'Too Big to Fail' Has Gotten Much Bigger

Once the market stabilizes, something needs to be done to isolate systemic risk in some of these very large banks. Right now, all of the largest institutions have experienced huge market share gains in mortgage and other segments while at the same time have huge risk taking operations.

Not to pick on poor Goldman (GS), who gets enough heat these days, but the taxpayer shouldn't be guaranteeing one half of the balance sheet while the other half goes hunting in the hen house. This applies to Bank of America (BAC), Morgan Stanley (MS) (which is, as we speak, rapidly increasing its balance sheet risk) and virtually every other large institution. Just to be fair, Goldman took a lot of these risks at the behest of the Fed, which wanted to encourage risk taking again to stabilize the market. At some point, once the seas are quiet the table needs to be re set.

At we get more visibility into a situation where these institutions have income that outstrips loan losses, we need to look at ways to dismantle the behemoths we have created and firewall these balance sheets from proprietary trading and risk taking.

I don't want the Administration to go on some sort of pro cyclical binge regulating the banks into zero profits. Rather, the balance sheets that by nature of size or scope require underwriting by the US taxpayer need to be "firewalled" from those that undertake speculative risks.

Guys like Jamie Dimon over at JP Morgan (JPM) should be a big part of how we figure out how to do this. Of all the CEOs, this guy has the best regulatory head and makes the most sense--he'd make a great replacement for Geithner, who is not a strong Treasury Secretary. The battle plan, I believe, is to reform our regulatory system first then fix the banks. However, I don't think Geithner is strong enough to do this. Jamie Dimon is though and, if asked, he'll serve.

With bank profits finally stabilizing, this process may be coming sooner rather than later.

Just to appease the disclosure gods, I am long the common, preferred and debt of BofA, Citibank (C), and JP Morgan.

Comments

[ginsy:]

who wrote this article; i don't see a name.

Aug 30 01:20 PM

[einstein p ...:]

I don't get C or BAC, but I own both of them at substantially lower prices. Have already sold portions of both to cover my investment and a small profit, so I can sleep at night.

Have no idea what is too big to fail or what criteria is applied, but the only way to make back the money is to go with the mo. In this case you have to hold your nose and believe in the Tooth Fairy.

Aug 30 04:43 PM

[Joe Shareho...:]

Too big to fail is a losing entity. We encourage bad behavior and punish good. The large banks with the help of Heli Ben and the Fed have largely been responsible for this mess we're in but get bailed out. In the meantime, smaller banks competing for depositors' money are continually struggling and shrinking because of nervous depositors pulling their money to place in larger too big to fail entities. Reward the bad behavior and punish the good. That's the precedent set by our gov and central bank.

joeshareholder.blogspo...

Read more at the above link

Aug 30 05:18 PM

[Fitz919:]

Consider this....Mortgages and Loans at fixed rates don't reset. This is the solution. Subprime, Alt A, Option Arms, And Obama's Mortgage Rescue Plan, all have mortgages that reset their interest rates. It's idiotic to have the loan on your most valuable asset to have the interest rate reset in 3, 4, or 5 years. This is where the solution to our economic crisis rests. All mortgages could be written at 4% fixed for the next 7 years, and all refinances at 4% fixed for the next 7 years, and we will have a real recovery. If we made all mortgages in the U.S. 4% fixed permanently we would have financial market stability.

Aug 30 11:48 PM

[mikeg3:]

Has anyone thought about having the Fed and other country's equivalents driving down LIBOR to near zero so that the rate resets create the mortgage adjustments the mortgage servicers won't do?

Aug 31 12:03 AM

[JCC1977:]

Your idea will not work. What will differentiate a subprime borrower from prime borrower? It defeats the purpose of credit score. Why would anyone pay mtg or any other debt when a deadbeat borrower can refi at a rate equivalent to someone with perfect credit score?


On Aug 30 11:48 PM Fitz919 wrote:

> Consider this....Mortgages and Loans at fixed rates don't reset.
> This is the solution. Subprime, Alt A, Option Arms, And Obama's Mortgage
> Rescue Plan, all have mortgages that reset their interest rates.
> It's idiotic to have the loan on your most valuable asset to have
> the interest rate reset in 3, 4, or 5 years. This is where the solution
> to our economic crisis rests. All mortgages could be written at 4%
> fixed for the next 7 years, and all refinances at 4% fixed for the
> next 7 years, and we will have a real recovery. If we made all mortgages
> in the U.S. 4% fixed permanently we would have financial market stability.

Aug 31 01:00 AM

[acttang:]

what he is saying is for govt to trump the market economy, i.e., to do the exact kind of lending (or more reckless) that got us into this mess at the first place. the idea is that when government does it, it doesn't need to worry about the borrower not paying back: it just prints more dollars to cover the bad debt it issued. nice plan! except you have to tell the chinese that they should keep buying our t-bills to fund such lending...

On Aug 31 01:00 AM User 479605 wrote:

> Your idea will not work. What will differentiate a subprime borrower
> from prime borrower? It defeats the purpose of credit score. Why
> would anyone pay mtg or any other debt when a deadbeat borrower can
> refi at a rate equivalent to someone with perfect credit score?<br/>

Aug 31 06:02 AM

[Fitz919:]

Reckless lending is what got us in this mess....and it can never get us out. Lending in the form of liar loans, where the lender does no due dilligence is not even a sound business practice. If you create a stable interest rate for everyone, then the next question is: How much money does the borrower have for a downpayment, and how much does he make? Once that has been established, a simple formula will tell you the maximum dollar amount you can borrow. Some flexibility in the term of the loan would be another good option. Getting people into homes they can actually afford has nothing to do with credit scores. Punishing people with higher interest rates is what loan sharks and credit card companies do.

Often times people are trying to get into a home, and at the last second the libor rate, or prime rate moves, or something beyond your control effects your credit score, and you suddenly can't get the home.

Look at the far reaching global effect our mortgage market has had.
It took down the world. A stable mortgage system will work, and it doesn't require that every dollar comes from Uncle Sam, or the Chinese.

Oh, and by the way, when the Fed raises interest rates, it causes inflation. And when the Fed raises interest rates too much, it causes a feedback loop that crushes the economy, and once crushed, inflation is once again abated.

A proven inability to pay ones debts and obligations will be obvious in ones credit history, and should be taken into account by any lender. FICO scores are more voodoo than reality when you take into account all the nonsense credit card companies are pulling to justify bumping up your interest rates.

This isn't rocket science guys, this is basic math and 4% fixed.

Aug 31 08:59 PM