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In defense of the TBTFs, or the true originators of moral hazard
- AIG
- Alt-A
- American International Group
- Borrowing Costs
- CDS
- Chrysler
- Citigroup
- Corruption
- Credit Crisis
- ETC
- Fail
- FBI
- Federal Reserve
- Free Money
- Goldman Sachs
- goldman sachs
- House Financial Services Committee
- Housing Bubble
- John Paulson
- Julian Robertson
- Main Street
- Marc Faber
- Michigan
- Milton Friedman
- Mohammad
- Monetary Policy
- Moral Hazard
- Morgan Stanley
- Nouriel
- Nouriel Roubini
- Peter Schiff
- TARP
- Tiger Management
- Too Big To Fail
- University Of Michigan
- Wells Fargo
Written by Naufal Sanaullah (University of Michigan) & Mohammad Ali "Qasim" Khan (Duke University)
There is a certain increase in comfort in defending one's more controversial beliefs after events transpire that vindicate one of these non-mainstream opinions. Contrarians and conspiracy theorists have used the financial crisis as "proof" of every theory, belief, and emotion under the sun, and as a testament to derailing the entire notion of conventional wisdom.
Surely, asset bubble unwinds expose the pervasive misconceptions and twisted principles that bled through the masses during bubbles' inflations. And the sense of vindication that John Paulson, Nouriel Roubini, Peter Schiff, Robert Schiller, Marc Faber, and the like must have felt is undoubtedly tantalizing. But anyone and everyone wants a share of that "I-predicted-it pie".
Including the blamegamers, the scapegoaters, and other various groups of people shamelessly engrossed in one straw man fallacy after another.
This of course includes the critics of the too-big-to-fail institutions, blaming them for everything from the credit crisis to civil wars abroad. The fact is, at worst, these financial institutions were merely agents of demise, not originators of them.
I am personally of the opinion that the entire United States needs sharp deleveraging on all levels and a return to sound economic and financial principles to lead to efficiently-allocated capital and organic growth. Surely, many banks (especially those who were benficiaries of TARP, TLGP, etc) characterize the reckless, overleveraged, risk-ignorant principles that pervade the current flawed financial system. But is it the moral and legal obligation of banks to ensure the soundness of the financial structure of the United States and the world?
The answer is a pure and simple no.
Banks have intrinsic obligations not the US taxpayer, but to their shareholders. Their decree is to maximize profits for their investors, for the owners of the firms. When circumstances arise in which in order to merely compete with rival firms in your industry, important principles of risk aversion and financial soundness must be abandoned, the firm's obligations becomes an incentive crisis, which is the harbinger of moral hazard.
Anyone who follows markets knows the story of famed investor Julian Robertson. From 1980, his hedge fund Tiger Management Corp turned $5 million of seed capital into $22 billion in 1998. But his reluctance to buy into the tech bubble led to investment losses and, more significantly, investor redemptions. He correctly predicted the current financial crisis and has made over $1 billion on trading gains based on it. But the point to take home from his story is the problem of opportunity cost in competition when the underlying drivers of growth are unsustainable.
Goldman Sachs, JP Morgan Chase, Morgan Stanley, Wells Fargo, Citigroup, and the like did not sit out the housing bubble. Had they, they may not exist today, irrespective of taxpayer bailouts, purely because of loss in competition against rival firms. Citicorp's 1998 merger with Travelers Group, for example, was not met with prescient criticism targeted at the forming moral hazard and systemic risk. Rather, it was largely lauded with acclaim at the time.
Capitalism works because instead of fighting human nature, it embraces it, and funnels it into sustainable and organic growth, by checking it with natural negative-feedback mechanisms. The fundamental basis of this principle is found in the law of supply and demand. As demand rises, price does as well. And as prices rise, demand marginally falls.
But when these situations don't exist, when the circumstances don't allow for self-checking processes, the result is an assortment of myriad positive-feedback, unsustainable, inherently implosive and entropy-generating loops.
The fundamental blame for this financial crisis and the moral hazard accompanying it should be directed toward the purveyors of the artificial situations in financial markets that eliminated the natural self-checks of capitalism. This of course is found with the Federal Reserve and Congress.
Everyone knows about the Fed's lax monetary policy that injected the financial system with free money at low borrowing costs. Everyone knows about the ramifications of Gramm-Leach-Bliley. And there is a lot of justified blame directed at these causes of crisis, as well. But much of it is misdirected toward banks.
The fact is, if any one of us were in the positions of the banks' management, we would operate the same way. The idea of self-interest is intrinsic to human nature. That is the point of capitalism: to funnel that biological imperative into sustainable growth for the individual and the collective, and have natural checks and balances to prevent it from exploitative and unsustainable excesses.
Banks that engaged in illegal forms of predatory lending clearly broke the law and were unethical. But corruption and fraud exists in every industry, not just financial services. I've heard upwards of 90% of alt-A paper was originated on the premise of falsified borrower stated income. Surely these lax lending standards (through probably exaggerated by that statistic) led to the excesses behind the bubble and subsequent crash. But what about the borrowers themselves? "Everyone was doing it" and they would be at a competitive disadvantage by not engaging in such fundamentally unsound acts. This analogy is clear and direct, but absolutely lost to the conspiracy theorists, especially pervasive in financial blogophere.
It is no secret that Washington is a ticking pendulum of hypocrisy. Go back two years and see the Republican treatment of anti-government protestors; now the tea-bagging brigade has become the impetus for their dramatic revival. So it is no surprise to see the government so vehemently persecute banks that, although very clearly benefited from government support, have repaid their TARP debts, yet continue to support a dying American auto industry.
The new Obama tax to recover the TARP fund deficit is very problematic because while the banks did indeed require significant assistance, they were not responsible for the failure of the American auto industry; yet, the banks, which have already repaid their TARP debts are being forced to compensate for the lack of success of a completely unrelated industry, ironically making the auto bailout a Wall Street bailout for Main Street.
Let us ask ourselves who is the true culprit of the Too Big To Fail hostage dilemma. When viewing history objectively, the answer is immediately apparent. The fact of the matter is we have been here before with the American auto industry and left with the exact same results. A mere Google search of the '79 Chrysler bailout forces one to double take and check the dates on the printed articles because they describe the very situation we see today.
The fact is that frequently neither Congress nor the Fed uphold their respective oaths. And in the cases where the government is not lacking in genuine intention, they often lack the understanding necessary for pragmatic implementation.
As Milton Friedman once said, “We all know a famous road that is paved with good intentions. The people who go around talking about their soft heart -- I share their -- I admire them for the softness of their heart, but unfortunately, it very often extends to their head as well.”
Take the idea that reducing the size of banks will reduce the systemic risk they present. Proponents of this idea somehow fool themselves into believing that one and two halves are not the same; in an industry that is fundamentally predicated upon mimicry, the likelihood of ten smaller firms engaging in risky behavior or one large firm engaging in such behavior is at best the same and at worst greater due to heightened competition.
Illegal acts during the bubble and in response to the crash are clearly not the subject of my attempted exoneration of the TBTFs. Many modern controversies, including the AIG CDS counterparty par-value payments and the accounting standards employed on marking asset books, are issues I follow closely and am very opinionated on. But these banks were employing the principle of self-interest and without logical, natural checks to it, the self-interest ends up damaging others.
The true blameworthy entities of the genesis of the financial crisis as well as the political and moral hazards associated with it are the Fed and Congress. By allowing excess money to float around at little to no cost of borrowing, the Fed allowed banks access to excessive money, all of which chased yield and all of which chased incrementally worse assets. This causes unsustainable valuations and also leads to paradigm shifts because of confirmation bias, which further feeds the inflating flame. Meanwhile, by allowing commercial and investment banking units to operate under the same corporate flag, Congress opened up depositor capital, which is inherently supposed to be liquid and accessible and only used to collect a spread by investing it into low-risk securities, to chase these illiquid, risky, overvalued assets that were bubbling up.
The basis of my argument is that, had it not been for the Fed's and Congress's lax monetary and regulatory policies in the late 1990s and early 2000s, the banks could have never engaged in forming a housing bubble and subsequently receiving taxpayer bailouts because of moral hazard and systemic risk. But had Goldman Sachs not joined the bubble bandwagon, the bubble wouldn't go away: another bank would just take Goldman's reins.
I have criticized bank actions in various articles, and I stick to them. Employing unsustainable leverage, having a toxic asset book, etc etc are all subjects of my critique. But the true blame falls on the supervisors allowing the artificial circumstances that permit these bank actions from being profitable in the first place.
Yes, I acknowledge the Wall Street lobby is one of the strongest and most influential on Wall Street. But all that means is the banks do the best job at getting their self-interests employed by regulators.
Blame the actual pervertors of American capitalism, the Federal Reserve and the Congress, for creating a situation in which the profitable way is an inherently destructive way in the long-run. Don't fault the banks for simply going along for the ride.
Still don’t agree? Consider the following argument:
If A and B, then C.
If C and D, then E.
Then consider:
If A and F, then G.
If G and D, then H.
Now substitute:
A = Federal Reserve & Congress determine overreaching monetary and financial conditions
B = Federal Reserve & Congress allow free-market supply/demand valuations and self-checks to excessive risk
C = no asset bubbles exist and fundamentally sound risk assessment and valuations pervade
D = banks attempt maximizing profits and appeasing self-interest as much as possible, given monetary policy and regulatory laws
E = banks don't engage in intrinsically destructive actions and no moral hazard or systemic risk exists
F = Federal Reserve & Congress allow free and cheap money and leveraging of depositor and other low-risk capital into high-risk and illiquid securities
G = asset bubbles exist and valuations and risk assessment are negatively skewed
H = banks become too-big-to-fail and the subject of populist rage.
There's tons of wrongdoing by banks to be addressed and criminality to be punished. But the myopia in excessively blaming banks for everything under the sun is unwarranted and a by-product of the crash's vindication of a select few, with the entire conspiracy theorist and contrarian bloc seeking a piece of that pie for their own agendas' propagation.
In October 2004, the FBI’s assistant director of its Criminal Investigations Division made this statement before the Chairman of the Federal Reserve House Financial Services Committee on Housing and Community Opportunity:
"Based upon existing investigations and mortgage fraud reporting, 80% of all reported fraud losses involve collaboration or collusion by industry insiders. These schemes involve industry insiders to override lender controls.”
And what did the FOMC do from 2004 to 2007? Lower interest rates 17 times.
Blame Paulson the Secretary Treasury (hell, blame Bush for appointing Paulson). But don't blame Paulson the CEO of GS.
But that's just our view.
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Total BS, IMHO. Banksters lobbied and wrote Gramm-Leach-Bliley and are fighting to keep it. The TBTF banks are the Fed. What the hell are they teaching you guys? Or, are you the teachers? Either way, go back to school.
+ !
+1
Yeah, TBTF apologists need to STFU. Kenny over at BofA just got slapped with fraud - 'bout freaking time! Tip of the iceberg ladies and gents - anyone without a personal lifeboat of PMs, food, and the means to protect it is going to have to trouble the water.
Right! Like snakes on a medusa; the tentacles of a squid! They cannot survive on their own and are controlled by The Fed. Take away the printing press and see how "free market" their operations are.
Did they beam this guy in from 2000? Its like the past few years never happened.
Even the Citi guy who created TBTF now says it was a mistake...
http://www.huffingtonpost.com/2010/02/04/remorseful-banker-parts-w_n_450107.html
don't know if he is sincere...but between him and Volcker being trotted out, I get the feeling the PBTB are having an internal fight about reigning in the worst excesses, or not, and some are a wee bit worried about things...
And who had final say on approving GLB?? Government.
For some reason you want to view the bankers as the sole villain when they attempt to buy power from our "public servants," but somehow those same "public servants' are devoid of primary blame for actually selling it. Absurd.
So, the banks had nothing to do with this. No one said our "public servants" were blameless. If the banks didn't want it, then they wouldn't have gotten it. The banks bought the casino, run it and there are no rules (or regulators). And they continue to insist that that is just fine, so leave it all alone. And the Fed is controlled by the banks. I guess we'll just agree to disagree. Frankly, I think Congress was just too stupid to understand the game they allowed. Now its time to correct it.
Just saying, at least 50% and probably much more than 50% of blame should go to government since they are the ones with primary responsibility to look out for the public.
Not saying bankers are totally blameless, but posts on this site focus about 99.3% of blame on bankers - which is wrong. My comment is just trying to get it down to maybe 99.2% of posts on this site.
Government corruption and stupidity can be 100% solved with the right people in government. Fix the side of the problem you can most influence. It may be that those on this site think government is incapable of fixing its side of the problem -- yet most on this site LOVE and EMBRACE the government (and will vote in the same people they voted for before and expect a different outcome).
The irony, of course, is that many of the people who assign blame to the government because they have primary responsibility to look out for the public don't believe this for a second. A government which is run by people who don't believe they have (or should have) the power to regulate, won't regulate.
so people want to remove/break up TBTF have no critiques of our keystone cops policing Wall Street? So if you find your local police force has been corrupted by local drug dealers, you say the drug dealers didn't cause any problems, it was a government failure. And the solution is what? Just don't bother with a police force? say the drug dealers will police themselves because surely peaceful profits are the most important thing to them? and if we criticize the drug dealers, then we must have no critique of the cops. if your local police force is corrupt, don't you demand firing the leaders, putting new clean guys in charge, putting in more watchdogs and integrity testing? But, no, criticizing the drug dealers is just anti-capitalistic...whatever...
Re having 10 smaller firms being equivalent to one big firm.
Absolutely wrong, the point is that, with 10 small firms, they know the Government will let one of them go under. Whereas, with one big firm, it knows the Government has to backstop, thereby removing any sense of moral hazard.
Yeah, go back to school and rethink things. Start here ::
Think of banks as a public utility, like roads, part of the infrastructure of society, and the loyalty to shareholders takes on secondary importance. Granted, it gets complicated then, as the question who gets the loan money comes up, but think on it.
A bigger problem for our society is granting corporations personhood. If a corporation's primary goal is to earn money, and money is the root of all evil, then ... what ?
Not every corporation conducts itself primarily as a money making machine without regard to its employees and society at large, but those that do certainly spread ruination.
So called public utilities are govt granted monopolies. Monopoly does not exist without the aid of govt regulation.
Money...real money is not the root of all evil, it is an object used for exchange...a measure of ones productivity and honesty.
Fiat money could be considered evil because it is applied to the political, rather than the productive. This sets the modus operandi for and entire society.
Thanks - there are so many different ways we can organize economic enterprises: regulated monopolies, totally private businesses, non-profits, goverment agencies...each has their advantages and disadvantages and have certain situations in which they are the best fit. I think a sound, efficient, innonative economy that serves the common wealth well will have all the above types of organization that sort of "compete" with eachother to provide better services or goods, create more prosperity etc.
But the things we know does not work, is unregulated monopolies, cartels, TBTF, GSE with implicit govt support.
"Don't fault the banks for simply going along for the ride".
POOP.
They ARE the ride.
Congress and the Fed are simply the high octane fuel needed to move the ride along.
So you don't want to lay much blame with the government octance providers?? No octane, no / little ride.
Control fraud... Look it up and call me in the morning.
Apologists for the wealthy elite amuse me. No it could never be the stupid sons & daughters of the wealthy, untested and untried by any real opposition in life, coddled in private schools and bound for Ivy Leauge buisness degrees, that dreamt up complex financial instruments and erroneous models, crashing the system of overleveraged debt addiction. No, not them, they're the model captains of industry, for whom we should all be thankful...meh. Count me out of your adoration. I say the stupid ones, specifically, as any progeny of the rich with intellect travel about the globe and run foundations and other quasi-positive 'feel good' occupations, while their less gifted ilk have to run Poppy's buisness, and they have been our undoing. Look no further than 'W' for such genetic shortcoming.
You say capitalism works. Perhaps it does for those with the most wealth, but not for the majority. And, prusumably, in a democracy majority rules. We are now a bannana republic with unsavory criminality and corruption at the highest level of finance and government. TBTF is the very definition of moral hazard, and to say otherwise is outright idiocy. While banks race, now, to buy smaller failed institutions, so as to be TBTF, their risk-taking continues unabated. Unlimited growth on a planet of finite resources, you say? What a naive worldview, ignorant of science.
No, gentlemen, capitalism does not work, and that is certainly not the corrupt system currently being administered in the United States. The truth will become more clear to you with the next leg down, and the growning recognition that this financial mess is unlike anything that has come before. As belief in our current system of finance and government fades completely, willing particiaption in that system will decline precipitously. There will be cheerleaders for something called a 'free market' long after it's obvious that the age of consumerism is dead, until they're kicked forcibly out of their home in the Hampton's by the mob with pitchforks and torches. I rather like that mob as metaphor, since it strikes fear deep in the heart of the coldest hoarder of wealth, for they know in their hearts that it is the truth that boils the blood and fuels the fire in the average man's veins. Got security?
"Apologists for the wealthy elite amuse me"
Their prosecutors and jailers would make me proud. I forecast continued disillusionment.
Anon #217167---Couldnt have said it better.
"Apologists for the wealthy elite amuse me".
What amuses you infuriates me.
"No, gentlemen, capitalism does not work, and that is certainly not the corrupt system currently being administered in the United States." -- So, if capitalism is not the system in the US, on what basis do you say it doesn't work? Clearly the current US system doesn't work, but then your argument is that it isn't capitalism. So exactly what system is failing here? Or what events are you using to declare that capitalism is failing?
Hopefully you understand the founders feared democracy and had no intent of being one. Sadly we have moved that direction and are drifting to becoming one.
As the people run towards and embrace government dependency, you can see where we are headed.
"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover they can vote themselves money from the public treasure. From that moment on, the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world's great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependency, from dependency back to bondage." -- frequently ascribed to Alexander Tyler (or Tytler) (Scottish history professor at The University of Edinbourough in 1787 (The Fall of the Athenian Republic) but there has been no confirmation of this quote's author.
Day to day FED regulatory actions of the TBTF banks is overseen by the private, bank-owned FRBNY. Who are these bankers that own the FRBNY and sit on its board? The same TBTF bankers that broke the economy.
Per various articles, TARP is only 2% of the total dollars pumped into the system by the Treasury and the FED to backstop the banks.
Let's assume Bob Prechter is correct, the Fed doesn't set rates, they follow the market. And while the Fed had control of the monetary spigot, in the year prior to the crash they lost that control, and private equity was monetizing debt at a much faster rate (see Doug Noland at Prudent Bear). Okay so the Fed lost control, leveraged debt soared, Goldman threw AIG under the bus, the taxpayers bailed everybody out, and all the time the credit market was crashing, real banks were making real loans to real people. Unfortunately those real banks were limited in what they could do for small business.
There's nothing wrong with the banking system, taxpayers bailed out Wall Street, at the behest of officials in the previous, Bush administration, policies continued at an exponential rate by the current Obama administration, along with two budget busting wars, stimulus packages which stimulate government and not people. And all during the this time real banks are loaning money to real people, but not to do America's business, further empowering the megacorporations, at the expense of small business.
The president made a speech about the 'ownership society' which was synonym for another raid on equity, aka the housing bubble. Through unsound fiscal management, the monetary tea cart got turned over, and the contination policies of Obama guarantee its not going to be right for a long time, if ever. How did the executive branch get so much power?
First it was the Russians, then it was the terrorists. Oooh be afraid little ducklings, give the Unitary Executive all the power he wants. Oooohh, or else. Only his own party opposed him, and despite the sheer lunacy of their rhetoric, and they aren't afraid to call a prevaricator by his true name.
We can put most of the blame squarely on Osama Bin Laden, who revived a sub normal, failed Presidency from the ashes of 9/11. It was at that moment that Bush forget who he was, and threw America under the bus. What a laugh that must have been, in the caves of Tora Bora.
Not the end of the story by any means
"There's nothing wrong with the banking system"
You are excluding mortgage origination and underwriting when you make this statement?
What about allowing acquired firms to pile on so much bank debt that any loss of momentum will trigger default?
Let's not get started on credit card practices............
Post #217196---Excellent comment.
We got the government we dont deserve.
You point out Congress' and the Fed's complicity in the bubble / collapse, yet excuse the banks with the hand-waving argument "They were merely pursuing self-interest, in the interests of their shareholders, and who can really blame them for that?"
Don't fault the banks for simply going along for the ride.
They went for a ride on a bus they built with my money and labor, with the active assistance of the Congress they corrupted and the active ignorance of the regulators they co-opted, drove it off a cliff, stole more money from me to build a parachute for the bus, pushed me out of the bus, then opened the parachute and declared the system saved. It's not a conspiracy, it's a fact.
Either you believe in the free market system of pursuing enlightened self-interest, or you don't. You don't get to pick when it's good and when it's bad. You need to tell us in plain english why it's OK for the banks to pursue their self-interest and then come to the taxpayer with a gun and say "save me or we're killing everyone." Simply saying "they've repaid TARP" doesn't cut it. The federal reserve has expanded their balance sheet to take on your banks' toxic waste, and in so doing have debased my currency by a factor of three, the effects of which will be felt from here forward.
Your banks' predicaments have been the impetus for turning accounting (GAAP) into a joke. We're all Enron now. Capital goes into hiding when it doesn't feel safe, and then capitalism itself is threatened. How can capital adequately decide how to value a company or an asset when everyone is lying, especially the banks, and the regulators are doing nothing about it? How can there be recovery when capital hides? This is another effect that will be felt from here forward. My childrens' futures are directly threatened by your banks and their turning the economy into a charade.
Shall I continue? A-I-G.
Tell your government to stop being "corrupted" by bankers.
Tell your government regulators to stop being "co-opted" by bankers.
Tell your government not to bail out banks nor "take on toxic waste."
Tell your government to not allow "joke" accounting.
Why are bankers 100% of the blame? Government is at least 50% of the blame and they are the only ones that have a primary duty to look out for the public.
I am telling them, they are not listening, I cannot compete with the bankers' tens of millions of dollars of campaign contributions, money they stole from me in the first place through TARP, AIG, Maiden Lane....
Not stolen.....your friends in government gave it to them.
Somehow those in government got the idea folks would prefer that the government try to bail out the banks rather than let things run their course (i.e., reprice assets to clearance levels). Government did not get that idea from me -- let the chips fall where they may.
Pretty sure the 50% who pay no income taxes were wildly in favor of goevernment bailout (what do they care what the government spends to get a little macroeconomic relief?). And the majority of the other 50% who embrace government for every issue were probably in favor of it (no issue too big or too small for the hand of government -- think steroids in baseball or whether college football should have a playoff system).
So sadly the government is fairly representative of the people.
Uh, NOT!
Promising bags of free shit! always gets you votes. Are Walmart policies reflective of what the American public actually want? The American public is so clueless they have no idea WTF is going on anymore. Telling them the truth about the banksters' formula is like explaining math to a dog. "Do I get a treat for listening? Where's the treat! I'm a good dog!"
Not a threat, not a conspiracy; a fact. Wait for it. If ruthlessly pursuing self interest is what you want, it's what you're gonna get, unless the goddamned mea culpas start real real soon.
asymmetrical ethics
http://www.321gold.com/editorials/bonner/bonner020410.html
"There's tons of wrongdoing by banks to be addressed and criminality to be punished."
Hasn't happened yet! Time after time the evidence has been gathered on wrongdoing and conspiracies uncovered. Countrywide, BofA/Merrill merger, non bank holding companies granted banking status to steal taxpayer money. The time for excuses has come and gone, there is plenty of blame to go around and banks continue to be a major player in the fleecing of the US taxpayer.
Welcome to American school boyz.
How are those applications to GS coming?
Isn't Riba proscribed?
Meanwhile BAC going down for the Cuomo count
while DB and C divesting their prop desks.
Speaking of HUD fraud...
http://www.jubileeprosperity.com/
Some valid points about the government (Fed and Congress) being ultimately responsible for the mess. But it is hard to separate TBTFs from the government anymore, now that Goldman Sachs has effectively been running the government.
The best way to look at it is that Wall Street and Washington DC have become one and the same organization with the sole purpose of looting the public.
Any attempt to separate them, singling out one party over another for blame is meaningless. They all need serious reform.
In the short term, the country can not do without a government, it can surely do without TBTFs. Dismantling TBTFs would be a good step in the right direction, though as your article reminds us, it must not be the final step.
This is the only sensible comment here;
In the short term, the country can not do without a government, it can surely do without TBTFs. Dismantling TBTFs would be a good step in the right direction, though as your article reminds us, it must not be the final step.
I would only modify: the country can do without 90% of gov't all the time (a sensible citizenry), and a country can't do without banks...not TBTF's- but banks in general.
(let the lambasting of the "bankster" apologist commence!)
It seems to me that the Big Bank monopoly, the TBTF cartel, that is represented by the Bernankes, Paulsons, Geithners, Friedmans, Dudleys, Baracks and Barneys, has given itself monopoly control over all the basic creative activities of the USA -- sort of a supra-international power embodied in its unconstitutional Federal Reserve System, a political power for private gain and acquisition, with a self-dealt authority for bailout using the public treasury.
Looks to me that old Uncle Sam’s not needed much anymore – sort of a toothless old fellow with no power in Congress to protect himself or anybody else. Too bad. There was a time when I sorta liked him.
And from a U.S. president who ought to know, President Woodrow Wilson summed it up in a nutshell: “The great monopoly in this country is the money monopoly. So long as it exists, our old variety of freedom and individual energy of development are out of the question.” [from “Other People’s Money”]
The article misdirects. TooBigToFail is the linchpin that enables global financial trickery and deceit.
Take CDSs...the brilliant minds who conceived such surely knew the inherent fraud which had to be masked by not calling it insurance, thus escaping regulatory laws.
Even Charles Dickens, 150 years ago, spoke clearly of the inherent fraud. To wit:
'As to being a reference,' said Pancks, 'you know, in a general way, what being a reference means. It's all your eye, that is! Look at your tenants down the Yard here. They'd all be references for one another, if you'd let 'em. What would be the good of letting 'em? It's no satisfaction to be done by two men instead of one. One's enough. A person who can't pay, gets another person who can't pay, to guarantee that he can pay. Like a person with two wooden legs getting another person with two wooden legs, to guarantee that he has got two natural legs. It don't make either of them able to do a walking match. And four wooden legs are more troublesome to you than two, when you don't want any.'
[Dickens' Little Dorrit, Ch. 23, Machinery In Motion]
CDSs and their ilk had to quietly grow in volume until reaching TBTF status. Then damn the transparency. Full speed ahead.
Well the thesis here certainly isn't popular, but it is thought-provoking. For that, it really isn't a terribly bad write-up.
The most significant hole in the thesis, though, is your assumed role of the TBTFs as innocent agents before and after the crisis, trying to maximize profits for their shareholders (although even that could be debated, given current compensation structures).
The crude reality is that TBTFs-- and for that matter, Fannie Mae and Freddie Mac-- wielded enormous influence in the halls of Congress and the Federal Reserve. This is especially true over the last 10 years, as legislation and monetary policy both loosened to favor a constituency that wielded increasing influence with money created from thin air. It worked very well, too, when the economy was booming and the general public was complacent.
Unfortunately, the TBTFs were the farthest thing from being innocent bystanders. That's not theory, that's fact. Just look at the campaign contribtuions and recent comments from Ben Bernanke on the Federal Reserve's role during the crisis.
What would be a more accurate description is that the TBTFs were willing agents of manipulating and corrupting our political system to a degree unseen since the J.P. Morgan days. And, interestingly enough, those TBTFs placed themselves in a position to provide the biggest blackmail in (perhaps) American history-- "either bail us out in the trillions, or we will destroy the global financial system". Those TBTFs didn't get to that point by serendipity-- they bribed their way down that road by manipulating policy.
I wholehartedly agree that capitalism can work, so long as checks and balances are put in place so that the system doesn't run amok. A sound, honest, and accountable financial system is essential for capitalism to have a chance. We can certainly blame Congress and the Federal Reserve for their willingness to be compromised-- and be willing agesnts for changing the rules and looking the other way when it came to enforcing the stuff that was still on the books.
But the TBTFs provided the big fat carrot that corrupted both our political and financial systems. I just don't see how that can be overlooked, or minimalized.
"But the TBTFs provided the big fat carrot that corrupted both our political and financial systems. I just don't see how that can be overlooked, or minimalized."
When you're an ivy undergrad hoping for placement on GS's prop trading desk, well, you say crazy things. The banks repaid TARP... the U.S. made money on investments in the big banks... etc. etc. etc. Nothing to see here, folks.
His point is actually interesting (I've heard several bankers make it in the past. Make of that what you will.) However, for someone with an abundance of insight into the U.S. financial system to assert that the banks are absolved of all guilt now that they've avoided the world's biggest margin call and repaid the handouts - backstops notwithstanding - that they extorted from the taxpayers strains credulity and perhaps betrays a more sinister intent. The apologies are well considered, but politicians have been around far longer than bankers; if we are to conclude that bankers are profit-seeking beings, possessed by a nature of which we should have been cognisant, then such a priori understanding must logically extend to politicians who we KNOW never met a bribe they didn't like. Reversing this rationale, then, we can conclude that politicians will do absolutely anything in the face of a bribe, as they are bribe-seeking entities; thus, the regulatory captors bear the burden of guilt, not the captured.
Of course, the true ZHers out there know the truth: "We are all so seriously F'in doooooomed!" - Mogambo Guru
That's not entirely true. At the end of the day, a vast majority of politicians are power-seeking entities. Bribe-seeking is a common-- but not always successful-- means to an end.
In other words, not every politician will accept a bribe from the financial industry-- especially when that industry is recogized as a universal evil. To push the point further, I'm not sure Nancy Pelosi is taking an open book policy towards accepting bribes from the defense industry-- as doing so would risk losing votes and power from her liberal base of support.
The TBTFs have gotten away with so much for so long in buidling and bribing into a corrupt system-- because such bribes could finance support without being politically damaging. When the pie is growing and the economy is a full employment, very few feel cheated.
Unfortunately, the rose has come off that bloom and the masses have identified the evil parties-- rightly or wrongly. Given the continued looting in the face of rising unemployment and wage stagnation, I'm more than a little shocked how the behaviors among politicians, bankers, and Treserve alike has not changed in a material way. Bankers still want bonusus, the Treserve is still committed to "saving the financial system" by subsidizing its most favored customers, and politicians/regulators are still looking the other way.
Regardless of who pins blame on whom, the apparent behavioral indifference from these power brokers has already manifested itself in a high degree of mistrust-- not necessarily for the players involved, per se-- but in a broader skepticism of our own financial, political (and arguably now) judicial systems. Build that mistrust far and wide enough, and some real cracks will appear in our society.
When an individual commits crimes as part of a group he is not excused because others participated, all are punished.
This is the kind of writing we expect from academics, divorced from reality and contrived to serve it's conclusion.
Punish all, from the lowest fraudulent borrower to the highest government officeholder, then we can have fine logical rational debates. Until then save the worthless words.
You may wish to read the testimony of the Illinois AG before the Financial Crisis Inquiry Commission. The OCC actively worked to pre-empt the states from enforcing their own laws against predatory lending and mortgage fraud. Fortunately, the Supreme Court has overturned that policy, but the damage was done.
The FBI was right in 2004, but they still don't have a national database tracking mortgage fraud cases. It's disengenous to say the perps should be prosecuted, when the perps have managed to call off the dogs.
You want to blame Congress? Well, o.k. but who spent millions in lobbying money to pass Gramm-Bliley, pass The Commodity Futures Modernization Act, to get the Federal Accounting Standards Board to allow this crap to be placed off-balance sheet (ala Enron), and then got the SEC to increase leverage ratios from 14:1 to 40:1 ?
This was a "crisis by design" carefully planned and orchestrated, step by step. And to call any criticism of it "monday morning quarterbacking" is simply to say that anyone can do anything no one notices at the time and get away with it.
It also make you an obsequious sycophant and accessory after the fact.
yeh blame banks... how about guy next door who moved from trailer park to 200,000 house with no means to pay? they should of let banks fail and let capitalism be survivor of the fittest game. We would have 25% unemployment, but so be it.
Right, blame the little guy. Long Beach Financial gave an illegal Mexican strawberry picker, who could not speak English, and who made $14,000 a year, a $750,000 mortgage. He must have thought the Gringos were crazy, but he took it......and who wouldn't ?
As the Mass AG said of Goldman Sachs, these were "mortgages designed to fail at the inception." Of course, Goldman bought multiple Credit Default Swaps from AIG (which we paid off), and had their "pay day" and then paid Massachusetts $60 million to close the investigation.
As they say, "don't piss down my leg and tell me it's raining."
We're on our way there anyway, only we've killed capitalism in the name of e(i)nsuring the continued subsidization of our handsomest politicians and wealthiest bankers. Without these paragons of virtue, America would be but a wraith, forged from the broken backs of a tired underclass, barely fit to represent the gilded glory that is America. No, we love our tyrants and tycoons; we love hating the haves, lured as we are into their traps in hopes of joining them one day atop the mount. The banks were merely doing what anyone would have done in their positions, and regulatory capture is a flaw on behalf of the public, not the recipients of Federal handouts. The public should know that bankers and politicians will lie, cheat, and steal ad infinitum, just as we know that copperheads will strike when stepped upon and that flies will multiply when left to detritus. The peons are responsible, whether they like it or not... or so we hear. I wonder how the banks will feel when we stop pointing at them, crying for restraint. How will they feel when we realize that their bamboozle is our responsibility. How will they feel when we begin to take as much responsibility for our own plights as they do for their's? I imagine the misdirection campaigns will yield to the law of unintended consequences. The greatest asset on behalf of the kleptocracy is a pervasive absence of accountability at all levels of society, most profoundly so at the bottom. One has to wonder what happens when/if the common man takes his own life back into his hands, blaming himself for permitting the pernicious profiteering and piracy that have proliferated over the past decade within the annointed class, and ultimately realizing that flies and copperheads never really change their natures; such beasts are easily tamed when we recognize their inability to abstain from indulging their baser instincts.
Redirecting blame from the banks to the government and then from the government to the masses is a line that the powers that be and their apologists should quickly retract. Our apathy is their greatest lifeline.
Apparently these authors forgot their Econ 101 classes. A free market requires many buyers and many sellers. A free market has minimum requirements for entry and an easy exit-bankruptcy.
And Greenspan/Bernanke Printing Corp. served to provide the monetary crack-cocaine for all the useless mergers, acquisitions, and paper patty-cake skimming. It was a hell of a party, now we need to recover from the life-threatening hangover.
TBTF means you have a competitive advantage over your smaller competitors, not because you are smarter or more hard working, but because you have politicians in your back pocket, ready, willing and able to offload your greedy, stupid and arrogant mistakes onto the rest of the country- the middle class.
Following these guys' logic, we should have one only bank. Goldman should swallow up all the other TBTF reducing regulation costs.
Heads Goldman wins, Tails- offload the losses onto the taxpayer. That certainly should make these authors amd Lloyd's ilk happy !!!!!!
What a dumb argument.
Everyone knows that anyone who has decision-making capacity with respect to any aspect of the financial system is the orchestrated blame.
Its not this or that, or buyer or seller - it's ALL of it!
You can keep your precious TBTF, I'll be seeking to destroy all of it regardless of size or who is to blame. Then and only then can we change it.
I think there is ONE, and perhaps ONLY one claim made by Sanaullah/Khan that I agree with:
The action of breaking Too Big To Fail (TBTF) banks into smaller pieces is not a solution that prevents de-stabilizing crises and runs on the bank.
The problem is that once broken up, the TBTF banks will instead become TMTFAATST (too many to fail all at the same time).
The problem with banking is not so much bank sizes as it is the fact that they all take the same risks at the same time, and then additionally "spread the risk" by writing CDS
There IS one aspect of having many smaller banks which is useful, and it was already expressed by Anonymous above. They know that one of them will be allowed to fail, the CEO and management will be out when another bank takes them over. I can assure you that all bank CEOs have burning desire to be a bank CEO. And threatening them with loss of job and status IS a deterrent.
However, the threat is NOT enough to deter bank CEOs from risky empire-building. Human nature is to speculate.
The only solution to the problem is airtight regulation, based on objective measures and rules.
Sanaullah/Khan blame congress and the Fed for being corrupt and ineffective. Why don't they instead blame the bankers and moneyed interest that corrupted congress?
It is almost (but not really) amusing that Sanaullah/Khan sees Banker's action as all-to-human self-interest, but blame Congress when they succumb to the same temptation.
Why are they putting Congress on a pedestal an demand that they be super-human, while letting criminal bankers get off easy?
The answer to a corrupt congress and criminal bankers is the same: Airtight structure and regulation.
In the case of congress, the problem is our electoral structure, where we have only two parties that form a duo-poly, and you, the voter, are in effect required to be a customer (voter) of one of them. or else have no influence at all. Because there is no real competition between the parties for voters, the competition instead becomes a search of money from third parties.
We're living fitfully with the evidence that the problem is the corruption of the electoral system. The two political parties in America are “two wings of one bird,” and the evidence just keeps piling up. It is by 19th Century design. Here’s how Bill Clinton's mentor at Georgetown University, Professor Carroll Quigley, put it in his book Tragedy and Hope:
The argument that the two parties should represent opposed ideals and policies, one, perhaps, of the Right and the other of the Left, is a foolish idea acceptable only to doctrinaire and academic thinkers. Instead, the two parties should be almost identical, so that the American people can "throw the rascals out" at any election without leading to any profound or extensive shifts in policy.
Which seems to make the argument for why Americans can never "throw the rascals out."
Some of the best commentary I've ever seen on the American electoral system was in the episode of Futurama where the two major party candidates were identical clones...
>> Which seems to make the argument for why Americans can never "throw the rascals out."
Exactly. It never works to throw any rascals out, because there are new rascals waiting in the wings. And the gridlock will still be there.
What is needed is true competition between the parties. How do we get that? By having MORE THAN TWO of them. And how do we get more than two parties? By changing the electoral system so that it is possible to vote for a third party candidate without wasting your vote.
Once you have multiple parties, the parties can no longer afford not to follow their own stated principles. They will have to do what they stand for, so to speak. Or else voters will have true alternatives. In the current system, most people cannot punish their own party without voting for an even worse alternative (relative to their own policy goals).
You might have more luck selling this elsewhere- it all seems to make sense. The TARP lie is what buries you. To intentionally mis-lead the ignorant like that is morally bankrupt- future bankers are you perhaps? TARP is a small fraction of the taxpayers expense for the bankers crimes. Yes, plenty of "regulators", politicians and Raters also need to go to jail, but let's start with the bankers, o.k.?
Your true agenda leaks through- You want to discredit the idea of breaking up the banks. The next 300 S&P points down will do more to tear apart that effort than I could ever do.
One more point about your piece. Re-read the FBI's testimony in 2004 and you'll find that they only define "industry insiders" as the participants in the mortgage origination; crooked appraisers, bent underwriters, etc. They did not include anyone in the secondary market who were paying more for "no-doc" mortgages than they were for fully documented ones.
See: http://www.nytimes.com/2007/01/26/business/26mortgage.html?pagewanted=2
"For his part, Mr. Dallas acknowledges that standards were lowered, but he placed the blame at the feet of investors and Wall Street, saying they encouraged Ownit and other subprime lenders to make riskier loans to keep the pipeline of mortgage securities well supplied.
“The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans,” he said. “What would you do?”"
It was the demand from Wall Street that created, and fueled the supply, and the crappier the mortgages, the better John Paulson, Deutsche Bank and Goldman Sachs liked it. Read Greg Zuckerman's The Greatest Trade Ever pp 179-182. It's the smoking flipping gun.
I live in what you probably call "fly over" country. There are two kinds of people here. Those who are angry as hell, and those who aren't paying attention....... yet. So, if anyone thinks the Massachusetts Senate race was a one-time deal, hold onto your hat.......it's going to be a bumpy ride.
When the referees blow a call in the Super Bowl--you know, the call that causes your team to lose the game--remember it's the player who caused the infraction who's at fault--and not the referee who blew the call.
Because it's not the referees' responsibility to enforce the rules and get the penalties right--the players are supposed to play the game correctly, at all times.
fucktarded myopia in all of its strawy splendor....whoever said that enemies of the banks reserved all of their ire for the banks?.....i have plenty of anger towards the fed, obushma administration, congress, plutocrats, economists, and newsfakers who foisted the tbtf philosophy on us going all the way back to herbert hoover....
and if a bank merits bailouts in spite of its incompetent management then it is ipso facto too big and should be splintered....
bankster bonuses on tarp bailouts and 0% borrowing? yep i sure am angry. call it populist pique but i am not letting them off the hook just because they are serving their self interests or because everyone else is doing it....
and your nitwitted argument about two halves equaling one fails because splitting up 1 into sections creates relationships which did not exist in the unity....thus there is no comparability or associativity in your speculative example regarding the quanities of banks...
please save your tautological horse crap for pravda or your next encounter with baghdad bob...
in the main time, anything too big too fail should be broken up and reorganized into something systemically safe....
+1, if we have to insure, we must regulate it.. if you banksters don't want insurer nosing around telling you what to do, then do something that does not require insurance, like say start a hedge fund, and when you fail, just fail, lose your money, and dissappear.... we don't care how much money you make or lose, as long as it does not require us to make you whole.
Gentlemen - You needn't apologize for those who appear to believe no apologies are due. Currying favor with prospective future employers in a public forum might work, but doesn't speak well for your institutions if what you present is the kind of critical thinking they purport to advocate. Your argument doesn't reflect "Sanctified Knowledge" - Duke, and you're only hitting max two of the "Artes, Scientia, Veritas" - U of MI. Glad I didn't pay that tuition bill.
This garbage is solid grounds for immediate dismissal from any and all academic posts either of you may be currently holding.
It's actually "The LOVE of money is the root of all evil." A small but significant difference...
The main problem of your argument that (basically) "the banks didn't do it, they just followed the competitive forces they were obligates to, it was the gov't / feds fault for crating conditions that allowed this" is that the gov't/fed is basically a division of the big banks at this point.
Being that the gov'ts corruption is funded primarily by TBTF, this breaks down your argument that "it wouldn't matter if 10 small banks took the risks that 1 big one did, the same amount of risk would be taken as the industry mainly imitates other's success" - if it wasn't for the lobbying power of the TBTF banks, the gov't may have been willing to stop these conditions from existing. Also, if we had followed a free market standpoint, the big banks would have failed - since we didn't, the best we could do to catch up at this point would be to "break them up" as the best hope we have of avoiding retracing the same course as last time they should have been destroyed by market forces.
Your arguments that competitive forces will always drive industry to reckless behavior unconcerned with greater societal needs, by the same token drive labor on a race to the bottom, also drive industries to pollute the "commons"...and are in essence the same arguments for communism. This brings me to a new understanding of how entrenched the philosophies for "corporate communism" really are, as well a realization that you got some balls to be arguing this here!
The main problem of your argument that (basically) "the banks didn't do it, they just followed the competitive forces they were obligates to, it was the gov't / feds fault for crating conditions that allowed this" is that the gov't/fed is basically a division of the big banks at this point.
Being that the gov'ts corruption is funded primarily by TBTF, this breaks down your argument that "it wouldn't matter if 10 small banks took the risks that 1 big one did, the same amount of risk would be taken as the industry mainly imitates other's success" - if it wasn't for the lobbying power of the TBTF banks, the gov't may have been willing to stop these conditions from existing. Also, if we had followed a free market standpoint, the big banks would have failed - since we didn't, the best we could do to catch up at this point would be to "break them up" as the best hope we have of avoiding retracing the same course as last time they should have been destroyed by market forces.
Your arguments that competitive forces will always drive industry to reckless behavior unconcerned with greater societal needs, by the same token drive labor on a race to the bottom, also drive industries to pollute the "commons"...and are in essence the same arguments for communism. This brings me to a new understanding of how entrenched the philosophies for "corporate communism" really are, as well a realization that you got some balls to be arguing this here!
For some reason you want to view the bankers as the sole villain when they attempt to buy power from our "public servants," but somehow those same "public servants' are devoid of primary blame for actually selling it. Absurd.
One important ommission here. Your TBTF's OWN the Fed, and as owners of the FED, and in the interest of their self-preservation influence, it's decisions inure to their benefit.
If not so, why would they write half a quadrillion in interest rate based derivatives. And this has no impact on the FED'S "autonomy"?
As for Congress, your argument is sound, though neither they, nor the FED are what they "appear" to be (conspiracy, conspiracy!).
So...If A and B, then C as long as A is the chicken and C truly is the egg.
When even an insider calls for reform, rest assured, reform is needed.
http://www.huffingtonpost.com/2010/02/04/remorseful-banker-parts-w_n_450107.html
The thing is the markets have shown there is no economic gain from firms that are too big, it doesn't even work for the stock owners, only the execs. So why would we endanger our economy for something gains nothing but a very few over-paid employees.