Too Big to Fail: Breaking Up These Big Boys Is an Essential Battle for Our Time
With the possible exception of the health care fight, there is no more important battle for the future of our economy and democracy than breaking up these too-big-to-fail financial institutions. Limiting their size, their economic power, and their political power is urgent and absolutely essential. The problem is that these Wall Street behemoths have such incredible power that very few politicians want to take them on.
The Obama administration, while they proposed some reasonably good regulatory changes in terms of consumer protections and dealing with the so-called "dark markets" (the derivatives and credit default swaps that were kept away from regulators over the past dozen years), appears to have for now decided they want to take a pass on the fight. Larry Summers, according to a recent story in the NYTimes, says that there is no going back to the days of small banks: "I don't think you can completely turn back the clock." The President himself, in a New York Times magazine interview, seemed focused more on regulation than on breaking up the big banks:
Q: There was this great debate among F.D.R.'s advisers about whether you had to split up companies - not just banks - you had to split up companies in order to regulate them effectively, or whether it was possible to have big, huge, sprawling, powerful companies - even not just possible, but better - and then have strong regulators. And it seems to me there's an analogy of that debate now. Which is, do you think it is O.K. to have these "supermarkets" regulated by strong regulators actually trying to regulate, or do we need some very different modern version of Glass-Steagall, in which we basically slim them down?
THE PRESIDENT: You know, I've looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don't separate between investment banks and commercial banks, for example. They have a "supermarket" model that they've got strong regulation of.
The modest-sized regulatory package the White House just proposed reflects that this theory that regulation as opposed to Teddy Roosevelt style trust-busting is the way the administration wants to go.
So far, there doesn't seem to much more excitement for such a fight on Capitol Hill. Even progressive organizations have been slow to take up the fight, although I'm told the new coalition Americans for Financial Reform will be coming out with a policy paper soon on the issue.
The problem is that the too-big-to-fail is the central issue of our economic collapse. I become more convinced with each passing day, as I watch these should-be-discredited-pariahs dominate the Congress, that our economy will not start to seriously recover until we deal with this problem.
Our only hope is to build an outside of DC movement that rattles the walls. Politicians will not have the courage to take this on until we make it impossible for them to stop avoiding the issue.
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"With the possible exception of the health care fight, there is no more important battle for the future of our economy and democracy than breaking up these too-big-to-fail financial institutio
Energy is more important than the other two combined. A broken financial system will cause a depression every twenty years or so. A broken health-care system will end our superpower status. But no more cheap energy would mean the collapse of civilization.
Even within the category of financial reform, breaking up the current batch of behemoths is less important than changing the system so that being too big to fail is no longer a free-money bonanza for those firms. If we break up the current ones, but continue to have un-paid-for implicit guarantees on the assets of any firm that's too big to fail, very soon we will have a new crop of them issuing bad debt that they can count on the taxpayers to make good. On the other hand, if we leave the current set of overgrown financial firms intact but change the rules so that they have to pay double for all the costs they impose and get to privatize only half of the spoils, they'll spin off operationson their own.
I think it's also more important to stop having huge swaths of the financial system be completely unregulated because they technically don't fit any of the regulatory categories, and to end regulator-shopping among firms that are regulated.
We must dig down to the crime which is at the root of these institutions: swindling, securities fraud, extortion, racketeering, usury, and ... oh yeah ... bribery.
One scapegoat after another will be trotted out and put in prison, but the fact remains that we have experienced financial crime ... and, "high crime" ... at a truly gargantuan scale. And as long as the bribery continues, we are but "insects in the dust," but the "surplus population
The force to overcome such a well-entrenched organized crime cannot be expected to come from the Executive Branch alone. It must come from people. From hundreds of millions of people who call themselves, quite rightly, "plaintiff
The administration's assertion that "too big to tail" should not logically mean too big to exist is a canard. Whatever your political inclination, don't let what is essentially propaganda with no basis in fact or rational analysis blind you to the realities of one of the greatest wealth transfers (from everyone else to the rich) in history.
There are citizens of good faith who are organizing against this pernicious policy and the current financial doctrine in total. In fact, those of us with A New Way Forward http://www
Mike, your dead on. Large companies have to much power and influence with our congressional leaders. And unfortunately, our leaders are being rolled by well funded lobbyists. This is the crux of the problem. Large companies undermine democracy. Obama probably knows this, but he does not have the courage or will to make a stand. To bad he did not hire people who were more progressive and could have carried the flag for him. Instead, he hired "Green Shoots Summers" and "Oh was I supposed to pay taxes on that Geithner". Two people very good at defending Wall Street and getting us into the mess in the first place.
For my first post here I reiterste my opinion that we need good old fashioned Republican values back.
We need a trust-buster like either Roosevelt back, albeit Franklin swiped the idea late (well, he was a Democrat, after all).
For perhaps a century that was a core Republican plank. I don't remember if it was Reagan who repudiated that GOP idea.
Mike is absolutely right. There is a battle being waged between Paul Volcker and Larry Summers. Summers wants to create a "super" mechanism to put a bank or other "too big to fail" insitution into receivership and wind it down after it fails (again). Volcker wants them pared down to prevent the problem in the first place and let the FDIC do its usual thing.
The problem with Summers' idea is that the next step is an institution that is too big to save. When it fails, the whole system will come down and we'll have the mother of all depressions. Tens of millions of Americans will fall from the middle class into poverty, from which they may never recover.
Summers' plan is too risky. Volcker wins this one on credibility.
Volcker has more credibility in his pinky than Summers
Volcker pulled us out of the 70's stagflation
Summers got us into the bubble economy
Like Royal Bank of Scotland for example...
While I agree that too big to fail is a huge issue, I am not sure I understand your worries that the administration isn't aware of it.
The quotes you give from Summers and Obama are perfectly consistent with the assumption that they are well aware of the problerm, as is also amply expressed in the treasury white paper. The reform has as one of its cornerstones the goal to set up special resolution regimes for all candidates for financial institutions potentially too big to fail, no matter their structure or name (including insurance, investment banks (i.e. non-shadow-banks) etc.)
This goal is compatible with european style universal banks (Glass-Steagall type separation is not essential to it, and it's unclear to me which purpose that would serve, and also whether it can be meaningfully done at all) and it is also compatible with having a certain minimal size for internationally active banks.
In short: it is key to set up the process to let the behemoths fail and treasury is doing that.
And it's not even clear that they are terribly powerful. Economically they perform poorly, because there really is no good reason for the excessive size that they have reached. The influence they exert is more due to the crisis (bad moment for a breakup) than to political interconnectedness.
4 banks have more than 40% of all commercial and individual bank deposits - B of A, JPM Chase, Citibank, Wells Fargo/Wachovia. The old Federal rules had a cap of 10% for any one bank and 3 of these banks are above that. Even 10% is too much. We need to break up the top 5-6 banks in deposits into 3-5 banks each, perhaps with BoA for example being still under BoA name, like BoA Northeast, BoA SouthEast, BoA Midwest, BoA West. Each would issue it's own stock, own parts of some subsidiaries. We need to separate out investment companies from the banks too, strict limits on spreading of risk and so on.
The easy stuff
1) Re-instate Glass-Steagall.
2) Stricter regulation on derivatives.
3) Better enforcement of regulations.
4) Require all swaps, CDO/CDS exposures et. al. to be publicly disclosed at a transaction level
5) Other measures similar, as required.
Now the hard stuff....
6) Rank all the banks/bank holding companies by assets (domestic & offshore). Any bank currently ranked in the upper quartile must divest assets to bring it down to no higher than the top of the 3rd quartile. Assets/liabilities to be spun off are chosen at 'random' by the Fed (subject to prudent ALM techniques), and are spun-off to shareholders or IPO'd as a new bank, or sold to a smaller bank.
7) Repeat Step 6 every five years.
8) Ditto for insurance companies, thrifts, brokers.
Banks will be forced back into the era of syndicated loans instead of bought-deals - with resulting better due diligence; they'll have to keep their balance sheets cleaner because they might get stuck with crap every 5 years when the Fed rebalances them; and there will be more competition.
That's the money-center side. On the retail side there is lots of other stuff to do.
The Economy Is Tanking Due to the Bailout and Capital Hoarding by the Big Banks
The economic recession is going into free fall because Obama, Geithner, Summers, the Federal Reserve and Congress have made the big banks bigger by giving them direct infusions of taxpayer dollars with no strings attached. With all the money tied up at the top, and no significant amounts of money being channeled into maintaining and expanding the job base, the U.S. is headed for a deep, long-lasting depression.
It will be an unusual depression of course, because 10% of the population that has federal dollars pouring into its coffers through the $12.8 trillion bank bailout will be flying high. The rest of the population whose livelihoods have been destroyed by the big banks and their looting of the U.S. treasury will be in dire straits.
More and more homes are going into foreclosure because of job losses caused by the recession. The middle class is being wrecked by a chain of events unleashed by the insolvency of the big banks and federal lawmakers' disastrous bailout of banks that should have been shut down or broken up.
The bailout money should be taken away from the big banks and re-channeled to real banks operating in the black and making credit available to credit-worthy borrowers, as well as state and local governments that are facing insolvency because of the recess and drop in sales taxes and property values.
"Tanking Due to the Bailout and Capital Hoarding by the Big Banks "
Nancy,
A precision point for you. Capital is best thought of as "net worth" which is the difference between total assets and total liabilities. When capital is moved, it must be transformed into liquidity that either wire transfers or is liquid in some other sense of mobility. When capital is "injected" to a bank the accounting entry is to capital as net worth... but, (and here it is) the counter entry is to a liquidity account, their federal reserve clearing account, a liquid asset account for them. It's technically impossible to hoard capital in its constituent form.
Without the injection of capital into the banks, we'd be facing another Great Depression. We'd probably have 15% unemployment by now, rather than 9.4% unemployment. You can't grow the economy without a functioning financial system and certainly not if housing values had fallen even more than they have already because even fewer people can get loans for homes. Right now banks are doing what they're supposed to do. They've increased lending standards. The reason we're in the problem we're in is because of lax lending standards. Are you proposing to fix a problem of too much debt and too lax lending standards by issuing even more debt and relaxing lending standards further?
you cant grow the economy without a viable manufacturing base
the finacial sector should only be a facilitator
that is why Obama et al are going about this bass ackwards
propping up the fincial sector and ignoring the manufactuirng base when we should be doing precisely the opposite
we had a chance to break up the investment banking cabal but bush quickly gave them 1.5 trillion before anybody had a chance to think if it was the right thing to do....
There is another question to this matter and that is the component of "funny money" in banks. It used to be that deposits (and some federal funds borrowed or sold) were the sole domain of banks and the limit on growth of a bank was limited by its deposit base. You want more deposits, you have to pay a higher rate (it used to be called something like competition for available funds). However I worked for a bank in which the wall street bond trader chairman once told me "deposits have become passe". Think about that for a second. It used to be that deposits (and the savings rate) were relevant. But this "funny-money" breed of cat has unleased a brand new type of living on some derivative substance that places layers of availability on what was once a natural limit to growth. Carry trade anyone? The problem gets to be that working people depend on producing product. The carry-trade whores the funny-money world pervert the whole system where they take.... and the suckers have to produce.
Obama is right that most of the problem can be addressed with better regulation, but there is also some truth that a reasonable limit to bank size should also be a component to reducing risk.
All the Administration needs to put in place is a maximum limit to the amount of deposits covered by FDIC for any one institution. It can be a big number like $1 trillion, but some limit would be helpful while still allowing for numerous major banks to form.
It would actually be better, if instead of limiting total deposit insurance (writ large) that each depositor was limited to $250000 but that only 90% of the deposit amount would be "insured". Therefore, the component of "risk" would still avail and the brokered deposit scheme run by these bastards (socialism for the filthy) would be erased and a modicum of risk would "refresh" the game. So... if you had 100000 in deposits, your bank fails, you only get $90,000. New ball-game and even the fat-cat republicans would like it in theory ( the same way they like monogomy in theory)
But this would not limit the size of banks as the risk a consumer would see would be the same no matter how large their bank. Perhaps some combination of our ideas like: if a bank has more than $1 trillion of deposits its depositors are only covered for 90% of their deposits up to the $250,000 level.
How ignorant of you to assume there are no wealthy democrats - perhaps you need to go away and do some research - then come back and know of what you speak
This is how our elected "representatives" make a show of reform, without actually imposing reform:
they limit the scope of the debate.
When it comes to the economic "reforms" proposed by the Obama administration,
the debate has been limited to regulation without actual reform.
They are basically saying, we're going to let them play the same game, but we'll "debate" if we should watch them closer.
Meanwhile Investment bankers continue to gamble on unregulated commodity trading and credit default swaps.
When new regulations prevent large bonuses, CEOs simply double their pay.
Worried about US taxes and oversight? Just open new off-shore accounts.
And no one is even suggesting reinstating laws or protections that used to
prevent, or at least limit, this casino like mentality.
In fact, we are now letting them play with taxpayer money as well.
With Summers at Treasury and Giethner at the Fed, I don't suppose that any of us
should be surprised.
After all, with the same people driving the bus, why should we expect real change?
Quite
The Democrats are running it! Your guys are in office. Maybe historians have it right, Financial institutions and banks have been Democrats since pre civil war!
What historians? Just because you say it doesn't make it so, especially since you reference nothing.
Republicans have lead this country through intimidation, accusation and insult since Reagan and you have ruined our country with their foreign aggression and domestic manipulation. Clinton was badgered by them in office with the phony contract with America, basically a promise to big corporations and banks that they would over turn all New Deal policies and regulations. They attacked Democrats with their demands and fixed elections for Bush. How in the hell did we go from one crook (Watergate) to another crook (Iran/Contra) and then another (Iraq) if the intent wasn't to circumvent the constitution through deceiving the public over and over again so business interests could use government for their own monetary gains without any concern for this countries people or needs. They ran us dry and into the ground. The only way forward is to nationalize everything in order to rein in and cool down the self perpetuating greed of big banks and business. Thank you and good night.
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