gibbs responded tersely, “The SEC is, by law, an independent agency.”

  13. According the recent comments by Bill Clinton, the Glass-Steagall Act had already been “breached”, before it was officially dismantled. If there is no political will to enforce laws or regulations, then they are only window dressing.

  14. I fervently hope that Elizabeth Warren has the last word. We still need to require that all accounting for all banks, both large and small, is open and public. The world of CDOs is still a secrete world.

  15. Please explain one thing to me. Let’s say a bank gets in trouble. The government has three choices: (1) take it over; (2) bail it out; or (3) let it fail and let the depositors lose. For TBTF banks, we postulate that option 3 is off the table. The question is why is option 2 generally chosen over option 1? In 2008, it seems this was due to political from ideologues who were foolishly afraid that this meant “socialism.” The difference between option 1 and 2 is that in in option 1, the shareholders and executives lose, whereas in option 2, they win. So why is option 1 also “off the table” with TBTF banks? Size alone cannot be the answer, as the cost of option 1 and 2 would seem to be similar, with option 1 probably being lower cost.

  16. I want some criminal indictments and convictions. I want to see some of these heinous sociopaths divested of the pirate booty they absconded with. I want to see some teeth in clawbacks. I want justice.

    Blankfein is dissembling scum. ITs the same old song and dance. Deceivers always arrange for plausible deniability.

  17. Simon or James if you’re out there,
    Please contact Sen. John Cornyn (R-Texas) ASAP. He appears to reaching out for help on how to publicly advocate the breakup of TBTF firms. I think he could use your guidance. A quote from Huff Post:

    Making those banks smaller, said Cornyn, would reduce the risk. “Sixty percent of all the banking assets are concentrated in ten banks in the country,” said Cornyn. HuffPost asked if he’d support what’s known as the Volcker Rule, an administration plan to split off risky trading done by banks for their own gain from standard commercial banking activities.

    “Yes,” he said, “I think that’s one approach.”

    Without prompting, he added: “Glass-Steagall, we need to look at that.”

  18. APRIL 19, 2010 – Bloombert – excerpts

    “Goldman shares were higher in afternoon trade on Monday after their biggest drop since the financial crisis on Friday, helped by a Bloomberg news report that the SEC’s two Republican commissioners both voted against suing Goldman.

    “The fact that the vote was close has been the proximate cause for the stock’s rally. This means it wasn’t a clear-cut decision by the SEC,” said Doug Kass, president of hedge fund Seabreeze Partners Management.

    U.S. President Barack Obama prepared to fly to New York later in the week to press what would be the biggest crackdown on the financial industry since the Great Depression, and European regulators said the Goldman case could bolster their efforts to regulate derivatives.”

  19. erin burnett says we all need to learn to live with a lower standard of living. I will when she does.

  20. And I am glad that was a short interview. Heaven forbid NBC do any real investigative revealing journalism to the viewers that are the largest voting population.

  21. Hey, that was a good forum and a good three minutes for the message, which I heard, win, lose or draw, the banks need to be broken up.

  22. This fear of “socialism” is a real sticky thorn in the U.S.A.s side when it comes to considering all options. It is dogma of the worst kind. Especially given that if the Tea Baggers get their way and taxes are cut and regulatory agencies are dismantled and Government is reduced to running the military and sitting on the sidelines as TBTF institutions collapse under the weight of their tricky calculus, they will get more than they bargained for. I can understand why the G.O.P. is sucking up to the Tea Party. When the TP vision comes to pass and the system collapses the only mechanism capabable of keeping a lid on Anarchy will be for the Republican led administration to declare Marshall Law. Tea Party beware. The very freedoms you think you want so badly are the very seeds of the oppression that you fear so much.

    Any Government is a form of coercive monopoly. There are any number of groups in the U.S. that are foaming at the mouth to test the current monopoly regardless of its political stripe. Thing is, in face of a complete economic collapse some form of Marshal Law would absolutely be required and given that certain groups in the U.S. interpret the Constitution as some extremist Muslims do the Coran, one can only presume that there will be much bloodletting as various militia fight the U.S. Army and also amongst themselves in an effort to carve out their own regions of influence. And then the Chinese and the Indians will have to send peace keeping forces… Ah the irony of it all!

    For all the talk of financial collapse, no one with any authority has started a serious discussion of what such a collapse would look like or what the U.S. Military thinks it would look like and what their contingency plan is… because they must certainly have one.

    America has arguably been a beacon of hope for the World since WW2… but within it’s soul lies an uglinest that has yet to be come to terms with. It is clear to me that the U.S.A. is very much the United STATES of America… and that there is enough asymetry within (and weapons in the hands of citizens) to cause some truly Biblical mayhem.

  23. @AKW,

    As a recovering lawyer with a fair amount of litigation and trial experience, I agree with you.

    I’ve read the complaint, the disclaimer language that GS is relying upon as its defense, and the arguments that GS is making in its defense, and I don’t think any jury anywhere will have a problem cutting through the bull. GS clearly did something bad.

    The hard question for the jury will be whether what GS did was bad enough to rise to the level of fraud. I think it is, but I also think that there is enough chaffe in the air that a great (good won’t be good enough) trial lawyer should be able to persuade a jury to find that there was no fraud. It all will come down to who shows up at trial with the most compelling set of memes. Based on the current state of play, I’d say it will be the SEC who does, but GS has yet to start crafting its arguments for mass consumption. We’ll see what happens. (I’m betting on Obama’s SEC capitulating and calling it a victory without expanding its search for fraud on Wall Street.)

    FYI — The only reason why the fraud case against GS seems overly complicated is because it is being reported that way. John Stewart did a good job making this point, and Jesse at Cafe Americain did a nice takedown of the financial media, as well.

  24. Simon,

    All of your arguments make a lot of sense objectively, but to free market purists they trigger resistance because you are calling for government interference in business.

    One way to rephrase your arguments is that there can be no free market in the financial industry when certain banks have so much political and economic power that they no longer have to compete.

    Free market purists believe that businesses need not and should not care about the “social benefits” of business, that such benefits flow naturally through the operation of free markets. So, when you start talking about government intervention for social benefit, they hear “blah, blah, blah, socialism.” To make free market purists actually listen to you and persuade them to join your cause, you need to speak to them in their language and avoid words that trigger defensive reflexes.

  25. Couldn’t have said it better. unfortunately, this “civil” suit will be in the court for years. And in the meantime, every investment bank, commercial bank etc. will have a hand in the new round of mortgage failures & the CDO payouts. If you look at the Obama (i voted in) crew involved w/setting up “new rules” they have either been in the Fed, the Treasury, A Board member of Big Bank etc. so this is a well-connected, well-constructed fraud on the american people. They all claim they didn’t see it coming… I think they didn’t realize other people were watching on the sidelines, caught on to what they were doing, made similar investments & the whole thing blew up in their collective faces. Follow the money, follow the money, follow the money.

  26. April 20, 2010

    “Count me among those who were appalled by the news that the SEC’s decision to charge Goldman Sachs with fraud last week was decided by a 3-2 split vote among the 5 SEC commissioners.

    After missing Madoff, Stanford, and the financial crisis, the SEC is in desperate need of a redeeming victory — a fact that could not be lost on all 5 SEC commissioners. It is in every commissioner’s professional interest, as well as the interests of the agency, to bring this charge and see it through. And yet, despite this huge incentive to move forward, 40% of the SEC decision-makers decided the charge was unwarranted.”

    See this link for a speech I heard at around noon today. I was curious about what the administration would say — today — to a Brookings crowd. I got the impression — well, listen for yourself, and consider this snippet:
    “Every day we see developments that remind us of the overriding imperative here, the need to restore trust and credibility in America’s financial markets. Too many market participants themselves, through short-sighted greed, have squandered that credibility, and I would argue to their own detriment long-term. Wall Street reform must put a stop to this.”
    As to NBC, I liked that Simon seemed to have a carefully selected agenda of clear points that he was going to get across almost regardless of what he was asked. The timing was extraordinary. Strike while the iron is hot.
    By the way, Charlie Rose interviewed Rahm Emanuel for a full hour last night. He wants to run for mayor of Chicago when the current office holder leaves (Daly?). I understand he is ex-GS, and a huge fund-raiser, and I’m thinking the administration is thinking about sacrificing their golden GS connections if that’s what it takes to “get it right.” Emanuel says the administration knew nothing about the SEC suit, learned it from the media on Friday like everyone else.

    In order to restore that credibility, we have to end the practice of hiding opaque derivatives in invisible accounts antiseptically labeled “Structured Investment Vehicles.” So investors in markets can once again receive clear transparent price signals they need in order to function efficiently.

    It must block banks from steering clients toward a pit of toxic investments with one hand while betting against those very investments with the other hand. It must prevent underwriting practices that inflate the housing bubble that ultimately deflated the economy.

    The President and I will not support any reform that fails to address these fundamental problems; powerful, political lobby, the cynical tactics of opponents, opponents of reform are not going to stop us from getting this right.

  28. The SEC can win without proving intent to defraud. Scienter is not an element of a claim under § 17(a)(2) & (3) of the Securities Act. The illegal act is mistatement or omission of material fact. The SEC says omitting (or misrepresenting) Paulson’s role in picking the RMBS and/or that he had an equity position in the CDO satisfies this element. This is not complicated at all. The trier of fact will have to decide whether this was material, i.e., would the investor have attached importance to these facts if disclosed.

  29. Ooops. “In order to restore that credibility,” and following is more of the Vice President’s speech (however I managed to do that). Sorry.

  30. May be Paulson has bought CDS on GS and is minting on it too! However not sure whether GS wrote those CDS..

  31. A) Long are gone the politicians who were in it for public service. Personal aspirations and the need for getting reelected is the driving force behind the majority of their decisions.
    B) Corporations are in business to increase the value of their shareholders.
    C) Politicians need the funds from corporations to sponsor their election campaigns. Corporations need politicians to turn the blind eye on their activities.
    The math is quite simple: C represents a relationship in terms of A and B. But the obvious missing element of the equation is “the Consumer”. As long as the above is true we will always bet on the short end of the stick.

    What: Break this tight relationship between politicians and corporations.
    How: The right to vote is the most powerful weapon. Smarten up America, use it wisely.

  32. I think that a free market purist in “layman” form (i.e. not an economist) would simply reject the actual existence of monopolies – I know, I’ve heard people say it. I’m not sure, maybe even economists reject this.

  33. ” this “civil” suit will be in the court for years.”

    See the Letters column in today’s NYTimes (4/20) in which Oliver Revell a former associate deputy director of the FBI, argues that criminal prosecution of GS should precede any civil proceedings due to 5th amendment issues.

  34. The SEC complaint seems to me to be deliberately written in plain English (or as plain as possible given the subject matter) and breaks down the subject into easily digestible parts. I would guess this is intended to maximize the political effect.

  35. I explain to “purists”: ‘every system needs rules, whether capitalism or any other system – no rules means no system because you end up with chaos. What caused this crisis was not capitalism but crime. Criminals must be prosecuted. Laws must be enforced to prevent crime.’

  36. Politicians go into politics to make money for themselves, period. The campain funding is only to get and stay in the game by being elected and then reelected. Politicians make their money by skimming campaign funds and public spending, and by myriad forms of graft. ‘Public service’ is just a pose, which along with social issues are just a way to get reelected without antagonizing the real paymasters.

  37. Yes indeed, he is failing to focus on that, because now that the Dems are back in power he sees his role as not to seek the public interest, but to shill for Democratic party initiatives.

    The fact is that Krugman’s a neoliberal corporatist by ideology, and his opposition to Bush was not an opposition to any Bush policies in themselves but was out of anti-Republican partisanship.

    (As for his “reputation” as an economist, I think posterity will make short work of these globalization hacks who by now have been proven to have lied about every claim they ever made, who intentionally inflicted such infinite suffering on the world.)

    As we’ve seen over the past year, he now supports every racketeering program, as with the reactionary health “reform” bill, and now with his opposition to the most important and necessary aspect of finance reform, breaking up the TBTFs. (He’s even acted like a Republican with his repeated straw man that those who advocate breaking up the bank rackets think doing so is the only thing that needs to be done. That’s simply a flat out lie.)

    (I’ll also mention his deafening silence on the war. He was so eloquently opposed when it was Bush’s war. Now that it’s Obama’s war? Not a peep.)

    I’ve written several posts on this subject. Here’s the two most recent, on Krugman’s plan to help get a phony finance “reform” bill passed:

  38. The problem will never go away until the Federal Reserve can be audited,period! The financiers behind the Iron Curtain are communist,fascist,and authoritarian. The lifeblood of a capitalistic system by the way wasn’t factored into the US Constitution ,but only by incremental deception over the last century. I feel sorry for the American people,…and that includes myself. We’ve been had America!

  39. Glinda, the good witch, to Dorothy Gail: “Just say, ‘There’s no place like home; there’s no place like home; there’s…'”

  40. Simon’s key distinction: private vs social benefits and costs. Few comments pick up on this. TBTF offers private benefits to Wall Street and individual capitalists. These private benefits are achieved at heavy social costs: ower is concentrated, injustices are not addressed, among others.

    Simon seems to be asking, will the social side win out in this struggle? I’d have to short the social side. America tends to opt in favor of benefits for the individual over benefits for society. Looks at transportation, education, taxation, city planning.

  41. Beginning of ‘breach’ under Reagan, but Greenspan pushed to repeal Glass-Steagall in 1988. The FED in ’89 opened the door for commerical banks to get into securities, doubling the revenue limit from 5 to 10%, then in ’96 raised it to 25%. The Fed opened the door, and the banks sprinted through. Next came banks and insurance underwriting.

    Under Clinton it was Rubin and Greenspan vs. Robert Reich and Joseph Stiglitz, so Clinton was aware, and is more than disingenuous. CITI’s merged with Salomon Smith Barney and Travelers Insurance(who merged several months before] on April 6, 1998. ..”a $70 billion stock swap that was billed as the largest corporate merger in history(and the world’s largest financial services concern).” Sandy Weil, the CEO of the Smith Barney-Travelers ‘met with Greenspan before announcing the merger, later telling the Washington Post that he had got a ‘positive response’. Weill could also depend on Rubin, whom when he told him he had news, Rubin joked, “You’re buying the government.”

    Clinton, who along with Phil Gramm(chairman of the Banking Committee) Fall 1999 approved the repeal of Glass-Steagall.
    Clinton(on the day they reached an accord) “issued a statement predicting that consumers would be among the winners:
    “When this potenitally historic agreement
    is finalized it will strenthen the economy and
    help consumers, communities, and business
    across America”

  42. Thanks for the articulate dismantling of Krugman. Perhaps it will go some way to waking people up to the fact that he is a phony liberal who writes for the phony-liberal New York Times. He and his corporatist rag fooled me for years, but the scales have finally fallen from my eyes.

  43. Re: @ christian jardine….. check out the G-30 membership,past ,and present. You’ll find some interesting data. Oh,…I forgot to mentiom the G-20 where it’s more condenced. Wikipedia is a good start but their on the way out,…can’t ellaborate but their free speech is too free,and their less forthcoming with certain info – censorship is a coming. Krugman is on the side of the buttered toast,and won’t rock the boat. The powers to be own the press,media,radio,and every publishing compay that hasn’t yet been bought. They print the dictionary’s, and edit every religious,and educational book in the country,…?

  44. Re: @ RickK….there is a great white whale,…but it’s a mammoth “LandWhale” that controls every central bank in the known universe except for Iran,and Sudan,…to be cont.

  45. Re: @ Earl Killian….ironically, option Three(3) is the best choice. The laws can be changed giving the depositors equal rights involving the financial institutions breakup in Chapter #7(total liquidation). Shareholders rights can be stricken/waived, thus changed to include depositors equal too that of Warrants,Common,and whatever. Everyone shares equally,and proportionaly with all equal rights to the spoils. It could be a revolutionary in how banking was meant to be when the original FDIC law of the 30’s was enacted,too protect the depositors,and put all americans on a level playing field with the, “Robber Barron Bankster’s”!boys

  46. This is exactly the issue, and is the reason this qualifies as fraud. GS&Co deliberately withheld this information (the set-up-to-fail nature of the portfolio AND Paulson’s Credit Default Swap) from the buyers. It was withheld from the ‘selecting’ agent as well, and GS&Co went so far as to strongly hint that Paulson was taking an equity tranche (the so called 0 to 9% sliver), giving confidence to the buyers that the deal was just another synthetic CDO.

    The fraud is complete by the actions of GS&Co (and Paulson) whereby the disclosure of such information would have caused the buyer to decline to purchase the bonds, owing to both the poor credit risk of the portfolio, and the fact that the background sponsor (Paulson) had an enormous economic interest in the default of the portfolio.

    That’s fraud, folks.

  47. What is it called when a group of people have organized themselves to unfairly skim money from the unsuspecting and conduct fraudulent deals that most reasonable people would say is a crime while threatening that any serious challenge will result in great harm?

  48. Re: 2 ep3….Sorry:( I wished it was GS. However its the greater of the two evils,that being – AIG PS. Erin Burnett did pop-up on my radar screen scanning financials but,….paper chase tired.

  49. Yes, he was so good against Bush that I thought maybe he’d really changed his basic position and would still write on the people’s behalf even when the Dems were back in.

    We were sure wrong about that.

  50. Axually, the 3-2 vote is the best news I have seen on the case.

    It suggests that the charges have some teeth. If the fraud charges were mere window-dressing, a sop to the peasants moaning about the loss of their pathetic little sub-$1M jobs, then there would be no controversy.

  51. I agree, but I don’t think it addresses the even bigger issue:

    The financial sector as a whole is (*way*) too big.

    If you want less of something, tax it… Monsieur Pigou.

  52. Sens. Kaufman and Brown just introduced the SAFE Banking Act that would limit total assets of non-bank financial institutions to 3% of GDP and 2% of GDP for banks.

    The bill seems like a sincere effort to break up banks, and 2-3% is substantially lower than the current 63%. But if there are “no social benefits to having banks with over $100 billion in total assets,” will limiting their size to three or four times that amount still fall short of true reform?

  53. Let me reconstruct,and reiterate – depositors are guarranteed the right to dip into the spoils first,but the shareholders who create the entity lose all which is backwards,or better said unjustifiable. Without the shareholders the entity wouldn’t exist. Please be advised that the people make the laws through the individuals they elect into office. There is no reason why banks can’t offer,”Individual Depositors Insurance” quite similar too what the Gov’t. offers the banks or better said requires the banks in FDIC premiums.

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