The following is also posted on Johnson's blog, BaselineScenario.com.
"Breaking up big banks would actually increase system risk" is a refrain heard from top administration officials, ever more vocal after they helped kill the Brown-Kaufman amendment (that would have limited the size and leverage of our largest banks) on the floor of the Senate.
But while Mr. Geithner and his colleagues are still taking their victory laps and congratulating themselves on retaining "business as usual" after the biggest crash-and-bailout in world financial history, educated opinion starts to feel increasingly uncomfortable.
People who worry seriously about system risk break the problem down into several distinct buckets, including the nature of shocks and the way these are propagated across the system. In this typology, the "Chuck Prince problem" is in a class of its own.
It might be fairer to label this issue as the Royal Bank of Scotland problem - because RBS had a balance sheet that reached roughly 1.5 times the size of the British economy before it failed. Or perhaps we should call it the Irish problem - three banks with combined assets around 200 percent of the Irish economy, and then they failed. Or even the Iceland problem - three banks that were 11-13 times the size of the Icelandic economy before they went belly up.
But all of those overseas examples still seem rather esoteric to American audiences - at least, that's my experience after presenting 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown over 50 times to audiences around the US over the past few months. Recent European experience points to our likely future - huge banks that herd into bad mistakes and, when bailout time comes, further imperil states that have already weak fiscal positions. But most Americans are not quite willing to say we are there yet.
So we will stick with the Chuck Prince label. The point is that while many banks are run by good risk managers for a while, they all eventually end up in the hands of someone who does not really know what is going on.
Banks are bureaucratic power structures, after all, albeit ones that try to make money after some fashion. The people who rise to the top are not always the most risk averse - more likely they get on with the boss or reflect someone's glory in an appropriate manner or are just not that threatening to the people who matter.
Under our existing rules, good managers can build up banks and - with the continuing lack of effective cap on the size of big banks - these institutions can become huge relative to the economy. And then Chuck Prince gets the job.
The interesting thing about Mr. Prince, of course, is that he does not claim to have known what was going on. In fact, in his testimony to the Financial Crisis Inquiry Commission he rather emphasized that he was not fully informed or otherwise aware of the risks being taken by Citigroup – which he headed.
This “Chuck Prince” problem is exactly what would have been addressed by Senators Ted Kaufman and Sherrod Brown. And it is exactly what this administration ducked. Find me a systemic risk expert – and I’ve been talking to the very best – who thinks what the administration did was a good idea.
The next time a megabank fails, do not send to know for whom the bell tolls. It tolls for Tim Geithner and Larry Summers (as well as probably 25 million or so people around the world who will lose their jobs in the ensuing recession). Failing to break up the biggest banks was a policy mistake for the ages. Senators Brown and Kaufman handed this opportunity to Treasury on a platter - but they knocked it over, trampled it into the ground, and now brag about their feat to the press.
This was pure hubris on the part of the administration, with perhaps some NIH ("not invented here") thrown in - if they didn't invent an idea, they can't believe it's worth pursuing.
The next time a big bank crashes and burns – causing vast economic damage – you can blame Chuck Prince (or his latest incarnation) if you wish. Or you can blame the people who hired the Chuck Prince-equivalent. But I would respectfully submit that most of the blame lies with the folk who thought it was OK to continue allowing the existence of megabanks that can be mismanaged into utter disaster. Â
The “Chuck Prince” problem is a completely unnecessary source of system risk that could have been removed by this administration.
Bill Moyers and Michael Winship: Crocodile Tears on Wall Street
The week's award for sheer gall goes to the hedge fund Magnetar; Magnetar bet against the very same bad investments they had recommended to buyers, sold short and made a fortune. To simply call all of this "creative accounting" is to do it an injustice.
Richard (RJ) Eskow: The Case Against Jamie Dimon: Oligopoly, Pain, and Systemic Risk in Five Slides
Here's the danger: the centralization of risk and power is leading us right into another disaster. We need to get the banking oligopoly under control. But Jamie Dimon is fighting back tooth and nail. And that's why we must fight Jamie Dimon.
Greenspan bears more responsibility for the calamity than any single person. It is rare in the history of any major event one can make such a claim.
Simon Johnson: Jamie Dimon: The Most Dangerous Man In America
There are two kinds of bankers to fear. The first is incompetent and runs a big bank. The second type of banker is much more dangerous. This person runs a big bank and -- here's the danger -- makes it even bigger.
Prince out as Citigroup CEO; more writedowns disclosed - Nov. 4, 2007
Citigroup's Chuck Prince stops dancing - The Curious Capitalist ...
Predicting the Financial Crisis: A Q&A With Fault Lines Author Raghuram Rajan
(2008) Banks are 'too big' to fail .....we need to give them money so the whole economy survives
(2010) Solution? make sure banks aren't 'too big', so when the fail we won't need to give them money to survive.
This simple message should be beaten into every person running for office this year that votes for this lame financial reform.....
*grrr.....getting hard to mask the rage*
(2008) Banks are 'too big' to fail .....we need to give them money so the whole economy survives
(2010) Solution? make sure banks aren't 'too big', so when the fail we won't need to give them money to survive.
This simple message should be beaten into every person running for office this year that votes for this lame financial reform.....
*grrr.....getting hard to mask his anger*
We all need to dig down and demand a lot more from our elected officials. The banking industry was given an amazing opportunity to operate with less government oversight than they had since the great depression. They were all promises of self policing and operating creatively in the new economy. They crapped in their own sleeping bag and the citizens of the US got to clean it up. Hell of a deal. www.dailyreusables.com
STOP BAILING THEM OUT.
The only accountability would be to hold CEOs accountable for their behavior and their failures. Like the rest of us-who would lose our jobs if we failed or behaved unethically. Their income should be tied to ethical behavior and success. This is true gambling-losing your shirt if you fail.
CEOs get to the top because they DO take risks, are willing to make the "hard" decisions like layoffs to protect profits, raising insurance rates to increase profits, not following regulations to protect profits (oil drilling, mining and the like), destroying the environment to preserve profits, poisoning our people to increase profits and on and on.
NOT BAILING THEM OUT ... ever.
Not subsidizing them ... ever.
Not making regulations that favor one business over another ... ever.
Take them to court if they destroy the environment or hurt others.
What's more, their shareholders will be the watchdogs because the shareholders will not be bailed out, subsidezed, favored etc ... and they don't want their company to be sued to extinction either.
Works smart, not hard.
If we expected the banks to do that, then why do we have regulators?
It is completely ridiculous to think the banks will regulate themselves.
STOP BAILING THEM OUT.
you've been snookered.
that means, next time one fails, they will have to be bailed out.
Congress has basically accepted the need for future bail-outs
Or rather, I should say, would-be Republican voters are against it ... so they are holding their elected officials feet to the fire on this one.
The minority of Repuclicans who voted for TARP are in political trouble with their constituents. Every vote after that they listened a bit more carefully to their constituents. Republicans in Congress may be slow-witted, but they do eventually get it that they'll be voted out if they pull any more of the TARP c r a p again.
Democrats ... they still don't get it.