This piece first appeared in the Wilmington News Journal on December 18th.
I was in London last week, visiting three grandchildren and their parents, when the United Kingdom's Financial Services Authority released a 452-page report. The grandchildren were in school; I became interested. Specifically about the causes of the near-collapse of the Royal Bank of Scotland in 2008, the report dealt in a larger sense with the same financial meltdown we experienced in the United States.
The FSA report squarely placed the blame on RBS's poor management decisions, inadequate regulation, and its own flawed supervision. The parallels with the causes of our own banking crisis in 2008 were striking and obvious. What most interested me was how differently the U.K. handled its crisis.
On this side of the Atlantic, we bailed out our too-big-to-fail banks, giving them a major infusion of cash and credit through the Toxic Asset Relief Program. A recent Bloomberg News investigation revealed that, in addition, the Federal Reserve secretly propped up our major banks with loans that peaked at over $1.2 trillion on December 5, 2008. We didn't insist on management changes; one argument against doing so was that running a major bank was so complex it would be difficult to find qualified replacements. So our big bank managers got to keep all of their bonuses and continue to receive them. Nobody was held accountable for the management decisions that directly led to the crisis.
The Royal Bank of Scotland had assets of $3.8 trillion in December 2008, almost double Citibank's assets of $2.2 trillion. But the UK government wasn't cowed by the "too complex" argument. It took ownership of RBS that month with 83 percent of its stock. Fred Goodwin, the bank's CEO, was fired immediately. Within three months the Chairman and most of the Board of Directors were replaced. Goodwin was given a modest (by U.S. standards) severance of $1 million, but faced with massive criticism in the country and a possible legal challenge from the government, surrendered $300,000 of that.
One major reason for the downfall of RBS, according to the FSA, was the subprime mortgage losses piled up by an investment-banking unit based in Greenwich Connecticut. The man in charge of that unit, Johnny Cameron, was forced to retire and pledge never to run a bank again. Contrast that treatment with what happened to those who failed with similar responsibilities in U.S. banks. Most of them are still at their jobs and, yes, still collecting bonuses.
The actions the U.K. took with RBS were, in fact, very similar to what we did at the same time with General Motors. In both cases, the government took over, hired new managers, and then took a hands-off stance to allow them to operate independently. The U.K. government had to put $70 billion into RBS when it took it over. Our government initially put $50 billion into GM. In both cases, it now seems likely that the loans will ultimately result in minimal government losses.
I have never quite been able to understand how the decision was made to fire Richard Wagoner at GM but not Vikram Pandit at Citibank. Is running a huge bank really more complex than running a huge automobile manufacturer?
I would say it isn't. But if you think the answer is yes, then logically there is yet another argument for the Brown Kaufman amendment to the Dodd Frank Wall Street Reform Act.That amendment, which was defeated in the Senate last year by a 61 to 33 vote, would have reduced the size (and the complexity) of the megabanks so that the failure of one of them would not threaten the entire financial system. It would have treated them in the same way the other 99 percent of our banks are treated. Over 350 smaller banks in the United States have failed in the past three years and been taken over by the Federal Deposit Insurance Corporation, which has done an excellent job providing burial services.
There is no "good" way to save a bank that is "too big to fail." The U.S. way was probably the worst. The way the U.K. handled it and the way we handled GM produced better results.
The best solution of all is to make sure that taxpayers will never again be forced to bail out a bank. The only way to do that is to make sure there is no such thing as a "too big to fail" bank.
Website: www.tedkaufman.com
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Study finds bank bailouts profitable for U.S. | Reuters
Of Course There's a Profit on the Bank Bailout - Daniel Indiviglio ...
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Government's Bank Bailout Program Turns A Profit : NPR
Bank Bailout Returns 8.2% Beating Treasury Yields - Bloomberg
You can see where I’m headed here. That means the real power to control the world lies with four companies: McGraw-Hill, which owns Standard & Poor’s, Northwestern Mutual, which owns Russell Investments, the index arm of which runs the benchmark Russell 1,000 and Russell 3,000, CME Group which owns 90% of Dow Jones Indexes, and Barclay’s, which took over Lehman Brothers and its Lehman Aggregate Bond Index, the dominant world bond fund index. Together, these four firms dominate the world of indexing. And in turn, that means they hold real sway over the world’s money.
www.coloradobetterbankingamendment.com
Only Tea Party can say "No" to Rape and Destruction of American Economy thru DEBT !
DEMS/GOP are only a Cat-Mouse MeloDrama of stealing from Citizens while Praying for
Compassion and the Future of America.
Just the FACTS ! Thanks to Tea Party for saying "No" to LIes and Falsehoods.
If I as a structural engineer failed....I'd be in jail. At a minimum they should have seized the banks, and then chopped them up and sold what was left to small well run banks. That means....everyone is fired. EVERYONE.
But atlas the polticians will bail these chumps out every 20 years or so and then blame the free market and call for more regulation. When in fact its the regulation that allows them to walk. In a free market the banks would fail, people would get out their pitch forks....and well...... The free market would estinguish these failed businesses permanently and tar and feather the leaders. The problem is that financial companies rather its the "too big to fail" argument or the "We can pad the polticians and get away with it" argument do not live in the free market and most importantly of all....they know it.
Is there really any logical basis for paying a huge bonus (as noted, much more in the US) to the captain who just ran aground? Is there no "moral hazard" in rewarding failure?
"I have never quite been able to understand how the decision was made to fire Richard Wagoner at GM but not Vikram Pandit at Citibank."
Especially since the banks were the primary architects of the crash. If you examine the financial press of that moment, you will find it replete with opinions that renegotiating the bonuses of the officers of bankrupt financial institutions would violate the most sacred and fundamental of American principles and literally bring about a total collapse of the economy; while autoworkers contracts were an entirely different matter.
"That amendment, which was defeated in the Senate last year by a 61 to 33 vote, would have reduced the size (and the complexity) of the megabanks so that the failure of one of them would not threaten the entire financial system"
Megabanks would not concern the public were it not for the fact that they take us down with them (and that their directors are escorted away in speed boats while the rest of us sink). "Too big to (let) Fail" actually means "big enough to significantly harm the rest of us" when it falls, and that's much too big.
This is a huge problem when you consider the entire world's gdp is less than $70 trillion. bofa's derivatives are over $75 trillion...this can't possibly be leading to anything good...the programs the congress is worried about is peanuts compared to the damage these co's have done...
The main reason the CEO's and "upper"management are still getting those massive bonus checks is because they have in the past given themselves ever more controlling shares of the companies they "run" it is a perfect "good ole boys" club with very few members.