The Real Reason the Giant, Insolvent Banks Aren't Being Broken Up

George Washington's picture

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Anonymous's picture

We let the banks use creative accounting so they can selfishly justify bonuses at the end of the year. I wonder if Lewis and Mack are giving up the fight for reasons soon to be learned by the taxpayer (in a not so positive way)

Anonymous's picture

Good article but I still think it misses the real reason that the TBTF's are not being broken up and I personally don't think it is really all that complicated.

The fact is, we don't have a free market capitalist economy any more. The Federal Reserve which is not really a Federal agency and accountable to either public or Congressional scrutiny controls our economy by controlling the interest rates and the generation of money as well as the rates that banks get and just about every other aspect of the economy in one way or another.

The real reason the TBTF's haven't gotten broken up is the controlling forces at the Federal Reserve don't want to break them up at this point in time. When they decide that it is in their best interests to break them up, like Lehman Brothers and Bear Sterns, they will be broken up. It's really that simple. The market doesn't get to decide, the Fed's do.

Step one- support Ron Paul's bill to audit the Fed. H.R. 1207 which already has 297 co-sponsors and can pass in the House. Support S. 604 Bernie Sanders "Sunshine Act of 2009" the Senate compliment which has 30 co-sponsors and needs 27 more to insure passage. Hearings have already been held on H.R. 1207 and went well. We need to see where the money the Fed generates is actually going. The public after all is ultimately responsible for the debt the Fed generates. Now isn't that convenient for them.

Step two- End the Fed. We don't need a minority of financial elites controlling our economy, charging us interest to do so, having all of their prodigious salaries and operating expenses paid for by the public, not being held accountable for their actions and then on top of it all destroying the value of our money through massive inflationary debt generation. Let a free market operate and decide interest rates based upon the mechanisms of the free market. To call the Fed's performance stabilizing is a sick joke. They have eroded the dollar to a shadow of what it was when they began in 1913 (It's purchasing power value is .05 of what it was worth then.) and we all pretty much know that with the massive bail outs and so-called stimulus plans more is on the way and this economy is teetering already as many of you most likely already know.

Anyway, I agree with the writers assessment but think he stops at the threshold. Pull back the curtain and go after the real wizards who have got our economy and citizenry by their proverbial throats. End the Fed.

Anonymous's picture

Note John McFaul is the Chairman of the [House of] Commons Treasury Committee and not "Chairman of the Commons Treasury", which doesn't really make sense.

Anonymous's picture

Please!! Why would we need any more lending. Isn´t the outstanding debt of the system huge enough??

Of course we don´t need those big banks, we only need a small and tiny fraction of the current banking activity. Why? becuase it´s not time to borrow. It´s time to pay back.

It´s time for all to realize we´ve gone to far, and now it´s time to pay back our debts. The only way out of this mess is to begin to pay our debts, begin to save and begin to produce goods that are really needed and useful . No borrowing anymore, pleeease!!!

Fish Gone Bad's picture

About 3000 banksters went to jail because of the S&L crisis (  It would be nice to see some jail time and some claw backs for all the current banksters.

Careless Whisper's picture

Props on this posting.

The gov strategy isn't only to cover it up, it's also to pump it up & dump it up.

Anonymous's picture

I agree with Bruce.

GW: all you have done is gotten a bunch of academic eggheads to pontificate their positions. Not one of them have ever been a banker or know the business. Therefore I don't see them as experts and their opionions are useless.

You need big banks with big balance sheets who have big financial intermediary roles in issuing, trading, settlement and risk appetite. Banking is a volume business. Volume drives costs and prices down. If you are a company and want to borrow 10 million. Do you want to pay 5% on top of the bank's cost of funds or 1%? Your choice, dude. Even if you get the lower cost loan from a small regional bank, they can only offer you that by off handing the risk to the large liquidity providers, ie the big banks. Smaller banks don't have the balance sheet to make the economy work.

I have no problem with a bank that is big (and can someone please define TBTF size? Is it a 1trillion balance sheet, 2 trillion, 750 billion????). Is it a bank who is "systemically important" - so WTF does that mean? If you can't define it you are talking out of your ass.

My problem is that when a bank goes bust the government jumps in to save it. Even the biggest global banks can be unwound. It would be very messy take a long time and affect economies all over the world, including individuals (so - you have a Citibank credit card - just guess what would happen if Citi closes it's doors...).

The bigger the better as far as I'm concerned. Banks are not too big to fail, they aren't being allowed to fail.

Anonymous's picture

first i would like to sue JPM and GS and reinstate LEH and BSC whom they destroyed.

if all of the nine go under, there are plenty of other underwriters around - Blackstone does it lots of boutiques, McQuarie, BBVA, Santander, Soc Gen, BOM, on and on.

nationalization is not the answer - free market is, for a change - they need to die and let the vultures come in - in a month there will be a big underwiting group at BBT or any other large well run regional.

Marge N Call's picture

Yep. Funny how many so-called "free-market" folks don't trust the free market.

I'm uneasy with it, but you have to ask yourself this:

Which group has the greater chance of completely screwing the whole thing to hell

a) the goverment

b) the private sector



Anonymous's picture

i loved the article....the zombies should be carted to the morgue.....let there be a new beginning....

many of the crooks who were saved during the s&l crisis are the very same fucks caught holding the bag this time....indymac is a perfect example....can't remember the name of the piece of dog shit running that organization but he was the same incompetent terrorist who destroyed a s&l in ca in the 1980s....

let it crash baby....

Bruce Krasting's picture

This all correct but the problem is, who will intermediate the big capital flows? Regional banks are not going to be the underwriters of corporate and muni bonds. What happens when IBM needs to convert a couple of billion $ into Euros? We have to have big balance sheets to handle the big numbers. We are dead dead dead if our ability to form capital in the future is impaired.

If we go out and shoot BoA and C what do we have left? Goldman and JPM. I would not define that result as a succesful one.

Don't read me wrong. I hate the zombies. More nationalization is no answer.

Assetman's picture

IF Goldman and JPM are the only ones left, treat them like heavily regulated utilities.

I'd say imposing an ROE of 10% and refunding the rest to the FDIC (or even taxpayers) would be a start.  There's nothing in the book that says we can't socialize gains as well as losses.

JohnKing's picture

That is why they call it creative destruction, it is part and parcel of the process of capitalism. You could go the other way on that ask how long anyone will be willing to risk their capital in a system that is utterly corrupt. The big banks can fail, others will fill the void, maybe with better products, services and dare I say better ethics. We have a defacto gov't run system for the big capital players, no different than Venezuela or any other emerging banana republic, how long until all the capital just flees?

MsCreant's picture

Mine done fled already.

Anonymous's picture

i hear you but i don't think that we are proposing
a large-free banking system.

the current insolvent banks are mismanaged for
whatever precious mitigating circumstances one
may wish to invoke....however as they are liquidated
new large banks will emerge which will be given
trust to handle billion/trillion usd worth
of business....

liquidation sweeps away the
formation will occur when legal, regulatory,
tax, and economic conditions foment it....banks
of sufficient size will remain to conduct the
nation's business....

and if they do not exist, that's the price we
pay for letting gross criminality and financial
terrorism run amok....out of the ashes
will rise new organizations to rebuild....

that's what depressions are for - they reteach
us the economics morality which was tossed
out during the years of debauchery....economics
has a moral element which i am not willing
to sacrifice for a continuation of tbtf....

Miles Kendig's picture


Clear & concise.  Cheers.

MsCreant's picture


Shifty or intentional?

defender's picture

maybe he was going for the reverse gamer approach?

(in console games the ! takes longer to type with a controller, so the hardcore gamers will type 1 instead)

Miles Kendig's picture


Both.  Actually, one of my rarest and highest forms of praise. And yes Defender...... sometimes it is better to take the time for the proper response rather than going for the quick as seems to be all the rage today and the downfall of the folks Anon is referring to.

Cheddar Bob's picture

Another piece of phenomenal writing.  And again I struggle through three very basic questions:  First, is it unrealistic for us to think that, at this late date, it is even possible to effect successfull reform of; abolish; or otherwise break the deep and deepening intrenchment of these particular interests?  Does Too Big To Fail really mean Too Big To Stop?  If so, secondly, what can be done to frustrate, agitate against, confuse, short-circuit the scheme as manifest at its most basic level, the level of me, the simple and popularly-universal American consumer with a couple dollars, few compromising committments, and a thorough wariness of the ongoing grand heist.  Who knows how this might be done. ?  The most effective of those actions that might bring about any such underminement are certainly illegal.  But once the motivations and actions of certain interests have been laid plain, and an inability to thwart the monopoly of power/money has been generally agreed upon, we have reached a point where the question of whether to act is rendered moot.  Finally we must ask:  How to win this one while holding fast the precept to Do No Harm.  Once enough American consumers, both those like myself with spare money and an open schedule and those not so lucky; once enough Americans go through this thought process and become stuck, much like I have, that is when the amazing creativity of our populace will bring forth more concrete proposals than I can offer.  This has been done before, and I'd like to emphasize that the founding of this great and god-blessed nation was based primarily on principle, as opposed to necessity - I've heard.  One further thing to consider is the likelihood that efforts would ultimately transend any given local populace in repercussions.  As such, any efforts must be not be localized.

Anonymous's picture

The elephant sitting and defecating in the middle of the room that so many are chosing to ignore is the power reality of Banksters buying and owning Washington. End of subject.

Lionhead's picture

GW, excellent post and I fully support their break up. As many have commented here, the solution to this problem, would be so disruptive we almost are captive to the banksters as the consequences of the break up would force much pain on the populace. Pain that they're unwilling to bear as they have continually elected officials that dispense public money into their pockets. Someday the choice will be pain or complete collapse... IMHO, pain is the more palliative option. It's time to end the FED & break up the system of TBTF banks.

MsCreant's picture

Reinstate the Glass-Steagall Act of 1933.

Make lobbying illegal.

Apocalypse Now's picture

Excellent.  Then regulate and have all derivatives traded on exchanges.  Also back the FDIC with a government guarantee.

MsCreant's picture

Hi Lionhead,

I keep saying this. We are dependant on a system that needs to be shut down so that it can be fixed. Everything that I can think of that might actually fix this is freaky and sounds like socialism, or something that a fascist could really exploit to advantage. I think of stuff like a government campaign to get people to stock up on food and othe supplies for a year. Savings go into the larder. Some people won't be able to do it, or do it enough. Stockpile emergency food and rations strategically around the country. Set up aid stations that citizens work at to earn the aid. (or something, this ain't perfect here, this is just putting something out there). The point is, when you know that there are enough, or close to enough resources everywhere, shut everything down. National holiday, not just a bank holiday. The only folks working are those in the finance business. Unwind the derivatives. Mark to market the assets and sell em. Break up the TBTF banks.

I know what I suggested has logistical problems from hell and angles that some folks would game and others where folks could be wiped out financially. But it seems something like this is needed. A total Control/Alt/Delete done in such a way that people will be taken care of, but it ain't business as usual.

Anonymous's picture

@ Roman Biko:

I'm thinking the "fake it til you make it" works like a ponzi scheme works, if you can fend of the crisis of confidence due to say, a Barron's article like Madoff did, you can keep going for a few years. But ultimately, what the TBTF banks are doing is unsustainable. There are no greater fools left to suck into the system everyone is tap out and can no longer service the debt they accumulated, can't even make the interest payments anymore. Doubt has crept in, if not totally sunk in yet. Once prevailing public sentiment is fear as opposed to confidence, there is no longer a "make it" point in the future that you "fake it" to reach.

So the question is, is this just confidence hit they can fake it thru til next upsurge, or is over, done, poof, gone? Just a Barrons article or is Madoff walking into the Feds office?

I think most of us commenting at zero hedge would say it is over and any money spent on supporting TBTF is just going into an economic black hole. Let us ignore sunk costs, clear out the garbage and start over.

I don't think it's a coincidence that the "undead" are running amok in pop culture right now, zombies, vampires etc..I think its a sign that in our subconscious we know our aged financial and political institutions should have died by natural causes by now, to make room for birth of something new and vibrant. Our crumbling empire has resisted the grim reaper and is haunting us, threatening our survival. The "undead" always have superhuman power, they are not truly immortal, but refuse to die from natural causes...thus it is up to the remaining living humans to figure how to take out our stubborn opponents and move on with our lives. It will likely require all the wit, grit, and cooperation we can muster, and a few wood stakes.

Hat tip to GW, great summary, thoroughly showing how our regime's actions are not in the best interest of the people and how intellectually bankrupt their reasoning is. The orignal GW would be proud.

A Man without Qualities's picture

I realize it is only a part of this, but one thing that could be done with immediate effect is for the banks to clean up their derivatives books.  We have millions of transactions, with many of them largely offsetting and colateralized.  Two market makers in the swaps market would never actually unwind a position, but rather put on a new offsetting trade and this goes on time and time again.  If the banks won't agree to a swaps clearing house, then they should be forced to trim the number of deals.  At least this way we would hear less about the quadrillions of interest rate swaps when they true economic risk is many times lower.

If banks were forced to hold additional capital because of the number of trades I am sure the banks would be willing to devote the necessary resources to deal with this. 


Anonymous's picture

complexity is just another way to avoid transparency, if it is to complex to unwind, reugulate, it is too complex to allow...

Marge N Call's picture


Let's NOT FORGET it's the FUCKING JOB of the government regulators to understand and deny/allow this shit to happen. If they can't understand it yet they allow it, then what the fuck good are they?

Anonymous's picture

conclusion: Geithner's a trust fund twit being used by a higher power. Anyone care for SQUID

Anonymous's picture

I would say that on top of all the reasons stated there is also an almost a religious belief in the market and a fear the boogeyman of "socialism". This false belief "fear" based reasoning will prevent any real change, all that is needed by the proponents of the status quo is to scream "that would be socialism!!" and everyone runs like the cockroaches that they are.

Another issue is the fraud in the DOJ/FBI/SEC, that has known about the fraud present in the housing sector since at least 2004. The DOJ/FBI/SEC absolutely refuse to do their jobs, even to this day.

We probably do not need a whole lot more than minor refinement of current regulation, but we do need enforcement.

MsCreant's picture

It does seem like the death of justice via a million little cuts, FBI does a favor by looking the other way on this one, the SEC on that one, in exchange for...all the tiny little dishonesties than each knows they were a part of, mount up so that no one wants to do anything about anything because they are ashamed of their small role in the matter. And the 2B2F can count on it, because even as each favor got done, note was made of it by someone, and used as blackmail later.

Anonymous's picture

"The fake it to you make it" won't work now, because of where we are in the Minsky debt theory; add on also the overall worldwide mercantilism against this country under the guise of free trade, mainly promote it by american corporation self-interest of better profits by outsourcing everything.

A corporation's behavior of profit above everything else is sociopathic in nature & always be short term, unless that natural pathos is restained thru proper management or governmental regulation. Not doing that we have what we have today - a gigantic manure pile, a gigantic situation cause by lack of foresight - a tragedy of the commons.

If Obama was not so full of sh!t. And was really a Chicago politician- not some over coiffe community organizer. This would be what a political boss would do & would have them by their balls...

-Using Patriot/National Security Law -take over banks. Equity for debt swap. Banks will become Mutual Corporation. Across board decrease in banking fee/increase in interest paid in savings account. Task force would clear the mess with CDS&Sort out foreclosure to be package in groups & given to non-profits. The sweet part -> All bank's insurance division will start selling health insurance across all markets & niches, if not already so & convert to a system, where they use the Medicare payment system/billing structure - which is contracted directly thru CMMS/Medicare (which gets paid a fee to use their system) - A defacto single payer structure overnight - which marginalizes the present Health Insurance Oligopoly, which will be ripe for take over by the banks..

So you get to keep the 9 evil children (FNMA/Freddie/AIG/City/BOA/Wells/&bitch slap Goldman/Chase/Morgan) - but essentially have been lobotimized or their evil impulse.

He can do it anytime. National Security Act are very powerful. One call to Atty General & is on the way to it.

dcosby7's picture

Sure he could do it, but it would be in opposition to those who "elected" him. The bilder's, the Trilat's and the CFR'.s  Which when you think about it, it sounds like the nefarious cabal that rules the world is made up of construction workers, workout machines and substances you huff.

Anonymous's picture

Clearly the only solution to "Too Big to Fail" is to make them all "Too Bigger to Fail."

MsCreant's picture

2big2fail becomes 2fat2move

Hephasteus's picture

Don't audit the fed or interest rates will rise. You don't want people suddenly getting their credit card interest rate raised from 13 percent to 30 percent. Oh wait that's totally happening. All the are threatening congress with is huge interest rates on the national debt to make the budget unserviceable. Let em do it. We'll put congress on youtube in baseball t-shirts screaming debtor revolt.

Ich bin ein whatever's picture

What a quagmire.

The more I find out, the less I want to know. Having learned that the games of "Extend and pretend" have been going on for over twenty years now without implosion (merely a few hundred thousand unemployed along the way that don't matter as long as the stock prices go up, just ask Larry Kudlow), I no longer have to worry each day about an impending economic explosion in which life as I know it will no longer exist.  That sense of impending doom has been expelled once and for all.

Sarcasm works wonders for my sense of denial

Anonymous's picture

As noted public opinion, expert opinion, economic common sense all favor breaking up the mega banks. Regulatory capture may have some validity as to why this action has not been taken but I would suggest another reason. Fear!

They say that when the first lifeboats on the Titanic were being lowered many passengers refused to get on them preferring the seeming safety of the mighty ocean liner to the danger of being on a small wooden boat in the Atlantic ocean.

Given the fragility of our current economic situation we likely have the same dynamic going on today. Breaking up a Bank of America or JP Morgan may seem like the right thing to do but the long term benefits are just that while the short term hazards will be felt immediately.

Renfield's picture

This point deserves to be emphasised.

What happened after Lehman went down? Lehman took over from Bear Stearns as the unofficial Beginning of the End. Lehman 'was allowed to fail', the markets collapsed, a bigass bailout was rammed thru against the overwhelming majority of citizens - it was an economic '9-11'. Suddenly Lehman became a historic name for hubris and consequences.

Now no-one wants to be the name associated with Let Fail the Sequel, especially on the heels of a market rally and heaps of 'green shoots'. Bear Stearns; Lehman; and [your bank]. The three fatal sisters. Do YOU, Mr/s Elected Congresscritter, want to be known as the guy who ended the 'recovery'?

Lehman was the experiment. Everyone found out the immediate result of being first (or second) in line to fail. Names are taken, history written. If 20 banks fail in a row, it will still be the first that is remembered, AND the name of the politician who turned off the stereo at the party.

Everyone knows the ship's going down, but would rather wait with the crowd singing Nearer My God to Thee as the ship sinks, than be first pushed off the plank. And remembered that way ever after. If you're going down anyway, best do it anonymously and along with everyone else.

Roman Biko's picture

just playing devil's advocate-- if the "fake it 'til you make it" strategy worked in the early 80s, why wouldn't it work today?

Hephasteus's picture

Insufficient quantity of fake and isufficient quantity of make. Especially when the make becomes too rebellious in the middle east. Once the IMF is in place. Everyones fight back capabilities will be harshly limited by committee. Which is why terrorism will be employed so much by the powers that be BEFORE it's employed by the helpless because it will be the only way people have to fight against powerful controlling forces. They always FAKE what becomes real to distort the motivations of the reality and confuse it with the motivations of the illusion.

Anonymous's picture

because everyone's wising up to the jig...
open source information viruses are a biatch aren't they?

pigpen's picture

GW, fantastic post. It is a shame that in the US we ostracize good regulators like William Black. It shows you that honest regulators can never succeed as bad regulators drive out the good and the good are marginalized. Kind of like Gresham's law for regulators.

The fact that William Black is not on every MSM outlet screaming this proves the complicity of MSM with maintaining the status quo.  The biggest outlet he gets is the blogosphere and Bill Moyers - another journalist who tackles tough issues who is banished to PBS on friday nights.

The entire information system and organizational structure of this country is broken and without values. I am sure this will end well.



Anonymous's picture

playing devil's advocate-- if the "fake it till you make it" starategy worked in the early 1980s, why wouldn't it work today?

Anonymous's picture

because it will take a very long time for those bastards to fake it until they "make it" now.

Green Sharts's picture

I would love to see the TBTF banks broken up and agree that regulatory capture is one of the things preventing it.  However, another issue is how difficult it would be to break up these institutions.  It would be like untangling a big bowl of spaghetti.  The top 5 players in the derivatives market account for something like 96% of the notional value of outstanding derivatives.  How do you split all that up?  This OTC derivative contract between Citi and JPM is now between Citi #10 and JPM #5?  How does one fairly spread the toxic assets and good assets when breaking these banks up into multiple pieces?