Big Banks: The Consensus Is Cracking 29 comments
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By Simon Johnson
Just when our biggest banks thought they were out of the woods and into the money, the official consensus in their favor begins to crack. The Obama administration’s publicly stated view – from the highest level in the White House - remains that the banks cannot or should not be broken up. Their argument is that the big banks can be regulated into permanently low risk behavior.
In contrast, in an interview reported in the NYT this morning, Paul Volcker argues that attempts to regulate these banks will fail:
“The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company.”
Volcker may not have the ear of the President (as the NYT points out), and Alan Greenspan – also arguing for bank breakup, but along different lines – might also be ignored. But watch Mervyn King closely.
Mervyn King is governor of the Bank of England and a hugely influential figure in central banking circles. Time and again he has proved to be not only ahead of his peers in terms of thinking about the latest problems, but also the person who is best able to frame an issue and articulate potential solutions so as to draw support from other officials around the world.
Mervyn King also does not mince words. In a major speech last night, he said, “Never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.” (full speech)
He hits hard (implicitly) at the White House’s central idea on large banks: ”The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion”. And he lines up very much with Paul Volcker’s views – breaking up big banks is necessary, doable, and actually essential.
Remember and repeat this Mervyn King line:
”Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.”
The big banks will push back, of course. But Mervyn King’s words mark the beginning of a new stage of real reform; the consensus starts to crack.
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This article has 29 comments:
Wall St. has been at the public trough repeatedly, and it got far worse after the repeal of Glass Steagall. So, that genie, at least, can and must be put back in the bottle.
Yes, break up the big banks. Don't forget clawback and, as banks are a publicly-licensed trust, abused like never before, there criminal avenues to pursue.
Both small and large banks have incentives to scam the public and participate in increasing systematic risk because only high risk actions are very profitable.
On Oct 21 12:55 PM greedcanbgood wrote:
> All you "break up" propoenets out there have yet to come up with
> a reasonable strategy for calculating how you would do so (by business
> line, by assets, by geography [which, by the way already occurrs],
> by deposit base). Everyone has opinions but no solutions.
Incidentally, does anyone fancy joining me in putting out a contract on Richard Bove. I was having a good day until around 3:15pm.
Once this current economic down turn (Recession and perhaps Depression) passes the only future "high ground" for American in maintaining it's relevance to the economic world will be it's ability to provide financial expertise and financial structuring to the developing world - and technology innovation. To achieve this end "size" will matter. My suggestion therefore is before embracing the "small is better" logic give thought to how the global economic environment may restructure post the current melt down - "big" Financial Institutions may be the only strategic value that America has to retain it's global influence.
ps and obviously it's military capacity!
People do not know when they have it good and tend to function on material generated happiness as the IF ONLY I HAD A..........
There will always be the conflict of what we want vs. what we need and marketing tends to go haywire telling you what you need. I have a problem with that.
That cash for clunkers was a clunker as far`as I am concerned. Crushing in many cases perfectly good vehicles to get back into debrt is what got America in a jam and consequently the world
G
Right now the existing system gives way too much to Goldman at the cost of the rest of the equity market participants save maybe JP Morgan and Morgan Stanley. How can we compete against GS HFT funded by almost infitite low to no interest Federal Reserve funding? Talk about too big to fail, at 98% profitable trades GS is turning it into too big to lose.
Currently there is a moral hazard for banks that are too large to fail, they know that reckless risk does come with a backstop in the Treasury and FED, the Federal Government will bail them out. If I know that ultimately that is what will happen if I run a bank to the ground while making bets and taking in the profits until the collapse of the bank, who's going to stop me?
I can guarantee you that quite a few people would do it if given the chance. Tell me that the possibility of 100's of millions of dollars, or more, wouldn't push people to take that risk?
Actually no less a luminary than Kansas City Fed President Thomas Hoenig has laid out a detailed strategy for dissolving these "Too Big Has Failed" institutions.
www.kansascityfed.org/...
So we have Hoenig, Alan Greenspan and Paul Volcker all arguing for the breakup of the too-bigs. That's three highly prominent central bankers who agree that too big has failed and needs to be broken up. And we thought the Fed was just running interference for the too bigs. But now that these wise gentlemen are speaking out it is apparent that many of the central bankers are actually interested in saving the American financial system from the banking oligopoly that is destroying it for its own perverse gains.
Numerous less high profile monetary authorities, many right here on SA, agree. I would suggest that if there is any "consensus" about too big to fail, the consensus is restore Glass-Steagall and carve these money suckers down to size. The only people who seem to have a consensus that "too big is ok" are the too big bankers themselves. Their bonuses depend on being too big to fail, which explains the "logic" behind their opinion and their increasingly desperate rationalizations for their continued existence.
1) All shareholders and bondholders have lost there entire investment prior to any taxpayer money being used in a bailout.
2) All Officers and Directors are forced to return any compensation received during their tenure with interest at the average 30-year T-Bond rate before any taxpayer money is used in a bailout. This would include any O/D that have left the company in the past five years.
Dictating financial deals geopolitically should not be a corporate agenda at government levels and already happens all too often at perhaps unwarranted levels of unaccounability. Offshore Republics already exist and we should be precautious about allowing fiat capital run the world from positions that can turn desparate, and desparate to retain power. We stand at the threshold of mercenary finance and privitized hidden agendas of questionable designs.It is simply recklessness writ large to suggest we need to mobilize these silos of mass distruction by forging a dependence upon their perogatives.
On Oct 21 04:37 PM The shark wrote:
> The counter view from a South African:
>
> Once this current economic down turn (Recession and perhaps Depression)
> passes the only future "high ground" for American in maintaining
> it's relevance to the economic world will be it's ability to provide
> financial expertise and financial structuring to the developing world
> - and technology innovation. To achieve this end "size" will matter.
> My suggestion therefore is before embracing the "small is better"
> logic give thought to how the global economic environment may restructure
> post the current melt down - "big" Financial Institutions may be
> the only strategic value that America has to retain it's global influence.
>
> ps and obviously it's military capacity!
MERGERS & ACQUISITION (JP MORGAN & GOLDMAN SACHS) (Paraphrased : see original off the link)
www.bloomberg.com
www.bloomberg.com/apps...
JPMorgan Passes Goldman Sachs in Fees From Advising on Mergers
by Elizabeth Hester and Zachary R. Mider
Oct. 21 (Bloomberg)
" JPMorgan, which posted net income of $8.45 billion for the nine months, and Goldman Sachs, with $8.44 billion, are the most profitable U.S. banks. "
– JPMorgan Chase & Co., navigated the financial crisis without a quarterly loss and is now making more money advising more corporate clients on mergers and acquisitions than Goldman Sachs Group Inc. The New York- based lender took in $1.26 billion in advisory fees in the first nine months of the year, topping Goldman Sachs for the first time since 2000, data compiled by Bloomberg show. The bank also extended its lead in underwriting equity and debt offerings, earning $4 billion in the same period, twice as much as Goldman Sachs."
“JPMorgan has done a wonderful job managing through the storm, and they were able to do what others wanted to do in the down cycle, which was acquire"
"...JPMorgan and Goldman Sachs may make it harder for other banks, including boutique advisory firms, to compete, said Matthew McCormick, a banking-industry analyst at Bahl & Gaynor Inc. in Cincinnati, which manages $2.5 billion."
‘Insurmountable Leads’ from Investment Bank Profit :Although the company has certainly benefited from the strong trading environment, JPM has also taken considerable market share in investment banking throughout the crisis"
“They have captured share and will sustain a lead for a considerable period of time,” McCormick said. “It’s going to be very difficult for upstart or broad-based firms to come in and usurp what many believe are the insurmountable leads that Goldman and JPMorgan have over competitors.”
The above business report (excerpted qoutes & paraphrases) from Bloomberg posted by Hester & Mider on Oct. 21 indicate an unbiased statement of position held at the pinnacle of financial power by two financial giants during and, in part, gaining from a major crisis which they helped to produce. It is pretty clear that the onset of a new era of financial leadership is being forced upon the network of financial markets. It is not just competition that is being snuffed out and blended into a tunnel of emergent homogeneity, but a total loss of adaptive flexibility. With mergers and acquisitons dominating the financials, the power of these two giants is nearly sovereign. At that level they make their own rules since everyone is in a dependency allotment contest. There are undoubtedly those people who can read the (see original full text) content with glorious envy at their success. But there is something obscene about the figures that are emerging given their role in creating such misery, and now having them positioned with the money to be one of the few who will actually gain tremendously and progressively from pirating all the spoils. They will certainly benefit now, at this point in time, from any and all cluster busting orchestrated by popular opinion and the need to find some scapegoats. What I do suspect is that the anti-social branding game will concentrate their viscious appetite on the long sort after demise of the mortgage trusts.