The Sickening Abuse Of Power At The Heart of Wall Street

By Simon Johnson, co-author of 13 Bankers

Here’s where we stand with regard to democratic discourse on the future our financial system: leading bankers will not come out to debate the issues in the open (despite being approached by reputable intermediaries after our polite challenge was issued) – sending instead their “astro turf” proxies to spread KGB-type disinformation.

Even Larry Summers, who has shifted publicly onto the side the angels (surprising and rather late, but welcome anyway), cannot – for whatever reason – bring himself to recognize the dangers inherent in our unstable and too-big-to-manage banks.  Or perhaps he is just generating excuses that will justify not bringing the Brown-Kaufman amendment to the floor of Senate?

So let’s take it up a notch.

I strongly recommend that the responsible congressional committees request and require all assistant secretaries at the US Treasury (and other relevant political appointees over whom they have jurisdiction) to appear before them early next week.

The question will be simple: Please share your calendar of meetings this weekend, and provide us with a complete accounting of people with whom you met and conversed formally and informally. 

The finance ministers and central bank governors of the world are in Washington this weekend for the spring meetings of the International Monetary Fund.  As is usual, the world’s megabanks are also in town in force, organizing big meetings and small dinners.

Through these meetings dutifully troop US treasury officials, providing in-depth and off-the-record briefings to investors.

Banks such as JP Morgan Chase and the other top tier financial players thus peddle influence, leverage their access, and generally show off.  They accumulate information from a host of official contacts and discern which way policymakers – their “good friends” – are leaning.

And what is the megabank whisper mill working on?  Ignore the “economic research” papers these banks put out; that is pure pantomime for clients-to-be-duped-later.  I’m talking about what they are telling the market – communicated in specific, personal conversations this weekend.

They are telling people that, based on their inside knowledge, Greece and potentially other eurozone countries will default on their debt.  Perhaps they are telling the truth and perhaps they are lying.  Most likely they are – as always – talking their book.

But the question is not the substance of their whisper campaign this weekend, it is the flow of information.  Have they received material non-public information from US government officials?  Show me the calendar of the top 10 treasury people involved, and then we can talk about whom to summon from the private sector to testify – under oath – about what they were told or not told.

There is no question that the megabanks derive great power and enormous profit from their web of official contacts.  We should reflect carefully on whether such private flows of information between governments and “too big to fail” banks are entirely suitable in today’s unstable financial world.

Large global banks make money, in part, through nontransparent manipulation of information – this is the heart of the SEC charges against Goldman Sachs.  But the problem is much broader: the Wall Street-Washington corridor is alive and well on its way to another crisis that will empower, enrich, and embolden insiders (public and private) while impoverishing the rest of us.

The big players on Wall Street are powerful like never before – and they use this power to press for information and favors from sympathetic (or scared) government officials.  The big banks also appear hell-bent on abusing that power.  One consequence will be further destabilizing global financial markets – watch carefully what happens to Greece, Portugal, Ireland, and Spain at the beginning of next week. 

It is time for Congress to step in with a full investigation of the exact flow of information and advice between our major megabanks and key treasury officials.  Start by asking tough questions about exactly who exchanged what kind of specific, material, market-moving information with whom this weekend in Washington.

131 thoughts on “The Sickening Abuse Of Power At The Heart of Wall Street

  1. Prof. Johnson:

    While I agree completely in principle with your suggestion to break up the banks, has any thought been given to how that could actually be done?

    For example, if Goldman Sachs or Citibank had to be broken into 10 parts, and they choose the parts, aren’t they going to find 7 reasonable businesses … and cram all of the junk they hold into 3 “businesses” that would instantly fail and trigger massive CDS payouts that no one can cover?

  2. Perhaps the question has become this simple: Who will dominate all the rest? The sovereign United States or the Six Largest Banking institutions in the World.

  3. Yes, I’m still waiting to hear that answer too – details on how to safely and efficiently break up the banks, with pros and cons of different methods.
    Without concrete simple examples, politicians and citizens alike cannot imagine how it could help our economy.

  4. Some people seem to believe that it’s over – listen to Michael Lewis on the Daily Show. The dirt was done in 2006-07. But Fannie and Freddie are guaranteeing like never before and the government is doing little to hedge (used without irony) the next collapse other than to warn that it made a promise, not a fiduciary commitment. I have a hunch that there’s an even bigger short out there.

  5. Wow, I really appreciate your comments. The only thing I have to offer here is that way back in, god, 1992, I dated a guy who traded derivatives on the “SWAPS” part of J.P. Morgan (I believe since the bank has merged and whatnot) and he would bring back these binded books prepared by the quants. He told me many times point blank that no one knew exactly what he was selling and it would be a waste of his time to even open the books that supposedly explained it all. Our relationship did not work out but I have never forgotten his cavalier attitude (by the way he was 25 at the time and already a senior VP at JP Morgan).

  6. We should reflect carefully on whether such private flows of information between governments and “too big to fail” banks are entirely suitable in today’s unstable financial world.

    Given the facts that the government is supposed to be the servant of the people, and that via the Bailout we the people are now the rightful owners of these insolvent banks, it follows that neither is entitled to secrecy.

    How can underlings and employees be entitled to keep secrets from the owner and boss?

  7. Is it me or is there a certain amount of anxiety in Simon’s tone for this post? It’s one thing to say the sky is falling but he SEES it coming. It’s right there for all to see..and yet the Titans of Finance are spending the weekend playing their game of Hellsbro’s Global Risk over fancy drinks and cigars…

    So what are possible Meltdown Scenarios? Anyone care to share their prophecies?

  8. Immediately revoke the TARP legislation. It was never implemented as Congress required. Let the TBTF banks fail if needed. Use the recovered TARP to protect US businesses as originally intended to prevent a 2nd recession.
    Reinstate Glass Steagel or something like it. This was legislated as part of TARP. So relegislate it out of existance.
    Make all Derivative trades transparent and taxable. Simplify the transactions so that regulation can be facilitated.
    Restrict artificial financial instruments where there is no actual investment being made. Why should a side bet be made without putting in the amount that is being bet on? This would never work in a Las Vegas Casino unless you signed an IOU that commits you to repay the house bet.
    Also, if one is allowed to invest in this type of instrument that enables one to benefit from the failure of an investment opportunity, then this type of investment should be heavily taxed and regulated. This needs to happen because the investor may try to make failure more than an option. They may try to initiate a domino-like series of events that may lead to failure while claiming that they never played a role in the failure.
    Get the SEC off the GS and MS dole and get it exclusively funded by the US Treasury.
    Set up a consumer protection agency that has teeth and funding from the US Government.
    WE truth in financial transactions as a mantra.

  9. Immediately revoke the TARP legislation. It was never implemented as Congress required. Let the TBTF banks fail if needed. Use the recovered TARP to protect US businesses as originally intended to prevent a 2nd recession.
    Reinstate Glass Steagel or something like it. This was legislated as part of TARP. So relegislate it out of existance.
    Make all Derivative trades transparent and taxable. Simplify the transactions so that regulation can be facilitated.
    Restrict artificial financial instruments where there is no actual investment being made. Why should a side bet be made without putting in the amount that is being bet on? This would never work in a Las Vegas Casino unless you signed an IOU that commits you to repay the house bet.
    Also, if one is allowed to invest in this type of instrument that enables one to benefit from the failure of an investment opportunity, then this type of investment should be heavily taxed and regulated. This needs to happen because the investor may try to make failure more than an option. They may try to initiate a domino-like series of events that may lead to failure while claiming that they never played a role in the failure.
    Get the SEC off the GS and MS dole and get it exclusively funded by the US Treasury.
    Set up a consumer protection agency that has teeth and funding from the US Government.
    We need truth in financial transactions as a mantra.

  10. There are so many historical precedents of people thinking they were invincible, even as they were starting into freefall, that I don’t expect the banksters to be capable of walking themselves back from the economic precipice. Dimon and Blankfein are turning into Cautionary Tales.

    The bankers have shown themselves incapable of self restraint.

    If Congress doesn’t break those banks up with Kaufman’s bill *as written,* then it will be embarrassingly obvious that Congress has been completely captured by the banksters.

    With that prospect in mind, Sen. Durbin’s assessment that ‘breaking up the banks is a bridge too far’ for 2010 lays the ground for political suicide.

    I doubt that I’m the only American for whom Durbin’s words call to mind the bridge in Minneapolis that sunk into the Mississippi on a weekday afternoon.

    That bridge had not been repaired because government budgets had been looted by thirty years of dumb economic policies — culminating with the Bush administration, aided and abetted by the very same Congress that now appears cower in fear at the prospect of ‘breaking up banks’.

    Meanwhile, if Dylan Ratigan is correct and the bank execs siphoned $121 billion out of the US economy in the first years of this decade, I don’t think voters are going to be amenable to being told that our bridges are crumbling because our Congressional so-called ‘leaders’ don’t have the guts to break up banks.

  11. Ma Bell was broken up into several different companies and our Telephone system didn’t fail. The government stepped in and did an organized breakup of the companies. The officials at the banks wouldn’t have the only say in which companies were spun off.

    Just my 2 cents…

  12. That fact is, most of the Treasury, the Fed & the powers that be, have all been top executives, board members ect. of Goldman Sachs, or at Citibank, JP Morgan & the like. They have been sleeping w/dogs (themselves) for so long now it’s like a distinction w/out a difference. (or vice-versa) In the end, the fox watching over the hen house mentality isn’t going away. Not in this administration, past administrations, or any future administration. When we voted in a new president “for change” & then he drags the same old guard with him, nothing changes. At this point, even the Supreme Court has been packed by Congress. Federal & on down to the state level, judges are being bought through campaign “contributions”. Any changes in law Congress enacts will only appear to “fix” ie., or regulate these crooks. This is just an exercise of futility. The games rigged. Even if we voted out every “career” politician on the hill, the most powerful will still remain. I think it’s time we realize our government is as corrupt as it can get & no different then the likes of Afghanistan, or Iran. We even had a presidential election decided by our Supreme Court! It can’t get any worse than this. I’m totally disgusted by it all at this point. Many empires have fallen before us & there’s a great possibility that the United States is going to be another one for the history books. :(

  13. Prof. Johnson,

    First and foremost, thank you for writing a book that helps people understand this whole mess(13 Bankers). However, I must admit that I had to put the book down several times, because I became visibly angry at the audacity of Wall Street and their cronies.

    Second, I appreciate your continuing crusade to call out the cronies in our government and to shine the spotlight on the “behind close doors” meetings taking place. However, for those of us that do not have a platform or have written a book, you can still take action. Everyone and I mean EVERYONE should constantly call their Senators and Congressman/woman to let them know how you feel.

    I left a voicemail yesterday and I’m writing a letter today to my Senator, Mark Warner. He voted against Sen. Bernie Sanders’ amendment that would basically “pave the way for the break-ups”. I’m asking him to explain his reasons for voting against this amendment. We as citizens need to act as well!

  14. and look what we have now … ma bell was broken up into the RBOCs which simply continue to consolidate. we’re down to having just a few really big ones again and the contraction continues.

    perhaps when the gov’t forces a break-up they need to leave a permanent stipulation in place that prevents the newly formed components from EVER rejoining.

  15. Banks lend money they don’t have. Therein lies the fraud, enshrined legally by the Federal Reserve Act of 1913. Breaking up big banks into smaller banks doesn’t negate the fraud, nor does the continued definition of money as debt-based credit and its management in a fractional-reserve banking system provide a way out of our predicament. Far from it!

    We sign promissory notes to banks in the Federal Reserve system to create our money, the system collects interest for this bookkeeping operation and distributes it to these so-called “entrepeneurs” of finance.

    They control the horizontal, they control the vertical. We get to be serfs. It is a deeply flawed, unconstitutional system in which the medium of exchange in the economy is controlled by a financial elite.

    Return to gold-backed currency and no more leveraging of money through fractional-reserve lending practices. Loans can originate only from savings, not from the judgments of power-brokers who arrogantly believe they know where to allocate a society’s productive capacity using fiduciary media.

  16. Prof Johnson,

    You don’t think the substance of these rumors (Greece defaulting on its debt, and potentially dragging Portugal, Ireland, Italy and Spain with it)- is not “the question”?

    Wouldn’t the default of these countries be even worse than Lehman Brothers? It could potentially have the same effect as the failure of the Bank of the United States in December 1930 during the Great Depression, or the failure of Kreditanstalt in Austria in May 1931. In short, it could be the moment when the ‘great recession’ turns into the ‘Greater Depression’

  17. I mean don’t you ever get sick of regaling political figures with your opinion of what they “should” be doing? Egag, man, for months now you’ve been shoulding all over yourself. When is it that you take hold of the fact that these slime you’re addressing regard you with only the most profound contempt and that your notions concerning reform are both naive and a colosal waste of time, unless you’re trying to sell books, that is. Ask yourself if you really think they’re listening, Simon.

  18. How did Teddy Roosevelt break up Standard Oil? What’s the specific history? Is it relevant?

  19. There is always a way to beat others at their own game and perhaps in this case competition is what is required. I brought this subject up before and see no reason why it couldn’t be done. Prior to the establishment of the Federal Reserve in 1913, we had US Treasury banks with dollars backed by both gold and silver.

    I’ve often wondered why Congress which controls weights and measures insists that our countries gold is only worth $42.50 per ounce when the rest of the world say that their gold is worth currently $1,150 an ounce.

    Perhaps if people were given a choice in having a system with dollars backed by real money or a system in which a paper IOU is all you have to trade in based on the credit worthiness of the country issuing these dollars, whose dollars would you rather hold? The US used to be the worlds largest creditor nation. Now we are the worlds largest debtor nation. I say, fight fire with fire. Offer the people another form of banking that was once the established norm and let market forces decide who comes out the winner.

  20. “It is time for Congress to step in with a full investigation of the exact flow of information and advice between our major megabanks and key treasury officials. Start by asking tough questions about exactly who exchanged what kind of specific, material, market-moving information with whom this weekend in Washington.”

    Thank you, Simon, for naming what needs to be named. Going deeper…to the core. The core.

  21. Okay, Everyone, I emailed my senators, Lincoln and Pryor,asking them to support Brown-Kaufman, but I don’t know if they will or even how to tell if they did or not. What does that even mean, for them to “support it”. What would they do, exactly?

    I called them as well, but their offices are closed.

  22. More Questions:
    1) if a break up were helpful, does that damage the baby-banks’ competition with foreign banks, as posited by Larry Summers(I believe)?
    2) How do you break the mega-banks up (to say, $100 billion) and still allow them to grow w/o hitting some upper limit?

  23. Yes an investigation that begins with a fully transparent audit the Federal Reserve. Support the Paul – Grayson bill to do exactly that and not the watered down version Senator Dodd is considering. Dodd could actually care less as he isn’t running for re-election anyway. He got his sweetheart mortgage deal from Countrywide, so he’s st.

  24. Good god Simon, you’re such a self-important tool. You have the political instincts of a 3-year-old, and your self-righteous nonsense got old months ago.

    We’re not going to break up the banks because it’s a stupid idea, not because the money center banks used their (entirely mythical) political power to kill it.

    And now you want members of Congress to go out of their way to try to embarrass the administration in public (for having, God forbid, meetings). You’re insane. Any member of Congress does that, and they won’t get administration support for anything they want ever again.

    So please, just go away, and let the grown-ups handle this.

  25. I maintain that the easiest way to dismantle the power these so-called “banks” wield is to clip their credit wings.

    This will only be accomplished by dragging Bernake before Congress and having him explain exactly why his banking buddies, who are deriving the vast majority of their profits from trading, not banking, have unlimited access to free capital and assurances from the Federal Reserve with which to speculate recklessly far and wide in everything from derivatives to common stocks at the risk and expense of the taxpayer.

    Why can’t anyone on these banking committees put it to him to explain why Goldman Sachs–basically a giant boiler room operation–has privy to these funds while the average investor does not?

    It seems unlawful to me that the Fed can give these proprietary trading operations preferential treatment over average citizens who trade and invest for themselves simply because these institutions perversely qualify as bank holding companies. (Let’s not forget that Goldman was magically allowed to convert into a bank holding company overnight to take advantage of this free money.)

    In fact, I wonder if it might not be possible to sue the Fed for giving these institutions this extraordinary advantage? I would even go so far as to suggest that individual investors sue for the right to change their individual taxpayer status to that of a bank holding company in order to reap the same advantage and level the playing field.

    If the trading operations at GS and the other so-called banks are entitled to the benefits of bank holding company status and access to free capital and assurances, shouldn’t all traders have the same advantage?

    Is there no end to the shameless efforts by Bernake and Geithner to bolster these leeches’ balance sheets?

    We need to get rid of Bernake and Geithner. Restore nominal interest rates. And eliminate the perverse backstopping of the so-called banks. By clipping their credit wings, their perverse risk-taking habits will disappear overnight as they are forced to speculate with their own money. Problem solved.

  26. Hope you don’t mind, but Glenn Greenwald wrote a column yesterday on a similar theme re: the incestuous relationships in Washington…so I posted excerpts of your insightful, bold piece, along with the URL to this page.

  27. way to go simon! u really sound like u r willing to go the distance to win this. & michael its called the shernan antitrust act. its supposed to keep these big corps from merging & colluding

  28. Am all in favor of transparency; we should know with whom government officials meet.

    That said, I find your remarks a little strange. The holders of Greek debt are…mainly banks. Mainly European banks, especially German ones, because the German banks can’t make any money in their home market due to excessive government interference (too fragmented, various official guarantees of Landesbanken and Sparkassen, resistance to consolidation). The ECB / IMF “bailout” is designed to bail out German banks

  29. “So please, just go away, and let the grown-ups handle this.”

    You’re flippin’ hilarious. I don’t know for sure if Simon is right or wrong. I’m betting he’s right and urging my congresspeople to vote that way. For you to call him a child, though… that’s flippin’ rich.

  30. Jeff, it’s one thing to disagree with someone…but another thing to do a full-out character attack…oozing spite, pettiness, and aggression.

    I will politely, yet clearly request of you: Please don’t post here.

    You are expressing a mean-spiritedness that is not acceptable.

    P.S. You might consider enrolling in a meditation class.

  31. hmmmm wrote:

    ” Am all in favor of transparency; we should know with whom government officials meet”

    You asked for it. :-(

    C.D.O. Days, S&M Nights at Derivatives Conference

    April 23, 2010 – The New York Times – excerpt

    SAN FRANCISCO — “By day, they dealt with risk. At night, it got risqué. . Financiers, lawyers, traders and accountants gathered this week at the annual International Swaps and Derivatives Association conference here to discuss “Collateralization and Netting — the Impact” and “Systemic Risk: Advances and Challenges in the Wake of the Crisis.”

    By Thursday night they needed to put out of their minds the specter of sweeping legislation to regulate the derivatives.

    They escaped to Supperclub, a bar and restaurant, where some plopped on the beds that covered the floor while a waiter in denim short shorts, suspenders and a scarf delivered drinks. The truly relaxed turned over on their tummies and received back massages from a dreadlocked member of the Supperclub staff.

    By midnight, others ended up in the S & M chamber with a bed-to-ceiling stripper pole and videos of dominatrixes playing in the background.

    “They don’t seem nervous,” said Iam Crowley, who also happened to be at the establishment because his girlfriend puts on a burlesque show for the guests.

    During more sober and somber conditions at the conference at the posh Fairmont hotel on Nob Hill the next morning, some of these people confessed that they were in fact very nervous about the future of the derivatives industry.

    The drive to bring a bill to the Senate floor that will set tighter guidelines around derivatives trading has left many spooked, but largely unapologetic. Politicians want derivatives swapped in a more open fashion that resembles the way people exchange stocks, bonds and pork belly futures. “Generally speaking, there is a push against what the legislators are trying to do,” said Masaya Yamashiro, a vice president at Sumitomo Trust and Banking. “But, obviously, something went wrong to an extent.”

    The United States has led the call for greater regulation in part because politicians hope to leave their mark on Wall Street ahead of November elections, Sarah J. Lee, associate general counsel for Bank of America Merrill Lynch, told one session at the convention.

    “Obviously, things are to going to become much more complicated,” Ms. Lee said.

    And with complexity, attendees fear, will come costs and an end to the boom times so many people at the derivatives conference have enjoyed. Some traders assume the worst.”

    Bottoms up!

    “We who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success — only then can societies remain economically alive, dynamic, progressive, and free. Trust the people.

    This is the one irrefutable lesson of the entire postwar period contradicting the notion that rigid government controls are essential to economic development.”

    Ronald Reagan quotes (American 40th US President (1981- 89), 1911-2004)

  32. Goldman Sachs Emails: Firm Had ‘The Big Short’ As Economy Fell

    04-24-10 03:12 PM – Huff Post – excerpt

    “As homeowners were falling behind on their subprime mortgages, wreaking havoc for investors that owned slices of their mortgages in securities peddled by Wall Street, Goldman Sachs was “well positioned,” according to internal company emails from top executives.

    The firm had “the big short,” declared chief financial officer David Viniar — Goldman Sachs was making money off the souring of the very securities it had peddled to the market.

    The internal emails released Saturday by the Senate Permanent Subcommittee on Investigations paint a picture long known by most of the country, yet never before so vividly and explicitly articulated by Goldman officials.

    In a Nov. 17, 2007, email, Goldman’s chief executive officer, Lloyd Blankfein, wrote to his top lieutenants in response to an upcoming New York Times story about how the firm had profited off the souring subprime market: “Of course we didn’t dodge the mortgage mess. We lost money, then made more than we lost because of shorts.”

    Blankfein is one of the top executives to be questioned Tuesday by Levin.”

  33. You said it all…The corruption goes far & deep and the same players go back to their first creation, S&L…

    But keep your head up, that way you won’t miss anything…After you get rid of the old dogs…The old ways & old ideals with go with them…

    It could have been worse…Look at everything they had in hand for the last 25 years…The politicians, the media, the regulatory agencies, the entire market of the world was controlled by a handful of banks and all they wanted to do with it was “Loot it” like a bunch of punk thieves…It is a lesson many should learn from, you didn’t have a government controlling the wealth of the world but a handful of institutions controlling the world of wealth just by waving money in peoples faces, corrupting the world…What could have happened had they been smarter or visionaries…
    New world order for two classes, those with the most and those with everything else…Use your imagination…

    This is the US…There will be a New Day tomorrow…

  34. Wall Stret And The Financial Crisis:
    The Role of Credit Rating Agencies

    From: van Praag, Lucas
    Sent: Sunday November 18, 2007, 5:47pm
    To: Blankfein, Lloyd

    Cc: Winkelreid, Jon; Cohn, Gary; Viniar, David; Roger, John F.W.; Horwitz, Russell

    Subject: New York Times

    April 23, 2010

    “ 3. The article references the extraordinary influence GS slums have – the most topical being John Thain, but Rubin, Hank, Duncan et al areall in the mix too. She hasn’t gone as far as suggesting that there is a credible conspiracy theory (unlike her former collegue at the Ny Post). She does, however, ake the point that it feels like GS is running everyting.”

    5. We spent a lot of time on culture as a differentiator – she was receptive ”

    “Confidential Treatment Requested Gold”
    #Exhibit #101

  35. I get your point SJ & commend your work but what you are asking is akin to asking the mob to inform on itself…
    It ain’t gonna happen at this time…Like many have said the crooks are still in control of the congress & the agencies and until the capo’s of both parties are found out & brought down & booted out, you can’t clean out the crap house & the elaborate webs they have spun throughout the system & the agencies…

    Look from Greenspan to Geithner, the same people from the same crowd show up & embed within all the institutions like viruses…Presidents & Administrations come & go but these pariahs have been around since Reagan…

    You need like an undercover operation, Search & Destroy the Virus, and its gonna take a great program to find & destroy the virus before it gets a chance to spread again…

  36. “We’re not going to break up the banks because it’s a stupid idea”

    As opposed to letting them remain too big to fail forever, and committing the tax payer to always and forever bail them out when they get in trouble? Institutionalizing the privatization of profit and socialization of loss?

    You want to talk about leaving this to the grownups, then you’d better be prepared to answer some hard questions.

    Pledging to forever bail out the banks is not an option IMO.

    Letting the biggest banks fail and imploding the economy is not an option either.

    Either we break them up, re-instate an updated Glass-Steagall to build a firewall between the payments system and the speculative capital markets, and impose some hard caps on leverage…..


    We keep the banks as they are and just nationalize them in recognition of the FACT that they are already quasi-public institutions and just end the concept of banks as for-profit institutions.

    Those are the only two options.

    Status quo is not an option, nor is the “just let them fail” nonsense.

  37. Greece needs to throw in the towel, go back to local currency, and can mitigate the contagion affect by withdrawing from the EU – a total divorce, not just the estrangement baloney from EU (ex)partners.

    p.s. Simon, that’s ‘administrative assistant’ (the politically correct vernacular).

  38. Republican Senator Mitch McConnell doesn’t think there is abuse of power on Wall Street. When Republican Mitch McConnell has private and secret meetings with hedge funds which promise him money and favors for his Senatorial votes, he thinks Wall Street is a wonderful place. But right now at this time, he won’t have time to meet with depositors and savers of the banks in Kentucky because Mitch is too busy counting money and favors from the hedge funds.

  39. One can only take the vitriol as clear admission that Simon is hitting the oligarchs right where they hurt.

    I’m guessing there are a lot of people in powerful places right now thinking that this blog and the clarity it lends to current circumstances is getting a little too much attention.

    What a sad, corrupt mess of a nation we’ve become.

  40. Congress will never do this because it would so obviously beg the question of whom the Representatives and Senators hob nob with, what is said, and what is exchange.

    Of course our elected representatives should have to list every person they discuss public information with, including when the conversation took place and for how long and the general topic(s). This could be done with a small delay.

  41. The “core”, son, is this: That no investigation, no committee, no election and no amount of side-lines moralizing is ever going to end the corruption that is our ruling class. The sepsis these filth thrive in simply goes too deep and is too wide-spread to give way to naive measures of reform. The need is to start over, not to apply tourniquets. If you, your idol, Simon, and his sidekick Quack want to do something positive, help organized a general strike. Anything less is self-expansive bildge.

  42. Implications of Toothless Regulation and Weak Reform
    If it becomes clear that US banks have captured not only the regulatory system but the political system, the world will be forced to make a judgment about the wisdom of allowing powerful financial interests to control the political establishment of the world’s reserve currency. There has already been talk about replacing the dollar as reserve, it is logical to expect that those talks will take on more urgency.

    The Euro is the leading alternate (in the short term, anyway), and the Europeans have a powerful incentive to promote the euro as reserve: it makes the PIIGS problem much easier to handle. Already, Europeans have taken steps to curtail certain business with American banks, have pushed for a European rating agency, and have started investigations into American banking practices. A certain set of political and economic reforms could make the euro more attractive. While Europe is already on course for greater integration, a real possibility of the euro’s becoming the reserve currency could hasten the process.

    With more revelations of financial shenanigans to come, one can only imagine that anger regarding perceived US recklessness and financial corruption (notably, Iraq, sub-prime, and Greece) will grow. Critics will argue, with good reason, that the weak reforms enacted by Congress will fail to prevent a recurrence and that unseating the dollar as reserve currency is both necessary and appropriate.

    Some will say that the American financial industry has been chastised and “learned its lesson” and that the dollar’s reserve status is not in an danger any time soon. Those are likely to be many of the same reasonable people that couldn’t see that there was a real estate bubble and/or felt that the effects of a sub-prime meltdown would be “contained.”

    The alternate view would be that the American TBTF banks, emboldened by their success will take more risks and cause a crisis sooner and bigger than anyone would expect. Some believe that this is already happening. At any rate, whenever the next crisis occurs (toothless regulation and weak reform mean that it is a matter of when, not if) it could be dramatically worsened if the world suddenly loses faith in the dollar.

    It seems to me that politicians that coddle the financial industry take the dollar’s reserve status for granted and inadvertently put the American economy at greater risk.

  43. A little off-topice, but Beth, he really does mean assistant secretaries — assistant Treasury secretaries. The “big bosses,” if you will, right under Tim Geithner. (He forgot the undersecretary, though)

  44. While Goldman benefited from the subprime meltdown, it didn’t cause it. It was Congress that actively encouraged the extension of mortgages to insolvent borrowers. It was Congress that refused to constrain the mortgage agencies each time the issue was raised. It was Congress that failed to act on Brooksley Born’s recommendation to regulate derivatives.

    It was Congress that failed in its funding and oversight of the regulatory bodies to assure that the financial markets were operating in a prudent and ethical manner. Had the Congress fulfilled its primary function of assuring the integrity of the system, the system would not require the life support currently being extended. As it turned out, Congress was so diverted by its desire to reward financially supportive interest groups that the primary interests of the people became an afterthought and tragedy resulted. It’s time that attention be re-focused on the deficiencies of government and not the public scapegoats being offered up in their stead.

  45. The European “Portual-Ireland-Greece-Spain” mess seems to be a dramatic cause for alarm.

    The second source for “meltdown,” I think, would be systematic abuse and flouting by China, Burma, and Russia of WTO ‘global economy’ rules. Add one more reasonable powerhouse, say India or Brazil, and the WTO and associated minor treaties would utter fail, causing a global political crisis.

    What do you think? Does my brainstorm hold water?

  46. Simon, we need more like you. But, despite your efforts to enlighten the masses, to do the right thing, etc. This country is going down, think Roman Empire. I mean you can hear the train coming, meaning the train wreck! Most in this country have no clue what’s going on, and I don’t see anything changing until after the crash – for those still standing. Sorry to say. The system is broke. Add in Peak Oil, we’re done, not to mention global warming. I always laugh when I see people saying things like, “Well in 2050” – 2050, I doubt the world as we know it will still exist in 2050.

  47. Finally, we are all to blame for what has happened to this country, world. Again, history is repeating, why because that’s what humans do. The crash is coming folks.

  48. Tom_D: Just see under “Notable M&A advisers and underwriters of securities that are not affiliated with commercial banks.”

    Brown Brothers Harriman, Lazard, Blackstone group, Evercore Partners, etc.

    So a group of M&A, PE firms, or boutique investment banks would team up with an army of restructuring corporate lawyers to determine how to get the best value out of the banks.

    PE firms have been likened to locust in the past so for an outcome that has the possibility of beneficial to society the government would have to get involved in a large way. To make sure the government keeps its nose clean everyday citizens would have to full court press their respective congress people and senators. (maybe just read 13 bankers to them)

    These are not just any banks. These guys are huge. For one you can completely split Capital Markets (investment banking, the trade desks, and the like) from Commercial banking. You can also split off the in house hedge funds, Asset Management and PE funds. Then split off the credit card services and and retail financial services. (You can further break off prime brokerage there’s no way a bank that has a PB house should be allowed to borrow from the fed window.)

    Please see JP Morgan Chase’s wiki: see their business units you can logically break them up along those lines.

    As you can begin to see its a complex task you need the pros in there but you need the government also to make sure no one gets sticky fingers.

    In summation if this were to be done the big banks would no longer create a systemic risk to the country. Furthermore I stressed in a previous post that the risk matrix would fundamentally shift because it would change the intensive structure.

    Some people believe that 10 small JP Morgan’s would comprise of the same amount of risk just split up into 10 instead of 1. [ 1/10 = 10 ] While intuitive that ignores the fact that we would also be removing the implicit to big to fail insurance policy. While this insurance policy may sound abstract in financial markets it leads to material gains.

    For example borrowing cost on debt is lower because creditors do no have to worry about solvency of their investment because the US tax payer has their back. So the banks spread over Treasury’s are way to narrow for the risk the bank takes, well not really as I said with the US govt behind them.

    In banking the spread between borrowing and lending = profit. So theoretically Goldman can borrow from the Federal Reserve discount window for some of the lowest rates available and through prime brokerage lend to hedge funds or PE firms and make killer profits. I say theoretically because the FED doesn’t make enough info available to which banks are borrowing and which banks are borrowing.

    Probably more then you wanted Tom_D, but I just wanted you to know that there’s a pretty reasonable way to break up the banks.

  49. Simon,

    I’m shocked, shocked that the banks have decided not to debate you. After all, given the even handed and non-hysterical way you called for John Paulson to be banned for life from the securities business, what possible reason could they have to think that debating you would be a productive exercise?

    You tossed your credibility out the window last week. Good luck getting taken seriously from here on out.

  50. Sorry I just wanted to add. The banks incentive structure would change because markets would become more efficient. With the too big to fail subsidy removed Creditors and Shareholders would have to do there due diligence. Making it more expensive to float equity and issue debt.

    In my opinion you can break up the banks dynamically using tax policy and capital requirements.

    For example as a bank or shadow banking institution grows (by Liabilities or Assets or both) you increase taxes & capital requirements. With the correct taxing and capital requirement structure you could make it unprofitable to be too big. Using the market to do it would be particularly rewarding for me.

  51. Personally, I think there are a couple of things you could do. First, I would limit the % of deposits a bank could have in a market to no more than 6 or 7 %.

    Right now, the top three banks (BoA, Wells Fargo & JPM) have almost 32% of the deposit market share. That’s about $2.26 trillion deposits (Source: SNL Financial), which is why these banks are “too big to fail”. I don’t see any reason you couldn’t break them up into 6 or 7 separate banks.

  52. FYI This was my post. For some reason, “Jackrabbit” didn’t get transmitted.

  53. You can go to this website:

    From the little time that I’ve spent there, what I have seen is accurate. If something there is not accurate, expect bilious wrath on the Internet from all sides of an issue.

    This organization’s function and purpose is to shine sunlight on the festering mess we currently labor under.

    Bookmark that site, and use it as much as you want!

  54. Simon Johnson says “leading bankers will not come out to debate the issues in the open”

    Well leading Basel regulators seems not willing to come out to debate the issues in the open either?

    Here you find the financial crisis explained to non-experts, dummies and financial regulators.

  55. would it help if banks (commercial and investment) were prohibited from trading for their own account? What public good does such trading do?

  56. It has become rather obvious to most of us, even if we choose not to say it out loud, that there will be no change in the behaviour of these people until they experience pronounced and prolonged physical discomfort. Greed, and its associated profits, has simply created a profession of sociopaths who are unwilling and unable to consider the well-being of society or this country.

    Until direct and tangible PERSONAL consequence is a factor in this process, they will continue to be “punished” with laughable fines and testimonies.

  57. I imagine Simon is a really nice guy and cares about other people. Unfortunately, I think he projects this way-of-being onto others not so inclined. This, I believe, is his Achilles heel.

  58. thanks for doing all you are doing. the last shred of proof america has not become a banana republic is that you have not been silenced. in most countries, esp ones with whom the imf works, a truth-teller like yourself would be far too inconvenient.

    at what point does serious, mainstream discourse start calling the banksters what they really are-traitors to america and americans, especially considering what they did while we are fighting two wars?

  59. Simon,..always look ,where the obvious doesn’t exist. The sounding of audacity might awaken your senses,and wriggle your skin for the underbelly sheilds the collaborator within? Check the guest list of overnight stays at the White House (Lincoln Room,etc.)over the last month. Thanks,and please “Never Stop the Good Digging for America’s Sake” PS. co-incidence is telepathies co-conspirator tethered only too which way the wind blows,…? Follow the money!

  60. Well, for one, I’m sane enought not be lecturing monstrously corrupt politicians on what they “should” be doing when it ought to be clear enough even to the dullest among us that these slime consider us more subjects than citizens. Then again, unregistered one, I hadn’t considered how all of this might strike folks so limited that they can’t manage to punctuate their questions properly. I’ll have to look into that.

  61. Barbara- you have sipped the Kool Aid. For years Fannie & Freddie loaned to the working ‘poor’ without any significant increase in mortgage failure or foreclosures. Only after Greenspan designed low Treasury rates to push capital elsewhere did the investment banks start bundling mortgage-backed securities to sell to conservative investors. It worked out ok until they ran out of ‘product’ and decided their risks could be ‘minimized’ loaning to folks with no income and no assets. At some point, Freddie & Fannie had to try and compete as this predatory lending soared.
    But it is total drivel to claim Congress promoted lending to inso,vent borrowers. Can you show one iota of evidence ?
    That regulators failed and Glass-Steagal should never have been cancelled–that is true. That some folks still rationalize the benefits of the derivative market and remain addicted to the notion that more leverage means more capital sizzle–and that is good for growth, etc.- that is more Kool Aid.

  62. Please. Your logic would blame the Keystone cops for the crack epidemic. Trickle down plutocracy is the actual legacy of Reaganomics. Look at the redistribution of wealth in the past 30 years. The government has not impeded the ‘free market’- the people with the gold have made the rules.
    Regulation obviously failed because the profiteers- like any clever opportunist- played a shell game that befuddled elected officials or bribed others. Gramm & Rubin may be able to justify killing Glass-Steagal as a public good, a blessing after 9/11–but follow the $$$. Who has become obscenely rich….who has suffered ?
    Face those facts before dressing self-serving ideology up as reason.

  63. Btraven – FRAUD is the accurate description of what Wall St. and Washington are perpetrating together on the American Public. The problem is this relationship is so incestuous, how can we get our “leaders in Congress” and our President to fight this fight for us when they are so compromised by their collusion with the sociopathic CEOs of the Wall Streets MegaBanks? How did Dylan put it, “Money doesn’t talk; it swears.”

    Another voice that I find even clearer than Max Keiser is William K. Black, the former regulator who oversaw the investigations into the S&L crisis of the 80s. Black et alii had more than a 1,000 criminal convictions and we’re not talking about just tellers. A favorite line of Black from the S&L days: “The highest return on assets is always a political contribution.”

    Moyers interviewed Black last Friday here:

    (The first minute and a half of the interview is Moyers explaining why, for personal reasons only, he is closing down the Bill Moyers Journal. This is a huge loss of honesty and intelligence and civil discourse in the Media. I can’t think of anyone in the Media I respect more than Bill Moyers. It’s where I first came across Baseline Scenario.)

    Black lays out the case for Fraud in lucid measured terms often with a sardonic smile.

    “BILL MOYERS: Bill, are you describing a political culture, that is criminogenic? (created/borrowed from the sense of pathogenic – an environment that spreads fraud)

    WILLIAM K. BLACK It’s deeply criminogenic. And this ideology that both parties are dominated by that says, “No, big corporations wouldn’t cheat. Fraud can’t happen. Market’s automatically excluded,” is insane. We now have the entitlement generation as CEOs. They just plain feel entitled to being wealthy as Croesus with no responsibility, no accountability. They have become literal sociopaths. So one of the things is, you clean up business schools, which right now are fraud factories at the senior levels, right?

    They create the new monsters that take control and destroy massive enterprises and cause global economic crises, cause the great recession. And very, very close to causing the second Great Depression. We just barely missed that. And there’s no assurance that we’ve missed it five years out.”

    The pervasiveness of Fraud in High Finance/Politics is going to be a hard cancer to cut out of ourselves without killing ourselves, but we’re dead if we don’t do it… Major Surgery Needed.

    Thanks for your efforts Simon; keep chipping away at it. I called my Senators and forcefully supported Brown Kaufman and demanded 5-6 other critical changes. We need a couple a 10 million more fleas and mosquitoes to stick it to our representatives and make ‘em realize they’re there to serve us.

  64. Slowly, a conflict is unraveling between big banks, (perhaps even multinationals in general) and sovereign governments in developed countries. While companies are pocketing record profits and dramatically reducing their indebtedness, governments (and simple citizens) face mounting debts and default risks. In other words, corporations become the creditors of the world, governments become debtors.

    The scenario is more complex for companies that operate in developing countries, where governments are less indebted. On the other hand, the mega-financials that derive the bulk of their profits from developed countries epitomize this emerging divide. Expect the battle to escalate…

  65. Was going in this direction myself after reading more about Greece…you crystalized it for me. Well stated. And I agree: The tension…going to escalate.
    “…corporations become the creditors of the world, governments become debtors.”
    House of Cards…falling soon.

  66. JohnnyO:

    Thanks for that, not more than I wanted by any stretch. This certainly differs from some of the examples given, as Ma Bell didn’t have billions in derivatives and bad loans as part of its portfolio. But as you say, if the breakups are handled not just by the TBTF firms but by other parties, with proper government oversight, maybe there is a chance.

    I still wonder though what prevents Citi from dumping its junk into one small subsidiary that is the Mother of All Zombies … how could the resolution authority afford to dismantle that one?

  67. Equityval,

    I’m shocked, shocked that you would employ one of the oldest tactics in the world – discredit and demean the source – as a way to offer cover for the corruption.

    You tossed your credibility out the window with this post. Good luck getting taken seriously from here on out.

  68. Actually Bell did some interesting research and inventions. Now it’s all innovation. 1G, 2G, 2.5G, 3G, 3.5G, … well you can see the innovative pathway there.

  69. From Tourre, Fabrice
    Sent: Wednesday, June 13, 2007 4:04PM
    To: Serres, Marine
    Subject: Re: Good morning sunshine

    “Just made it to the country of your favorite clients [Belgians]!!! I managed to sell a few abacus bonds to widows and orphans that I ran into at the airport, apparently these Belgians adore synthetic abs cdo2.”

    E-Mail Exchanges Involving Fabrice Tourre

    “The Senate Permanent Subcommittee on Investigations released e-mail messages on Saturday from Goldman Sachs executives that discussed the firm’s practices involving mortgage-backed securities and collateralized debt obligations.

    The documents released by Goldman, including numerous e-mail messages, explain how the firm handled the financial crisis itself and dealt with questions about its actions.”

  70. From Torre, Fabrice
    Sent: Tuesday, January 23, 2007
    To: Serres, Maarine
    Subject: Fw: ft–friday

    “…the fabulous Fab (as Mitch would kindly call me, even though there is nothing fabulous about me, just kindness, alturism and deep love for some gorgous and super smart French girl in London, standing in the middle of all these complex, highly levered, exotic trades he created without necessarily understanding all the implications of those monstrosities ! ! ! Anyway, not feeling too guilty about this, the real purpose of my job is to make capital markets more effiecient and ultimately provide the US consumer with more efficient ways to leverage and finance himself, so there is a humble, noble and ethical reason for my job ; ] amazing how good I am in convincing myself ! ! !

    …..I am now going to try to get away from ABX and other ethical questions, and immediately plunge into Freakonomics…”

  71. Secretary was first intended as a term of respect when applied to female office assistants, as it originally referred to trusted male aides. As in current political usage. Ironic. We wear out terms applied pc-wise to females, much as we wear out our polite euphamism for the defecation-room each generation, and have to find another. We never get at the underlying dis that way. fwiw

  72. I have a scary question. If a truly effective and meaningful financial reform bill is passed will all the BIG BANKERS, HEDGE FUND MANAGERS, and others of that ilk do the equivalent of picking up their marbles and go home? That is, will the Blankfeins et all just take their humongous profits,withdraw them from the markets and bring on the BIGGEST depression the world has ever seen ???!!!

  73. @balanceact – I agree with you wholeheartedly. William “Bill” Black is absolutely one of my heros.

    I’m also keen on historian and economist Michael Hudson. Interestingly, they are both at the University of Missouri, Kansas City.

  74. Some may argue that this is already baked into the cake. We should know in the next 12-months. My 2-cents.

  75. Double-down.. The only people who don’t think the banks are a menace to our country are, I don’t know, BANKERS..or the lackeys underneath.

    Defending John Paulson?-enough said.

  76. THE GOLDMAN DEFENSE: All the counterparties in our CDO/CDS deals knew the risks involved.

    WRONG!: The American taxpayer who had to bail you out along with the entire banking system is the biggest counterparty to all these deals and the taxpayer had no idea of what was going on, much less the risks involved.

    FURTHERMORE: If all the counterparties, as you claim, knew the risks involved, that means you, Goldman Sachs, knew the risks involved and therefore should have known that AIG may not be able to make good on their CDS obligations. Which means the one counterparty that wasn’t informed of the risks—the taxpayer—should not have paid you the $13 billion in AIG counterparty bailout money which you promptly distributed among yourselves as “profits”.

    FURTHER STILL: If, as you, Goldman Sachs, claim, that all counterparties were aware of the risks involved, then you, Goldman Sachs, should have been allowed to fail.

    THE GOLDMAN COUNTER DEFENSE: We were never at risk of going under.

    WRONG!: If that’s true, then you should repay the taxpayer—the only counterparty who wasn’t privy to the risks—the $13 billion in AIG counterparty money you distributed among yourselves as “profits”.

    CONCLUSION: Return the $13 billion you STOLE from the American taxpayer. Then kindly kill yourselves. And take your former CEO Hank Paulson with you!

  77. I have watched the parade of financial titans in front of the Congressional committees purportedly investigating the financial collapse. Of course I can’t actually sit through such testimony because its like watch fish rotting to seen when the maggots will appear. It is amusing to see the sour look on the faces of these executives being forced to grovel in front of politicians they previously owned as trained poodles. Just a bunch of rich. very old, white males who conducted their life’s work in secret behind the closed doors of their temple. I think you could make a hell of a comedy just putting clips together of all these guys.

  78. It will eventually dawn on someone the way to overcome the TBTFs is not to regulate them. Leave them be. Let them make market in what ever they want.
    In stead, sell the FED. Sell the SEC. Sell the GSEs. Put them in the market and sell them all.
    Privitize. With not back stops. Let the powers that be fight each other and stay the hell out of the way.
    Why pretend we are some how in control? Or that Congress represents the People?


    The parent company of American inovation…

  79. John Smith wrote:

    “THE GOLDMAN DEFENSE: All the counterparties in our CDO/CDS deals knew the risks involved.

    WRONG!: The American taxpayer who had to bail you out along with the entire banking system is the biggest counterparty to all these deals and the taxpayer had no idea of what was going on, much less the risks involved.”

    Well spoken.

  80. Do You Have Any Reforms in Size XL?

    April 23, 2010 – N.Y. Times – excerpts

    “EVERY once in a while, Congress awakens from its lobbyist-induced torpor, realizes that the masses are cranky and sets out to appease them. Such a moment occurred last week when lawmakers finally got the message that Main Street is disgusted with Wall Street and wants them to do something about it.

    Financial reform, which had been stumbling along, suddenly got traction. Bills and proposals began flying around Capitol Hill, and President Obama chided the bankers in an appearance in New York. Unfortunately, the leading proposals would do little to cure the epidemic unleashed on American taxpayers by the lords of finance and their bailout partners. The central problem is that neither the Senate nor House bills would chop down big banks to a more manageable and less threatening size. The bills also don’t eliminate the prospect of future bailouts of interconnected and powerful companies.

    Too big to fail is alive and well, alas.

    Indeed, several aspects of the legislative proposals sanction and codify the special status conferred on institutions that are seen as systemically important. Instead of reducing the number of behemoth firms assigned this special status, the bills would encourage smaller companies to grow large and dangerous so that they, too, could have a seat at the bailout buffet.

    Here’s an example of this special treatment: Both bills would establish a specific process to resolve big-bank failures. Smaller institutions, by contrast, would be allowed to go bankrupt without a new resolution scheme.

    This special resolution system is not only unfair; it also sends a pernicious signal to the market about large and intertwined institutions.

    The message is this: Subject as they will be to a newly codified “resolution authority,” these institutions and their investors and lenders can expect to be rescued if they get into trouble.”

  81. Dodd, Shelby say no deal yet on financial rules

    Posted 4h 5m ago – excerpts

    WASHINGTON (AP) — “The Senate’s top negotiators on financial overhaul legislation said Sunday they were not optimistic about striking a bipartisan agreement on key features of the sweeping bill before a showdown vote on Monday.

    Sen. Richard Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee, predicted all 41 GOP senators would vote to delay the start of debate, unless continuing weekend talks led to a deal.

    Senate Minority Leader Mitch McConnell said he didn’t expect the bill, as drafted by Democratic Sen. Christopher Dodd, the chairman of the committee, would go forward.”

  82. GOP ramps up attacks on SEC over porn surfing staffers

    Updated 2d 6h ago – excerpts

    WASHINGTON (AP) — Republicans are stepping up their criticism of the Securities and Exchange Commission following reports that senior agency staffers spent hours surfing pornographic websites on government-issued computers while they were supposed to be policing the nation’s financial system.

    The memo provides fresh ammunition for Republicans who suspect the timing of the SEC’s lawsuit last week against Wall Street powerhouse Goldman Sachs Group Inc. News of the suit came as the Senate prepared to take up a sweeping overhaul of the rules governing banks and other financial companies.

    The memo was written by SEC Inspector General David Kotz in response to a request from Sen. Charles Grassley, R-Iowa. It summarizes past inspector general reports some shocking findings:

    A senior attorney at the SEC’s Washington headquarters spent up to eight hours a day looking at and downloading pornography. When he ran out of hard drive space, he burned the files to CDs or DVDs, which he kept in boxes around his office. He agreed to resign, an earlier watchdog report said.

    • Seventeen of the employees were “at a senior level,” earning salaries of up to $222,418.

    • An accountant was blocked more than 16,000 times in a month from visiting websites classified as “Sex” or “Pornography.” Yet he still managed to amass a collection of “very graphic” material on his hard drive by using Google images to bypass the SEC’s internal filter, according to an earlier report from the inspector general. The accountant refused to testify in his defense, and received a 14-day suspension.”

  83. Now wait a second..I thought Citibank had almost paid everything back, diluting the value of their shareholders in doing so?

    If that’s true, why break them up? Force them into bankruptcy, and sell off whatever you can. If in the end the shareholders and bondholders take haircuts well, that’s the risk inherent in investing. Now, if they feel they were misled by Citibank management (and oh, were they ever), then let a shareholder lawsuit go forward in the bankruptcy court. If laws were broken, then fine Citibank, and make sure the fine cannot be discharged in bankruptcy so it is paid before all else. Finally, if laws were broken, prosecute Citibank’s management.

    Isn’t the right thing to do pretty clear in this case? Why break them up? This is Citibank’s fourth government bailout since its inception over one hundred years ago. Clearly, the company doesn’t deserve to exist since it can’t seem to go a few decades without needing the government to rescue it from its own terrible decisions.

  84. Why isn’t just letting them fail an option? Why can’t we just force them to immediately mark all their holdings to market, and as that will bankrupt them, use whatever they have to pay whatever creditors we can?

    Yes, it will be painful, but I for one don’t want Wall Street’s losses to be borne by the taxpayer. Clawback ALL executive compensation (salaries and bonuses, plus interest) from every bank that fails. The taxpayers shouldn’t have to pay one dime.

    Our choice is to take a lot of pain and get it over fast, or minimize the pain by the taxpayer bearing the banks’ losses. The latter option seems better until you consider that it could result in our living Japan’s lost decade, or the economic calamity caused by nightmare debt and deficits.

    If we DO keep the banks going, what happens if China stops lending us money? If our tax receipts only cover $0.61 of every dollar spent right NOW, where do we go to get the other $0.39 if nobody wants to lend to us (i.e. buy our debt)?

  85. I guess I dont really see the problem with Citi dumping all its junk into one or two of the 10 or so companies that would be created. So 1 Citi = 8 more or less successful companies and 1 or 2 garbage dumps.

    The two companies with all the toxic assets would have to be designated as such and maybe set up as a trust company or mutual fund. You would sell shares of the underlying toxic assets at a discount. You also want provisions to prevent active trading to mitigate loss. A market is definitely out there for this stuff at the right price, everyone is searching for yield when interest rates are at 0.

    I think you can do it kind of live a buyout. The current Citi shareholders get cash or shares in the new institutions. The current market cap of Citi is about $140 billion. So you would have to divide the company in a way that would give that kind of value or more. (probably more most buyouts are done at premiums to current market prices). That might be difficult given that now they operate with a too big to fail subsidy, but lets say the government starts to tax size and progressively matches capital requirement with size. There would be a financial incentive to have smaller more efficient banks.

    that’s just a rough idea i don’t have specifics yet. I am not a bank analyst or investment banker I would need time to jump into the balance sheets and do some modeling.

    Hey that’s if I was king

  86. “We keep the banks as they are and just nationalize them in recognition of the FACT that they are already quasi-public institutions and just end the concept of banks as for-profit institutions.”

    I’d be fine with this–just think of all the money we’ll save when we give all the banksters an “overly generous” public service sector union contract, with–you’ll just pee yourself in delight when you hear this–a GUARANTEED 3.5% annual raise every year for the next 7 years.

    Oh, PLUS, full health benefits. They won’t have to contribute a dime.

    We’re going to offer them whatever Barney Frank makes. How much is that more or less?


  87. Simon, Simon, alas, what you are asking is that the Congress bust on their fellow plutocrats. We know that many in the plutocracy have twisted the truth like a pretzel when it comes to what could have been done during the bubble building: (a) regulators prefered sex site browsing to enforcing the rules that they had a job to enforce (a total, under Christopher Cox, of 24 SEC employees were dedicated to the mega investment – TBF – banks, read casino players, and that is just a very small part of overlooking oversight) and, (b) although the FED had full powers to regulate the mortgage industry, if failed miserably to pay attention, and further, acting contrary to advice he had been given, Alan Greenspan had a “policy” of no policing thereof, and (c) virtually any potential whistleblowers were fired by employers and the most risky dicers were rewarded with ever increasing bonuses. These are just small examples of the continuity of the plutocratic games being played and continuing to be played at our expense.

    Congress is not, I repeat, is not, going to go against those who pay dearly to continue their grip on the apparatus of power and wealth. Call me a cynic, but that will take a real revolution. In Russia, they were called apparachiks, in America we call them Congress and Wall Street. The result will be the same — economic collapse by tamping down the folks who create real economic wealth, the middle class and small business. Both are being starved and strangled. That starvation and strangulation will continue.

  88. There’s a new book that came out, The Crisis of Capitalist Democracy, by Richard A. Posner, prolific author and U.S. Court of Appeals Judge, that should be a must read at the White House or in any American home.

    Until recently, Posner was one of the free market’s most articulate proponents. He contributed greatly to the anti-regulation perspective that shaped public policy for the past three decades.

    Posner foreshadowed his change of thinking in the Sept. 23, 2009, issue of the New Republic, with “How I Became a Keynesian.” In the book, he expands his argument and makes a compelling case that liberal icon John Maynard Keynes was right when he argued that governments need to play a strong role in the economy, particularly in stimulating demand during recessionary times.

    Posner presents well-argued suggestions for change and offers fresh thinking about the business cycle, building on Keynes’s theories. Like many critics, including former Federal Reserve chairman Paul Volcker, he would re-institute the Depression-era Glass-Steagall Act, which was repealed in 1999. It separated risky investment banking from commercial banking. He also savages the three bank-funded bond agencies that rated worthless financial instruments as AAA, arguing they should lose their semi-official status.

    He serves up the dismal science of economics on a skewer, a popular pastime these days. Some economists defend themselves by saying their job is not to predict the future. Posner rebuts that economists didn’t do bad forecasting; they were “oblivious to danger.”

    But, in the end, he offers little confidence that this crisis is over, let alone that its causes are fixable. He believes that polarized U.S. democratic institutions cannot rise to the challenge, lobbyists have near-complete control of government, and the prevailing belief that low taxes and appropriate public spending are both possible is foolhardy.

    We should expect waves of aftershocks resulting from rising public debt, including currency deflation, severe inflation and continued turmoil or worse.

  89. I just saw Johnson on C-SPAN and was fascinated. However, wasn’t the depression of 1837, leading to the loss of the presidency for the Democrats in 1840, caused by the destruction of the National Bank?

  90. Professor Johnson…tonight on c-span you mentioned the urgent need for an “FDR moment” (perhaps it was a “Teddy Roosevelt moment”). In any case it had absolutely everything to do with what is the great missing link in resolving this horrible crisis – Presidential Leadership! Where has President Obama been?! Why has he not come front and center, forcefully taken charge and moved this stalled legislative process out of gridlock?! These former Presidents took on the oligarchs and prevailed what is Obama waiting for??

  91. Because those large banks directly or indirectly control him and he probably knows it. Those bankers come from much more powerful backgrounds as did the Roosevelts.

  92. Is there a pattern of ethnocentric influence surrounding the various opinions in the current Wall Street and bank fix debate. I see bias on one side and open mindedness on the other. Am I the only one who has observed these beliefs and behavior? I want the problem fixed for Americans and not necessarily to the benefit of the overcompensated bankers who caused the problem.

  93. Bradley, our Commander in Chief is handling two wars (3, if you count the Global War on Terror), the execution and oversight of Recovery Act funds, various diplomatic initiatives, and more. He’s busy with his job. Also, I’m sure you noticed – he’s black. ANYTHING he does or says immediately becomes a lightning rod for strikes by the GOP, so he lets others publicly push and command the debate. In the case of Paul Krugman and Prof Johnson, these people include specialized nerds. :)

  94. ‘A truly effective and meaningful financial reform ‘
    should entail massive disgorging of their personal wealth and imprisonment as a sort of reparation for the damage they intentionally caused (fraud, Ponzi scheme, whatever you call it) to the US and the world.

  95. Professor Krugman has a blog post today that I think, unfortunately, is correct. This site, in my opinion, has been the best most influential and instrumental in informing the public about the imminent danger we face if serious Wall Street reform is not enacted. However, in recent weeks, Professor Simon has fallen prey to emotion in his honest quest to see the right solutions enacted. I have been getting the sense from this blog that only Professor Simon’s view (which coincides with the Kaufman amendment) of how to go about this is correct and all other variations (whether its from Congressmen Frank, the Administration, Senator Dodd, or Prof. Krugman) are all corrupt solutions that only Wall Street would support. Moreover, any solution that would come to actually pass is by definition not worth supporting in view of the rhetoric from this site in recent days. Honestly, it feels like a tactic that the Republic Party would employ. My guess though is that Professor Simon rightly believes these are critical days and that he may have only one shot to influence the debate. If he has to elevate the hysteria and anger to bring about the change, then so be it. That may not be a bad strategy but it is nevertheless surprising. Nevertheless, I’ll keep reading this blog and calling my representatives to get this done.

  96. Krugman: “Berating the Raters”

    4/25/2010 11:59:00 PM – by CalculatedRisk – excerpt

    From Paul Krugman in the NY Times: Berating the Raters

    “[T]he e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

    What those e-mails reveal is a deeply corrupt system.

    The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.”

    “Of course the rating agencies just offered “opinions”, and unknown to investors, those valued opinions were apparently quite malleable.

    How does the new financial regulation fix this problem?”

  97. You do not fix the problem… you get rid of it.

    Don’t you get it? Even if the credit rating agencies would have been 100% right we would still be heading in the wrong direction.Who ever told you that the future of the human race lies in never-risk-land?


  98. Ask William Black. We have people on the government payroll who are expert in exactly that. It is their area of expertise.

  99. “Are you confused by the recent bombshell civil fraud charges leveled by the SEC at Wall Street mega-firm Goldman Sachs? Can’t tell your collateralized debt obligations from your mortgage-backed securities?

    Well, today is your lucky day! Taking a cue from our Best Goldman Sachs Fraud Metaphors slideshow, we’ve gone through the entire past week’s worth of cable news (and even a little C-span from back in January) to find the most coherent, concise, and clarifying metaphors and analogies uttered on television, all to help you go from ignoramus to expert on the Goldman Sachs case in a convenient 5 minutes.”

  100. just wanted to note that this would not be possible were the system completely unregulated.

  101. My sense is Krugman’s and Johnson’s approaches differ here –

    In a recent post – Stop Stop TBTF – Krugman implied that “simplisic” messages were too easily co-opted. In this one, he likewise is arguing for more complexity and subtlety, and less of a strident stance.

    SJ is certainly aware of all the subtle issues surrounding regulation, international finance, multilateral treaty negotiations, capital structures, etc. – yet has singularly focused on TBTF as his signature issue. The justification is primarily that it’s a core issue, and the public can actually understand it and rally around it emotionally.

    Both are strong public advocates. And to answer Krugman’s critique that SJ’s stance is too simple-minded, if SJ were not the most notorious advocate to limit TBTF, the issue would have been claimed by more notorious and less honest folks. There is no question that SJ is striking a populist pose, but I think it’s a mistake to consider that pose ill considered.

  102. Paul,

    You are speaking about Consumer banks though. That means that people choose to bank with those institutions. Are we now going to have the government tell us where we can do our banking?

    Will these smaller banks have the same systems/benefits as they are now? If so, and they share the same systems, how is it any different? All tt sounds like to me is that we are breaking these banks to their oringinal forms.

    BOA – down to to Fleet and so on.

    I just don’t see how this is beneficial. There are many smaller regional banks out there right now. Why are these banks, even after all that’s happened, still doing so well? Because customers have chosen to stay.

  103. My sense is Krugman’s and Johnson’s approaches differ here –

    In a recent post – Stop Stop TBTF – Krugman implied that simplistic messages were too easily co-opted. In this one, he likewise is arguing for more complexity and subtlety, and less of a strident stance.

    SJ is certainly aware of all the subtle issues surrounding regulation, international finance, multilateral treaty negotiations, capital structures, etc. – yet has singularly focused on TBTF as his signature issue. The justification is primarily that it’s a core issue, and the public can actually understand it and rally around it emotionally.

    Both are strong public advocates. And to answer Krugman’s critique that SJ’s stance is too simple-minded, if SJ were not the most notorious advocate to limit TBTF, the issue would have been claimed by more notorious and less honest folks. There is no question that SJ is striking a populist pose, but I think it’s a mistake to consider that pose ill considered.

  104. WHOA! Paul Krugman accuses Simon Johnson of being “Self-indulgent”!!!

    “My sense is that too many people [meaning SJ] are taking the easy route of going for the cheap slogans instead of thinking things through; and some people [meaning SJ] are pushing their signature issues even when the evidence clearly shows that they’re wrong. And we can’t afford that kind of self-indulgence.”

  105. Scott Norsworthy wrote: April 26th, 2010:

    Krugman Blog – excerpt

    “Still, Krugman’s arrogance is only one or two steps from being truly sublime.

    Conclusion: Simon Johnson struck a nerve, big-time. HOORAY!”

  106. We can break up the banks ourselves, since government can’t or won’t. Look at

  107. The best way is to break up the banks by divisions, business units, etc. You see, it is a consensus among bankers that taking deposits from clients and providing credits to others, is no longer a good business. The real business is in trading. Having their propietary trading desks is where the action is.

    So you can break the banks up into the trading divisions, commercial/retail banks, corporate/wholesale banks, credit card divisions, M&A advisory, etc. It would create a lot of overweight in each division, but that is better for the whole market than having these guys manipulate their way through moral hazard again.

    Bring back Glass Steagall.


  108. Goldman’s Tourre Tells Panel: ‘I Did Not Mislead’ Investors

    Tuesday, 27 Apr 2010 | 11:29 AM ET – AP

    “Top Goldman Sachs officials defended their conduct in the financial crisis on Tuesday, flatly disputing the government’s fraud allegations against the giant financial house. “I did not mislead” investors, insisted a trading executive at the heart of the government’s case.”

    April 25 (Bloomberg) — “Fabrice Tourre, a Goldman Sachs Group Inc. executive director facing a fraud lawsuit in the sale of a mortgage-linked investment, said an index that facilitated derivatives trading in the market was “like Frankenstein.”

    The so-called ABX index is “the type of thing which you invent telling yourself: ‘Well, what if we created a ‘thing,’ which has no purpose, which is absolutely conceptual and highly theoretical and which nobody knows how to price?’” Tourre said in a Jan. 29, 2007, e-mail released yesterday by Goldman Sachs. Watching the index fall is “a little like Frankenstein turning against his own inventor.”

  109. “The big players on Wall Street are powerful like never before – and they use this power to press for information and favors from sympathetic (or scared) government officials.”
    Does that mean that Barney Frank will appear before the committee?

  110. I wouldn’t concentrate on breaking up the banks so much as scrapping the entire system of fiat, debt-based money managed by a cartel of fractional-reserve banks which submit to the authority of a central bank regarding interest rates.

    Return to a dollar defined as a fixed quantity of silver (or gold presently held in the Federal Reserve system and the U.S. Treasury), outlaw the practice of fractional-reserve lending (leveraging), and require loans to be made only from savings at interest rates that are allowed to float freely.

    Admittedly this is a drastic departure from the present system but it is a totally honest money system and only a return honesty at this point can save the American economy. The transition may not be that rough even, as the financial jackasses who got us into this mess, the so-called “experts”, still get to keep the money they have acquired by way of privilege and political favoritism.

  111. Hello Mike,
    You are 100% right. He is owned lock stock and barrel, not controlled, owned! Not only is he owned but the whole apparatus of governance in your country – executive, congressional, justice, military, everything is owned by the oligarchs, just like in my country they owned it all. Not only that look at the top levels of your industrial, corporate, financial, educational institutions they are all owned also. Don’t believe it look into the Trilateral Commission. Want a wake up call? Find out who they are who’s a member. These are the people who are behind the oligarchs. Even I know that and I’m not from your country. These people play for keeps just like the KGB in my country. And your president knows that too. They’ll take him out in an instant if doesn’t keep playing ball. They even had to send him a reminder. Remember the indian couple waltzed into his private party with no invitation right past his triple top secret guards right into hand shake position with him? Message delivered, message received.

  112. Yevgeni, I don’t doubt what you said for a moment. Perhaps people will ultimately have to resort to a private, internet-based currency System.

  113. It is not the collapse you should fear but the inevitable conflict of class and international trauma that is being pre-set by these over capitalized titans of greed. We have the ability to set up a system that works but that is not in their interest.

  114. China has a decompartmentalized system that oddly enough could be more technically and strategically modified along sophisticated basis that would accomodate a start up model for reconstructing the big banking monarchy of finance. It is time that we assess the utility of intermediation compared to the practice of current dynasties. Just because they are not lineage based does not mean they are not of the same structure and dangerous overconcentrations of power as true monarchies of the past. These hubs of international finance transform themselves as domestic tyrants and leave us all hostage to a dependence that serves nothing but their own survival.

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