Author: Simon Johnson

Wake The President

By Simon Johnson, co-author 13 Bankers

Most days we can coast along, confident that tomorrow will be much like yesterday.  On a very few days we need to look hard at the news headlines, click through to read the whole story, and then completely change a large chunk of how we thought the world worked.  Today is such a day.

Everything you knew or thought you believed about the European economy – and the eurozone, which lies at its heart – was just ripped up by financial markets and thrown out of the proverbial window.

While you slept, there was a fundamental repricing of risk in financial markets around Europe – we’ll see shortly about the rest of the world.  You may see this called a “panic” and the term conveys the emotions involved, but do not be misled – this is not a flash in a pan; financial markets have taken a long hard view at the fiscal and banking realities in Europe.  They have also looked long and hard into the eyes – and, they think, the souls – of politicians and policymakers, including in Washington this weekend.

The conclusion: large parts of Europe are no longer “investment grade” – they are more like “emerging markets”, meaning higher yield, more risky, and in the descriptive if overly evocative term: “junk”. Continue reading “Wake The President” →

Three Modest Proposals For Goldman Sachs

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

At this stage in the proceedings, the Goldman Sachs’ public relations people must be feeling more than a little down.  The firm’s lawyers are still breathing fire, Lloyd Blankfein trod the fine line between not being apologetic and actually saying “it’s capitalism, stupid”, and the more junior executives interrogated today did not say anything blatantly incriminating.  But the public image of the firm around the world – including with finance ministers and pension funds – has taken a severe beating.

In the interests of finding a more positive and cooperative way forward, here are three suggestions for the PR team to take up with senior management – once they are in mood to think long-term about their “franchise value” again. Continue reading “Three Modest Proposals For Goldman Sachs” →

What Did Goldman Know And When Did It Forget It?

By Simon Johnson

There is a live blog on the Goldman Sachs hearing now on the Lehrer NewsHour website, including comments by Paul Solman and me.  The interaction between Goldman and the Senators – Democratic and Republican – is fascinating.

The Goldman executives so far seem to be struggling to recall exactly what happened.  The Senators are pressing them hard.  This is much more than theater.  This is (some) people trying to figure out exactly who did what to whom.

The Republicans Help Reform, Inadvertently

By Simon Johnson, co-author of 13 Bankers

No one can publicly oppose what is widely perceived to be “financial reform” – the polls are quite clear on this point.  If you want to help Wall Street, your options are:

1)      Oppose the Dodd bill, claiming that it would create a more dangerous situation than what exists today.  But Senator Mitch McConnell already tried this and was thoroughly debunked, e.g., by Senator Ted Kaufman.  There will be rhetorical posturing along these lines, to be sure, but there is no sign of any real traction.

2)      Run a comprehensive “astro turf” disinformation campaign, pretending to be the voice of “true reform.”  But these efforts are too obvious at this point – and too obviously fraudulent, so this actually helps the pro-reform narrative.

3)      Stall for time in terms of preventing the Dodd bill from coming to the floor of the Senate, while working out a backroom compromise that will greatly gut the substance (on consumer protection, derivatives, and/or the resolution authority).  This appears to be what the Republicans are focusing on, with Senator Richard Shelby in the lead.

But there is a potential weak point in this Republican strategy. Continue reading “The Republicans Help Reform, Inadvertently” →

When Will Senator Dodd Start Taking Yes For An Answer?

By Simon Johnson, co-author of 13 Bankers

Senator Chris Dodd is a tactical legislative genius – keep this clearly in your mind during the days ahead.  In terms of maneuvering for the outcomes he seeks, managing the votes, and controlling the floor, you have rarely seen his equal.

Senator Dodd wants some financial reform – enough to declare victory – but not so much as to seriously undermine the prevalence of megabanks on Wall Street.  You can take whatever view you like on his motivation – but Senator Dodd himself is quite open about his thinking and intentions.

Given the mounting pressure from many sides – including Federal Reserve Bank presidents – to implement significantly more reform (see also David Warsh’s Sunday evening assessment), for example using some version of the Brown-Kaufman SAFE banking act, how exactly will Senator Dodd prevail? Continue reading “When Will Senator Dodd Start Taking Yes For An Answer?” →

The Washington Post Makes A Major Factual Error

 By Simon Johnson, co-author of 13 Bankers

Of all the weak, ill-informed, and misleading pieces written on the “resolution authority” – a central tenet of the Dodd bill – by far the most disappointing is the Washington Post editorial in Sunday’s paper.

I fully appreciate that these are complex issues and I understand that journalists frequently write under great time pressure. 

But honestly, if you don’t know the answer to a question – you should really just call Treasury, the White House or Senator Dodd’s people.  What even they will tell you, in my experience – if you press them hard enough (i.e., don’t fall for the initial spin) is that it is incorrect, or at least significantly incomplete and misleading, to say that the Dodd bill will create: Continue reading “The Washington Post Makes A Major Factual Error” →

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. Continue reading “The Sickening Abuse Of Power At The Heart of Wall Street” →

Two Senators And Larry Summers On Bank Size

By Simon Johnson, co-author of 13 Bankers

Bank size is suddenly the issue of the day – with politicians lining up to oppose any meaningful restriction on the size of our largest banks.  Their reasoning is varied and all quite flawed, particularly when they insist there must be no Senate floor debate on the Brown-Kaufman amendment.

Senator Dick Durbin may be right to say that the Brown-Kaufman amendment is “a bridge too far” and will not pass in this legislative cycle – presumably this sounds like a tactical political assessment.  Surely in that case he would not oppose bringing it to the floor of the Senate and allowing that body to prove him right (or wrong).

Senator Chris Dodd opposes the amendment, but his reasoning is rather vague.  Here’s what he says in his interview with Ezra Klein, which appeared yesterday,

“It’s not size; we’re preoccupied with size.  And I’m not suggesting that any size is okay, but it’s really risk, it’s these other elements in here.  A relatively innocuous product line in a relatively small company can pose huge, systemic risk.  That said, in our bill, we provide the authority to break up companies.  That is clearly in the bill, the authorization to do that under certain circumstances.  But I’m not sure that we ought to become so preoccupied with it.  And again, I’ve looked at the 13 Bankers book, and so forth, that approach, and hear this, by the way, not just from them, but from CEOs of major corporations.  This is not some left/right question.  But I just don’t think that it makes a lot of sense.  I don’t think it’ll prevail.” Continue reading “Two Senators And Larry Summers On Bank Size” →

Greece, The IMF, And What Comes Next

By Peter Boone and Simon Johnson

The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one.  The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell.  The spreads show all you need to know: a very clear and large contagion risk.  Continue reading “Greece, The IMF, And What Comes Next” →

The Consensus on Big Banks Starts To Move

 By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

The ideology of unfettered finance is crumbling.  Whatever you think of the merits of the Goldman case from a legal or short-term perspective, the SEC’s allegation – and Goldman’s response – have further moved the mainstream consensus away from “finance is generally good” to “big banks are frequently scary.”

Senator Ted Kaufman should get a great deal of credit for his well timed charge on this issue – as I argue in BusinessWeek/Bloomberg.  But Lloyd Blankfein also gets an inadvertent assist, quoted in the Financial Times yesterday as saying that the SEC case against Goldman would “hurt America.”

Mr. Blankfein is starting to sound – and act – a lot like Nicolas Biddle, head of the Second Bank of the United States (by far the most powerful commercial bank of the day), during his confrontation with President Andrew Jackson in the early 1830s. Continue reading “The Consensus on Big Banks Starts To Move” →

Make The Call Or Get Out Of The Booth: After The President’s “Wall Street” Speech

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover And The Next Financial Meltdown

Update: The Progressive Change Campaign Committee has a petition that takes you to a page with your senators’ names and phone numbers, as well as a script to use when calling them.

The president’s rhetoric today at Cooper Union was impressive and his body language indicates a major shift in administration attitudes towards the big banks over the past year.  This is commendable.

But there is still the awkward question of legislation that would actually reduce the political power of big banks – and make our financial system significantly safer.  The latest indications from the Senate are that there will be some sort of “Dodd minus” compromise bill brought to the floor early next week.  The Republicans have substantially backed down from Senator McConnell’s “hell, no” position of last week because the polling is crystal clear: Anyone perceived as opposed financial reform will lose badly in November.

But the Democratic leadership is not seizing on this advantage and on the opportunity presented by the SEC case against Goldman Sachs – key figures in the Democratic establishments are too worried about upsetting financial sector donors.  As a result, come November, independents will view the Democrats with scorn, while the Democratic base will be far from energized; you do the math.

What can you do?  What makes sense in both economic and political terms? Continue reading “Make The Call Or Get Out Of The Booth: After The President’s “Wall Street” Speech” →

The SAFE Banking Act: Break Them Up

By Simon Johnson, co-author of  13 Bankers.

On Wednesday, Senators Sherrod Brown and Ted Kaufman unveiled a “SAFE banking Act” with a clear and powerful purpose: Break up the big banks.

The proposal places hard leverage and size caps on financial institutions. It is well crafted, based on a great deal of hard thinking, and — as reported on the front page of The New York Times this week — the issue has the potential to draw a considerable amount of support.

The idea is simple, in the sense that the largest six banks in the American economy are currently “too big to fail” in the eyes of the credit market (and presumably in the leading minds the Obama administration — which saved all the big banks, without conditions, in March-April 2009).  The bill put forward by Senator Christopher J. Dodd, the chairman of the Banking Committee, has some sensible proposals — and is definitely not an approach that supports “bailouts” — but it does not really confront the problem of the half-dozen megabanks.

In the American political system — where the power of major banks is now so manifest — there is no way to significantly reduce the risks posed by these banks unless they are broken up. Continue reading “The SAFE Banking Act: Break Them Up” →

What Should The President Say On Thursday?

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

On Thursday, President Obama will give one of the defining speeches of his presidency.  Most presidents are remembered for only 2 or 3 policies or events during their tenure.  The SEC case against Goldman Sachs means, like it or not, the legacy of this administration is wrapped up with the outcome of this and related cases.

The president is apparently lining up to give a fairly conventional “support the Dodd bill” speech.  This would be major miscalculation.

The Democrats are afraid that if they truly take on the big banks, they will lose campaign contributions and be placed a major disadvantage for November 2010 and 2012 – “don’t push it too far” is the message from the White House to the Senate.  But this just shows the White House has not fully comprehended the modern nature of banking. Continue reading “What Should The President Say On Thursday?” →

Jamie Dimon Should Debate Us

By Simon Johnson

This weekend Jamie Dimon (head of JP Morgan Chase) told the German newspaper Welt am Sonntag that he needs “better access for bankers to politicians” and that the banking industry could do with more influence on politicians.   He also mentioned the need for a forum where banks can “demonstrate their arguments to politicians and supply them with the right facts” (that wording is from Reuters’ summary).

We would welcome a debate with Mr. Dimon in any forum, preferably in public and with TV cameras present.  We have previously extended a similar invitation to any bank executives – including but not limited to the 13 Bankers in the title of our book. 

One of the 13 appeared in an off-the-record panel last summer with me; it’s not clear that he would agree to do the same again today.  One other leading person from the financial sector – although not a current top executive – has expressed interest in a public debate; we agreed and now the ball is in his court. Continue reading “Jamie Dimon Should Debate Us” →

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.