Whither Megabank, Inc?
by Professor Bear
Should too-big-to-fail banks get special protection in the form of a free
(government-provided) ad hoc bailout insurance against failure?
Should a banker’s bonus be guaranteed, even if the bank he serves has lost
tens or hundreds of billions of dollars?
Does the banking system function better when it is overwhelmingly
dominated by banks so large and systemically important that they hold a
proverbial Sword of Damocles above the global economy’s head?
Has the financial sector grown so large relative to the rest of the
economy that it can no longer serve the common good?
A debate on the too-big-to-fail problem is radiating through the
international policy arena, and some interesting philosophical differences
are emerging. Below I offer some references to recent articles in the
Financial Times and other sources which highlight the growing divide among
national leaders on issues that will shape the future of international
banking for decades to come.
———————————————————————-
The Financial Times
Brown pledges bonus clampdown
By Lionel Barber and Philip Stephens
Published: August 31 2009 23:35
Gordon Brown has pledged tough action to clamp down on excessive
remuneration for bankers as part of an international effort to rectify the
systemic weakness that led to the global financial crisis.
———————————————————————–
The Financial Times
Berlin bids to halt ‘too big to fail’ banking
By Bertrand Benoit and Chris Bryant in Berlin
Published: August 31 2009 16:41
Germany is calling on the world’s largest economies to adopt joint
measures to prevent banks from becoming “too big to fail” and holding
governments to ransom in future financial crises.
Angela Merkel, Germany’s chancellor, said on Monday – following a meeting
in Berlin with President Nicolas Sarkozy of France – that steps to prevent
excessive risk-taking by large banks should rank high on the agenda of the
summit of the Group of 20 largest economies in Pittsburgh later this
month.
“No bank should be allowed to become so big that it can blackmail
governments,” Ms Merkel said.
——————————————————————–
TOO BIG HAS FAILED (PDF). Thomas M. Hoenig. President and Chief Executive
Officer. Federal Reserve Bank of Kansas City. Omaha, Neb. March 6, 2009
(Quote passage starting with “What Might We Learn from Previous Financial
Crises?”)
——————————————————————–
The Financial Times
Too much of a very good thing
Published: August 31 2009 19:17
The City of London is the most successful financial centre in modern
history, now well into its third century as a leading banking hub. In
2007, nearly 200 years after its funding power played a crucial role in
the defeat of Napoleonic France, it produced more than one quarter of all
British corporation tax revenues.
For the UK, a country which is rather self-conscious about its perceived
lack of world-beaters, this grand entrepot crowded against the Thames has
been a source of pride. Before the crisis, British politicians, for some
years, conducted elaborate liturgies of devotion before mighty finance,
humbly promising not to get in its way.
So, the view expressed by Lord Turner, chairman of the Financial Services
Authority, in an interview published last week that parts of the British
financial sector might be larger than is “socially optimal” is
uncomfortable. He is, however, right, and his intervention is symbolic of
the welcome change in attitude at the FSA since he took charge at the
supervisor.
———————————————————————-
Has “too big” failed? If so, how best should it be fixed?
Does the financial sector’s ability to shift $billions in campaign contributions between the Republicans and the Democrats in Congress in exchange for good behavior mean these questions are moot?
Congress may be blasting Geithner over the bailout, but they aren’t acting as though his regulatory reforms are too weak. They are watering them down. Why?
Does the financial sector’s ability to shift $billions in campaign contributions between the Republicans and the Democrats in Congress in exchange for good behavior mean these questions are moot?
Possibly. I’ve seen Paulson heralded in the media, even liberal media (NPR) without a single mention of his involvement in the deregulation that led to megabanks, shadow investing, and the subsequent bailouts.
Those who laud the fire brigade members for their crisis management skills tend to also conveniently ignore their possible complicity in creating favorable conditions for conflagration.
Campaign finance and lobbying reform are the key to this whole puzzle. If big money runs the gov, then we will continue to see pretty bubbles blown up in our face.
Bubbles are useful sources of investment returns to those who are armed with the capital and technical means to mine profits from volatility.
When said volitility is controlled by a handfull of investment banks that get a chance to see trade data before everyone else and who control the financial media I’d say there are very few who fall into that group.
The last attempt of campaign finance and lobbying reform was thrown out by the Supreme Court. Also Congress (I can’t remember which party) is working at overturning McCain Feingold attempt to straighten out this mess.
I can’t imagine that the Constitution and the Bill of Rights meant to legalize bribery for politicians.
If de facto bribery is in fact legal in politics, then it seems the Constitution would need to be amended to prevent it.
America really should not have “the best government money can buy.”
Watering down? always. something is being hidden.
I can’t wait to find out that answer.
I have my hunch, but ya’ll will say I
have my tin foil on to tight.
I’ll never say that, desert. Because one thing that spooks (I’m referring to gov’t intel and psyops personnel) know is that the way to hide something is to make it so incredible no one would believe it.
In contradiction to the appropriate reaction to “too big to fail”, we now have fewer smaller banks and the biggest which were provided safe harbor are bigger and more dangerous than ever. ATT was “trust busted” some years back in a move to “try” to bring competition to telecommunications. Citi, Chase, BOFA etc need to be broken down into smaller banking institutions. Goldman???
AT&T, what an interesting analogy. Telephone service and rates were satisfactory before the break-up, much worse afterward. They seem OK nowadays; I would say it took 20 years after the break-up for competition to do any good.
Yeah, amazing how dozens of redundant communications networks, each with its own eccentricities and too small to benefit from economy of scale, do not provide the efficiency or reliability needed for a basic infrastructure service. I don’t know how that escapes the minds of de-regulators of power and communication industries.
I don’t see credit default swaps or MBS falling into the basic infrastructure category - we can easily live without them. Breaking them up would be a truly painstaking process, though. I like the direction the Europeans seem to be leaning - if the mega banks have no risk, then regulate them to the point where they receive no rewards either. Maybe then someone will wake up and realize that more profit could be made by starting a smaller enterprise that takes its own risks, and we could begin to have capitalism in the US.
…if the mega banks have no risk, then regulate them to the point where they receive no rewards either.
Great idea. Ultimately, this is the crux of the matter. If someone is not **personally** taking the risk, then they should not **personally** be getting the rewards.
Risk-and-reward mechanism has been greatly distorted, and this is what needs to be rectified.
“Telephone service and rates were satisfactory before the break-up, much worse afterward.”
Rates were satisfactory? Az, I remember seeing an AT&T ad from probably the early 1970s (pre-breakup) that touted the fact that their evening long distance rate had been reduced to under a dollar for the first minute.
Yeah, and how about having to rent one’s phone?
I’ve seen someone reference the phone rental before. I though we owned our (dial) phones. Was that not possible?
“Does the banking system function better when it is overwhelmingly
dominated by banks so large and systemically important that they hold a proverbial Sword of Damocles above the global economy’s head”?
“Has the financial sector grown so large relative to the rest of the
economy that it can no longer serve the common good”?
As I expected, Prof. B. hit the main issue right on the head. My goodness, how long can they keep stealing from us? Thanks Prof B. for your wisdom, as always!
I appreciate you also PB. I wish I were half as intelligent as HBB posters. You guys saved me at least 70K. thanks !!!!
The communist block was the first financial system that was too big to fail. Of course in 1989 or 1991, there was no one to bail them out Comcon or the former USSR. The results were devastating on the local populations with pensions and savings wiped out for tens of millions of people who could never recover. Fortunately, many countries adopted somewhat reasonable policies in the early 90s. Poland is probably the best example of doing things right.
As far as how this relates to banking globally, the concentration of capital/power/(economic decision making) in the hands of the few was just inefficient. Errors were copied across banks much as risky securities were created in the modern crisis. Capital disbursement will always be more efficient than concentration.
A simple example: local banks usually know the conditions better, they just won’t make crazy loans if they are using their own capital.
The policy response today is a fairly high stakes game, if it is executed incorrectly, there is a small chance our system will go the way of Comcon. A few steps along the way need to happen but in short, it boils down to not being able to service debt at the national level because the economy isn’t stabilized. By reinforcing the status quo overconcentration of capital in mega banks, systemic failure is still possible. It would be tragic if the lessons of AIG/Lehmann/Citigroup/Bear Stearns/Fannie/Freddie are not used to really “fix” the system. Some of the banks (remains of Citigroup/ Bank of America) may need to be broken up along the lines of the break up of AT&T in the 80s. It didn’t make sense at the time but it did allow for a more effective system.
A simple example: local banks usually know the conditions better, they just won’t make crazy loans if they are using their own capital.
Agreed.
In 94 with local bank/lender who was in tune with the entire desert. Underwriters didnt’ want to approve, but local lender( as I sat there listening) stepped in to tell them the properties met all the parameters, unlike LA centrified.
Props were a
1st foreclosure @$70K
2nd/3rd Condo @ $20k (each in downtown Palm Springs-95)
4th house/estate @$64k ( again downtown PSP-95)
Local is much better in many fields. LA or GoldSuck would never have approved. They didn’t or wouldn’t have known the dynamics of a local faraway area.
A simple example: local banks usually know the conditions better, they just won’t make crazy loans if they are using their own capital.
Another simple example I noticed as a kid,
winter/summer/spring/fall apparel stocked in chain stores were always wrong for our location. Being in desert climes you didn’t need an entire supply of down filled jackets,heavy wool coats, thick thick wool sweaters etc.
Winter could be cool/cold or 100 degrees by noon.
LOCAL stores filled the correct type and balance of apparel supply by knowing the locale.
Another simple example of local and smaller than “too big to fail” is more nimble.
A simple example: local banks usually know the conditions better, they just won’t make crazy loans if they are using their own capital.
True but many smaller banks were selling loans to others to be packaged into MBS. So even the small banks were part of the problem.
The system needs to do away with securitization and insurance. If you make a loan you need to be responsible if it fails. CEO’s need to be held accountable if their banks fail with claw back provisions and much more emphesis on long term results.
“A simple example: local banks usually know the conditions better, they just won’t make crazy loans if they are using their own capital.”
But this is exactly where the too-big-to-fail bailouts come in: To protect Megabank, Inc from its own too-big-to-manage inefficiency.
Derek, I think I followed what you said. You are a smart man for sure.
The solution is simple. If a bank needs bailing out by the government, everybody on the board and all the senior officers down to the VP level are fired and banned from working in any business regulated by the SEC, FED, or GAO.
Too-big-to-fail suddenly becomes too-big-to-not-be-very-conservative.
http://www.zerohedge.com/article/farewell-america-switzerland
Read this… We won’t have a choice soon as the “others” are just not going to invite us to the party. For those of you that would suggest that the party is in our back yard and “WE” do the inviting, I’ll suggest that it is time too look around- there is less and less “guests” and they are bringing less and less to the table…
I like this approach very much for the incentives it creates.
OTOH when the bailout actually happens, the argument is made that oh, we need to keep these people on, because nobody else knows how to bring the business back to solvency. They might can the Pres or the Chairman, but he is replaced by someone who was already high up in management.
I think that “too big to fail” means “too big to bail.”
Yep, there I go. Thinking again.
Thinking’s all very well and good, but there’s also this thing called doing. Which means that it’s time to take action. What can we do?
1. We can steer clear of doing business with the “too big to fail” megabanks. There are plenty of locally based, community-oriented financial institutions out there. Some are credit unions. Some are banks.
2. Continue to educate ourselves — and each other — on how the financial system has failed us so badly. This-here blog is a great venue. So, Ben, looks like you’ll have to keep this party going for a while yet.
Anyone care to add more items to the above action list?
Arizona,
I’ve been trying to do that over the past twenty years - but my local banks seem to get gobbled up by the MegaBanks faster than I can set up new accounts.
In a crazy swing over just the last year my savings account, checking account, a money market fund, credit card, two car loans and my tiny mortgage are now held by PNC.
A year ago these accounts were with four different banks.
Question: Considering fractional reserve banking, how much damage do I do if I pull $10,000 out of the bank and put it in the mattress?
I guess you are celibate…………. right?
I would recommend buying $10,000 worth of gold and putting IT in the mattress.
“Too-big-to-fail banks” as a policy also appears to support all kinds of risk taking in the shadow banking system.
I would like to see more analysis/discussion of this aspect of the situation.
Wouldn’t the government stepping in and making these kinds of decisions be against the Free Market?
There is no free market, but to what extent there is a market in banking or anything else, yes. Banks that weren’t bailed out, particularly smaller banks, certainly suffered for those that were.
This fundamental fact has not been discussed:
Why were they allowed to get “too big” in the first place???
Why weren’t they smacked down with anti-trust provisions in the 1980’s when every got duped into the supply side lie that corporations were “nice” and “good for the economy”(not yours or mine), and “we need corporations” and “we must cater to corporations(not tax them essentially giving them money) or they’ll leave”?
Why weren’t they smacked down with anti-trust provisions in the 1980’s
Didn’t congress get rid or hackle that law in the past 10 yrs?
IIRC, something, um, the TEETH were pulled from the antitrust law.
I can not understand how Exxon was allowed to merge with Mobil…
The questions being asked do not spring from the most probable cause of the problem. Is it likely that high compensation for bank managers brought on the financial crisis? I think not. Is it likely that the tremendous size of some particular banks is the root cause of the largest global credit expansion (and collapse) in history? I doubt it. Will limiting either alter the underlying problems?
Banking executives had no incentive to protect the solvency of their banks. They got paid either way, and in most cases, were even kept on after their banks failed.
ahh.. that explains it… there’s no incentive to avoid being known as a complete and utter failure at their profession as well as being a thief and, by inference, bank execs have no ego and no conscience, which bolsters the idea that they are most certainly inhuman.
Ridiculous you say? No, you don’t say.
How could anyone who is showered with golden parachutes and large bonuses, regardless of the performance of their organization, ever be regarded as a complete and utter failure? I would consider anyone who achieves such a compensation package to have wildly succeeded, at least by the American standard that more money means you are a better human being.
patient renter,
Further, of late I’ve come to the opinion that they knew things would de-rail but were willing to take the risk in an effort to come out on top of the heap in a financial post apocalyptic world?
How else can we explain such stupidity? Look, back as far as the mid-90’s Greenspan was warning against too many Mega-Bank mergers. His logic was that if there are only (5) banks IN the U.S ( and one of them fails ) how can FDIC -possibly- insure 20% of the country’s deposits.
He went along with it, but only grudgingly and *not without a stern warning.
Further, of late I’ve come to the opinion that they knew things would de-rail but were willing to take the risk in an effort to come out on top of the heap in a financial post apocalyptic world?
?? What risk, they made huge bonuses gambling with other peoples money, then they got bailed out by the FEDS. Thats just it they didn’t take any risk.
The reason there are large banks
Bigger banks make bigger campaign contributions and pay their whores better when they become lobbiests.
see Glass Steagle repeal.
“Further, of late I’ve come to the opinion that they knew things would de-rail but were willing to take the risk in an effort to come out on top of the heap in a financial post apocalyptic world?”
Ding ding ding! We have a winner folks!
After reading Disaster Capitalism this nauseating fact became painfully clear to me. They did it to us ON PURPOSE. Nothing else really makes sense.
I agree, sleepr.
Sleepr Cell,
I’ll have to read “Disaster Capitalism”, after all, Oregon has but a few days of “summer” left? So I’ll have plenty of time shortly.
I’m not sure I used the term “on purpose” correctly? Any more than a bunch of Nascar drivers wound up in a 23 car pile-up “on purpose”. On the ‘up’ they couldn’t lend out money fast enough ( for fear of being left behind ) but when the ‘game’ suddenly shifted ( and you weren’t lucky enough to have been “in the pit” at the time ) they tried to “floor” their way through the mess.
I HATE to give these guys one iota more credit than they deserve. Looking back ( at the flaming wreck ) I don’t think there was any sense this would all end in the taxpayer’s lap, even in 2006 and maybe ‘07?
Banking executives had no incentive to protect the solvency of their banks. They got paid either way, and in most cases, were even kept on after their banks failed
CEOS etc all have this protection. There is no corp that will dishonor
the contracts they make with those in high management.
There is no vested interest in a ceo etc making a corp work and grow WeLL.
Read the KC Fed piece…
Pardon me while i wax philosophical..
I cannot think of a time or place in the history of the world where the majority of power, both political and economic, did not rest in the hands of a very few. Precisely how few will wield great power is the only open question.
What is the alternative to power and wealth being the domain of the few? It’s been said that if wealth (or power) were somehow equally distributed, a very few people would soon regain the majority of it, so there is no alternative.
People often tend to ignore the way social power naturally evolves. Fact is that few are capable of capturing and holding it. Call it a skill, a talent, or blame it on some evil inclination but whatever it is, call it rare.
We might think we’ve succeeded at disseminating power, but at best the results are little more than an illusion. We (the people) often choose sides and help transfer power from one powerful force to another powerful force, but we (the people) can never hold the power ourselves.
That ‘churn’ of money from the lower levels to the rich is also called velocity, and it’s a vital part of the system. Without it, you historically have revolutions and collapse. No one wants to outlaw being rich, we just want the membership in that group to change occasionally. And allowing massive concentrations of wealth in the hands of the few lessens that flux and has been shown again and again to be destructive to society. So it’s not a new-fangled naive thing to try to ’spread the wealth around’, it’s the product of much thought and experience. Countries with more equitable wealth distribution are generally more wealthy and secure than those with less.
Agree 100%, alpha. Now we just have to agree on how to get there. More Rube Goldberg regulatory schemes, more bureaucrats, lawyers, accountants? Or freedom and trust that, without special favors, the distribution of wealth will start to resemble the distribution of intelligence and industry?
The U.S. Code is something like 200 volumes and counting, and the Code of Federal Regulations another few hundred volumes. Talk about “too big to fail” …
History has also shown that it pretty much never happens naturally in a non-primitive economy. Go back to the tax codes of the wholesome fifties and we’d be getting there- coupled with continuing to close tax havens.
we’ve succeeded at disseminating power
“We” have not.
If “we” think that, “we” are bs-ing ourselves.
Let me offer a contrary perspective:
- There is a great deal of heterogeneity across nations and times in the degree of power concentration into the hands of a privileged minority.
- Those societies with the most egalitarian distribution of wealth and power have tended to be the most stable and best met the collective needs of their citizenry.
- Those societies with the greatest concentration of wealth and power into the hands of a few have tended to eventually succumb to political instability and, ultimately, revolution.
Which kind of society would you prefer?
“…but we (the people) can never hold the power ourselves.”
Tell that to the dead American Founding Fathers who successfully threw off the yolk of empirical British oppression and penned a document known as the Declaration of Independence in the process.
I wasn’t aware that the Founding Fathers were throwing eggs inside of Independence Hall. Yes, it was hot in there, but they kept the yolks out of it.
“…successfully threw off the yolk of empirical British oppression…”
Consider:
1. The British wanted us to bomb Egypt for nationalizing the Suez Canal.
Result: We told Britain to pound sand.
2. They also wanted us to take out Iran when Mossadegh nationalized the Anglo-Iranian Oil Company.
Result: The CIA instigated a coup and imposed the Shah. We can see today where that got us.
3. They wanted us involved in WWI & WWII much earlier than we were. We had to antagonize Japan into attacking us thru sanctions and an oil embargo (remember, in the 30’s, WE were OPEC) to justify our entrance.
All I’m saying is when your friend goes around picking fights with the neighborhood kids and then comes running to YOU to do the fighting, maybe they aren’t really your friend. We never really escaped from British oppression, we just became their military wing in an attempt to preserve their precious empire.
The British empire faded from its position as Number 1 global superpower, in part thanks to upstart nations like ours which stood up for our rights.
I believe a similar principle applies to US citizens standing up to a rapacious financial system which has ceased to best serve the public interest. It is time for a change.
“It is time for a change.”
Clarification: I mean substance, not cheap talk.
The British Rothchilds bought Reuters who bought the Associated Press and various senators and congressmen. Bingo ! Here we go again.
Good food for thought, Prof.
But how do we effect this change of which you speak? Folks like me have no more money left to pull out of their institutions, or not purchase their credit products, or refuse to buy their vehicles, or….
So what difference does it make if we boycott? (Or did I just answer my own question?)
“But how do we effect this change of which you speak?”
I am confident that obvious truths will eventually trickle up into policy. The articles I posted on this thread all offer hopeful evidence to that effect.
We can only hope, PB…
Thanks for the awesome write-up.
I cannot think of a time or place in the history of the world where the majority of power, both political and economic, did not rest in the hands of a very few. Precisely how few will wield great power is the only open question.
Rather than focusing on the number of elites I would focus on the middle class and what percentage of people have disposable income and any free time and access to real information. Without a middle class there is no one who can make campaign contributions that hold a candle to a handfull of bankers.
Wealth distribution narrowed from 1930 to the 70’s, it’s been down hill ever since. I think the numbers would be much uglier if you focus not on the top 5% or even the top 2-3% which include many people who work for a living. If you focus on the top 0.5% as the elite I suspect you would see a dramatic increase in their share of the pie.
And perhaps this is an inherent problem with free market capitalism: What starts out as a level playing field evolves over time into a concentration of wealth into the hands of a few who gain control over both corporations and politicians in order to tilt the playing field in a direction that retains their lock on power. It would appear that one of the most important roles a government could play in a free society would be to avoid such a tilting of the playing field, and yet the natural tendency of wealth to accumulate in some pockets and not others tends to empower some to rewrite or enforce the rules to confer special advantages.
Exactly.
Good point joey.
Reminds me of when I read “Lord of the Flies”
Barry Ritholtz just gave a nice interview on the right way and the wrong way to do a bailout. It’s good and relevant reading:
http://tinyurl.com/lx8wr3
My personal opinion on the topic can be summed up in a response to Angela Merkel’s comment:
“No bank should be allowed to become so big that it can blackmail governments”
No government should succumb to a bank’s blackmail attempt. We don’t negotiate with terrorists, and neither should we with financial terrorists.
No government should succumb to a bank’s blackmail attempt. We don’t negotiate with terrorists, and neither should we with financial terrorists.
THIS should be what people are angriest about now at town hall mtgs.
THIS should be what people are angriest about now at town hall mtgs.
Correction
This is what a small handfull of people who go to town hall meetings are angriest about. Until we see larger numbers of people angry nothing will be done.
Well CHINA has the potential to be the 800lb Gorilla Financial terrorist
The largest financial institutions need to be broken up.
There is no sense in going back to a subdivided financial system, or to separate banks in each state. But there needs to be at least 20 major banks across the country.
I believe the government erred in not forcing bank bondholders to take a hit, and wiping out stockholders. At the very least, if bondholders in effect had bonds that were as safe as U.S. Treasuries, they should have taken a hit that reduced their return to what they would have gotten on U.S. Treasuries.
WT,
Oh.., WELL, now ‘that’s’ an interesting point!
Want “risk free investment”? Want “Full Faith & Credit of the U.S Gubmint”? Here’s your ‘return’. Have a nice day.
Well said Sir.
forcing bank bondholders to take a hit, and wiping out stockholders.
Exactly -since when did buying stocks etc become a SURE thing.
isn’t a loss what sometimes happens?
IF holding stocks is going to be a ‘always goes up’ then just like the housing bubble, everyone should want in.
What about those of us that put up our $$$ on puts against banks we KNOW are doomed only to have the gov do a fake stress test, then postpone the release of said cooked data, and then use taxpayer money to “steal” from our position? Only later (just a few months) to find out that the banks are worthless and the stress tests were (mostly) fake to begin with?
Another reason why I refuse to play their game. If we want true change, we need to not play the game. Take your $ out and put it to real use. Or hide it (back yard
- safe deposit - etc) There are not too many groups out there that have the financial reserves as mentioned here…
Prof B. I posted something, but Mr. Filter decided to send it to Pluto. Good post by a man of high intelligence and wisdom. It was spot on re the problem, in my limited worth opinion.
Your opinions are just as good as any others around here, so far as I can tell (mine included!)…
Thanks, Prof. B.
The AT&T break up in the 80s could be a model.
They’ve all merged back into like 2 carriers
Bell Atlantic, NYNEX and who else make up Verizon? PacTel, SWBELL, the others merged. GTE (Not a baby bell) and Bell Atlantic merged to become Verizon. Now they are all a relic with VOIP.
I use VOIP for my phone service. It’s a heckuva lot cheaper than Qwest was, and I have free long distance within the U.S.
Arizon Slim,
Act…ually I was originally w/ an outfit called “Monarch Communications” out of Vancouver, WA. I think “I” ( or guys just like me ) put them out of business?
Qwest accidentally sent me a bill w/ the total LD breakdown and at their standard rate ( the bill would have been over $1,800 for the MONTH! )
Like NINE pages of fine print LD calls. Ooops. Anyway, if it weren’t for access to VOIP ( I’d still be commuting to downtown ) Any of us that work at home, owe a LOT to it.
And with voip, now get free service to europe.
Is the size of the bank, or the quality of the regulation the real issue? I could see a system of small banks imploding as easily as large banks- in fact we have with the S&L’s. That was a lack of regulation, not a size thing.
I’m against mega-bank because I think they strangle the market by their sheer size. Smaller banks are more attuned to and responsive to local conditions.
But big or small, they’ve all gotta be regulated, or they will eventually find some way to self-destruct, at our expense.
alpha-sloth,
Yahtzee! Our ( now failed ) local bank kind… of became the lender of last resort as specuvestors wore out their welcome at Mega-Bank.
Originally chartered to “service the local community” ( there’s a laugh ) they made construction loans as far as Bend, OR and even Klamath Falls! It was later explained to me ( and as much as we’ve all suffered here as a result of it, I thought I was ‘owed’ an explanation? ) In the end, they’d stop in and get ‘additional’ loans from Podunk Bank -before- loans showed up on their credit report!
So you’ve got a real rogue crowd that unfortunately took advantage of these smaller bank’s lack of sophistication. Of course the bank always could have just ASKED!?!
What was big was the CDO market that was unregulated and leveraged
by 40 times . What was big was AIG and the gambling on credit default swaps ,while they didn’t have the funds to pay . While Lenders were left holding the bag on their current holdings of loan paper when the secondary market stopped buying ,their credit default bets were the
elephant in the room also .
Now I don’t think the general public would take kindly to the rescue of
the unregulated lending market that gambled and leveraged beyond reason .It was bad enough that the regulated banks were leveraged up to their eyeballs ,but this unregulated world was off the charts . I also really don’t understand how a Insurance Company like AIG was allowed to
insure this faulty paper without the funds to back this bet .
There has been a serious lack of lawsuits against this unregulated world of banking and no doubt it’s because the investors were bailed out by these bail-outs ,or at least their losses were not as extreme .
As I said from the get go ,Fred and Fannie were used to pass the
bad paper to their books . Why would they of raised the F&F limits in a declining market ? F&F had good underwriting during the boom compared the the unregulated world of lending and were limited at the time by their loan amounts .
Anyway , “Blank Check” given to the Treasury Sec.,without accountability, was a big red flag that we the tax payers were to be the bag-holders for the gamblers .
I agree, the CDO market dwarfs everything else and illustrates perfectly the danger of deregulation of the financial markets. That’s the sort of thing they cook up when left to their own devices.
I’ve heard nothing about ISDA and why Derivatives went OTC. Wasn’t ISDA set up as a regulatory body for the world’s Swap and Derivatives market?
BINGO
And yet nothing is being done about it.
Housing Wizard,
Excellent, excellent point. While there ‘were’ extreme instances ( and Casey Serin comes to mind ) most of the fudging and mirror fogging happened on individual SFH loans, one at a time.
Painful enough in and of itself. But when you lever it up 40 X + in some derivative shell game..? In the end though, I -still- have confidence the avg. taxpayer won’t get stuck w/ the bill. Why? Simple, we can’t afford it! Even carrying this thing out and out, in the long run, we won’t put it up with it.
What will this or future administrations ‘do’ when even W-2 employees simply stop filing?
Nuc it from orbit…It is the ONLY way….
Banks with troubled assets? Check yours out,just click on your State and try to find a solvent one. Good luck. http://banktracker.investigativereportingworkshop.org/banks/
Mine looks OK on that site. Chemung Canal Trust.
Thx for the link!
I tried to find our bank, to no avail. Can anyone suggest what might be going wrong here?
Find your bank, by search:
There are more than 8,300 banks in the United States and many of them have very similar names. Enter as much of the bank name as you know and then scroll through the list of banks to find the one you are most interested in. This search does not identify branches of main banks, only separate banks. The FDIC data is not reported for local branches. When you choose a bank, you will be taken to a page displaying details about that bank’s financial performance.
Search:
Results for “Washington Mutual”:
No bank found
Or do by state and town, and if you don’t know where your bank’s origin is, you can ask them and they will tell you. If the same name exists for banks of different provenance, any employee can tell you where their bank originates.
Very funny Prof. How many troubled assets does a failed bank have?????
Mine has a troubled asset ratio of 20.5. Seems a tad high.
You just can’t make things up like this:
Location: Newport News, Va.
Property: 3 bed, 2.5 bath townhouse
Price: $257,000
If it was not for this tax credit, we would still be living in our two-bedroom apartment. Instead, my fiance and I closed on our first home in the last week of August.
When buying, the biggest problem I had was how to come up with a down payment. The house was $257,000, and I needed to put down 3.5% to meet the FHA rules. I didn’t have all of the $9,000 required, but then I found out about the FHA’s new program where you can use the tax credit for the down payment. Using the plan, which the FHA announced in May, I was able to buy the house without draining all our savings.
I got a great deal on the mortgage. The interest rate is just 3.5% for the first year and costs about $1,500 a month, with taxes and insurance. The rate goes to 4.5% the second year and caps after that at 5.5%, about $1,900 monthly, which we should be able to swing as our earnings go up.
Just a couple of banking, vermin, and health care analogies for your evening perusal.
It is unfortunate that most Americans don’t recognize the predatory and parasitical nature of the Megabank: The Federal Reserve, Bank of England, World Bank, et al, AKA as the “Powers That Be”.
If you had a child that was very ill, and very thin, and took him to a clinic, and had it explained to you that yes, the child had a bowling bowl-size mass of tapeworms in his stomach, but the problem with his health was, he wasn’t getting enough amphetamines, would you be consoled, or alarmed? Would you think that stimulating his appetite was actually the answer, or that getting rid of the tapeworms altogether was the answer? Would you wonder why the clinic doesn’t want to treat the tapeworms, but wants to sell you amphetamines instead?
Subtitute our economy for the sick child, the Federal Reserve for the clinic, deficit spending for the tapeworms, and “stimulus programs” for the amphetamines.
Now realize that the actual “business” of the Federal Reserve involves putting as many tapeworms into as many healthy bodies as possible, (all around the world, in fact) and selling amphetamines to the malnourished. That’s the game plan of the “business”, which in the analogy is called the “clinic”. In real life it is called the Federal Reserve “Bank”.
How does the Fed make money? By collecting interest. On as many loaned dollars as it can.
The Fed can collect interest on 20 trillion dollars, just as easily as 10 trillion, so it will encourage its host country to run up a 20 trillion debt if it only has a ten trillion one. Get it? The relationship is predatory, and parasitical. So the Fed has no interest is cutailing deficit spending. It makes more money as the deficits grow. The Fed has no interest in bailing out “the little guys”. They don’t have the ability to pay much. So the Fed always advises gigantic bailouts of big corporations- “big guys”, backstopped by the Treasury - the Government “big guy”. And yes, all the little guys together are paying their taxes to the Treasury, which pays an ever increasing share of it to the Fed.
Oh, and those guys down at the clinic that actually infect everbody with tapeworms and then sell them amphetamines? Those clinical “workers” are called “Congressmen”. They get paid directly by the clinic and they really have no reason to listen to your complaints.
“How does the Fed make money? By collecting interest. On as many loaned dollars as it can.”
1. What do they make under ZIRP (zero-interest-rate policy) then?
2. Doesn’t seigniorage creation have anything to do with the story?
* The Wall Street Journal
* COMMON SENSE
* AUGUST 25, 2009, 6:07 P.M. ET
Advice to Bernanke: Play to Your Strengths
By JAMES B. STEWART
President Obama hasn’t said what he and Federal Reserve Chairman Ben Bernanke discussed when they met in the Oval Office last week. But if I were President, here is what I would discuss with Mr. Chairman:
…
Everyone now understands that some firms are too big to fail. But how big is too big? Or should the standard be one of complexity and a calculation of systemic risk rather than size alone? CIT Group, one of the largest lenders to small businesses, evidently failed the test. And what are the consequences of a government rescue? Will shareholders be wiped out? Will bondholders? In the wake of last year’s events, business executives, investors, and taxpayers are understandably confused. Yet these issues get at the essence of moral hazard and risk assessment. While some degree of ambiguity may be inescapable, markets function best when there’s clarity and predictability. Once the crisis is safely behind us, the Fed could go a long way toward clarifying these issues.
…
The big philosophical rift that I see developing is not over the question of whether there are too-big-to-fail firms out there, or how exactly to identify them as such — WHO CARES? — , but more about
how best to protect economies against the risks posed by “systemically important” firms.
My impression is that the Fed would prefer to continue the current policy regime of free (government sponsored) too-big-to-fail risk insurance, while Merkel’s comments in the Financial Times piece suggest she might prefer measures to break up too-big-to-fail firms rather than allowing them to hold a proverbial gun to the heads of government leaders in the economically developed countries.
Cobaltblue nailed the depth of the problem. The very root of the entire issue is “capture” via special interest lobbies. Once the regulatory framework was gutted (repeal of Glass-Stegall and the 2000 Modernization Act), corporate capture of the lawmakers, the administration and even the judiciary was set into motion.
Enacting regulations that are not enforced only serves to give the illusion of progress and reform. If there is corruption throughout the entire govt/ corporate/ military complex, then adding more regulation is meaningless. Regulatory reform must go hand in hand with ending the systemic capture of those who “govern” us.
It goes without saying that “too big too fail” is simply a way to feign concern for the systemic risk that was baked into this equation from the beginning. Make oneself “indispensable” and you are set for life. A simplistic description of a complex scheme, but it basically comes down to just that.
Our government was created to protect us from this type of tyranny and monopolization and yet, today, they have become complicit.
Anyone want to buy a hotel? …Anyone? …. HELLO! (crickets chirping)
“Lender gets Orlando Sheraton after auction draws no competition
Sara K. Clarke Sentinel Staff Writer
12:35 p.m. EDT, September 3, 2009
The downtown Orlando Sheraton went back to its lender on Thursday, after an auction produced no bidders willing to pay what it wanted to for the hotel.
An attorney for the lender, Gramercy Investments, said he was prepared to bid up to $45 million, which is the value of the judgment against the hotel. He wasn’t surprised that there were no takers.
If it chooses, Gramercy can now try to sell the hotel itself. But interested parties put the price at far less than $45 million.
The 341-room hotel is located at the north end of downtown near Interstate 4 and Lake Ivanhoe. Its former owner, CF Hospitality Inc., filed for Chapter 11 bankruptcy protection in May 2008. Last month, the company said the property was not generating enough cash flow to cover all of its bills…”