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

George Washington's picture

Washington’s Blog.

Why isn't the government breaking up the giant, insolvent banks?

We Need Them To Help the Economy Recover?

Do we need the Too Big to Fails to help the economy recover?


following top economists and financial experts believe that the economy
cannot recover unless the big, insolvent banks are broken up in an
orderly fashion:

  • Dean
    and professor of finance and economics at Columbia Business School, and
    chairman of the Council of Economic Advisers under President George W.
    Bush, R. Glenn Hubbard
  • The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
  • Economics professor and senior regulator during the S & L crisis, William K. Black
  • Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.

In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer - who was Ben Bernanke’s thesis adviser at MIT - say that - at the very least - the size of the financial giants should be limited.

Even the Bank of International Settlements - the "Central Banks' Central Bank" - has slammed too big to fail. As summarized by the Financial Times:

report was particularly scathing in its assessment of governments’
attempts to clean up their banks. “The reluctance of officials to
quickly clean up the banks, many of which are now owned in large part
by governments, may well delay recovery,” it said, adding that
government interventions had ingrained the belief that some banks were
too big or too interconnected to fail.


This was dangerous because it reinforced the risks of moral hazard
which might lead to an even bigger financial crisis in future.

If We Break 'Em Up, No One Will Lend?

Do we need to keep the TBTFs to make sure that loans are made?


Fortune pointed out
in February that smaller banks are stepping in to fill the lending void
left by the giant banks' current hesitancy to make loans. Indeed, the
article points out that the only reason that smaller banks haven't been
able to expand and thrive is that the too-big-to-fails have decreased

Growth for the nation's smaller banks
represents a reversal of trends from the last twenty years, when the
biggest banks got much bigger and many of the smallest players were
gobbled up or driven under...


As big banks struggle to find a way forward and rising loan losses
threaten to punish poorly run banks of all sizes, smaller but well
capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners...

At a congressional hearing on small business and the economic
recovery earlier this month, economist Paul Merski, of the Independent
Community Bankers of America, a Washington (D.C.) trade group, told
lawmakers that community banks make 20% of all small-business loans,
even though they represent only about 12% of all bank assets.
Furthermore, he said that about 50% of all small-business loans under
$100,000 are made by community banks...

Indeed, for the past two years, small-business lending among community
banks has grown at a faster rate than from larger institutions,
according to Aite Group, a Boston banking consultancy. "Community banks
are quickly taking on more market share not only from the top five
banks but from some of the regional banks," says Christine Barry,
Aite's research director. "They are focusing more attention on small
businesses than before. They are seeing revenue opportunities and
deploying the right solutions in place to serve these customers."

And Fed Governor Daniel K. Tarullo said in June:

importance of traditional financial intermediation services, and hence
of the smaller banks that typically specialize in providing those
services, tends to increase during times of financial stress. Indeed,
the crisis has highlighted the important continuing role of community

For example, while the number of credit unions has declined by 42
percent since 1989, credit union deposits have more than quadrupled,
and credit unions have increased their share of national deposits from
4.7 percent to 8.5 percent. In addition, some credit unions have
shifted from the traditional membership based on a common interest to
membership that encompasses anyone who lives or works within one or
more local banking markets. In the last few years, some credit unions
have also moved beyond their traditional focus on consumer services to
provide services to small businesses, increasing the extent to which
they compete with community banks.

Indeed, some very smart people say that the big banks aren't really focusing as much on the lending business as smaller banks.

since Glass-Steagall was repealed in 1999, the giant banks have made
much of their money in trading assets, securities, derivatives and
other speculative bets, the banks' own paper and securities, and in
other money-making activities which have nothing to do with traditional
depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still
have trillions in bad derivatives gambling debts to pay off, and so
they are only loaning to the biggest players and those who don't really
need credit in the first place. See this and this.

So we don't really need these giant gamblers. We don't really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

largest banks often don't show the greatest efficiency. This now seems
unsurprising given the deep problems that the biggest institutions have
faced over the past year.


"They actually experience diseconomies of scale," Narter wrote of
the biggest banks. "There are so many large autonomous divisions of the
bank that the complexity of connecting them overwhelms the advantage of

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

community banks have thrived, in large part because their local
presence and personal interactions give them an advantage in meeting
the financial needs of many households, small businesses, and
agricultural firms. Their business model is based on an important
economic explanation of the role of financial intermediaries--to
develop and apply expertise that allows a lender to make better
judgments about the creditworthiness of potential borrowers than could
be made by a potential lender with less information about the

A small, but growing, body of research suggests that the financial
services provided by large banks are less-than-perfect substitutes for
those provided by community banks.

It is simply not true
that we need the mega-banks. In fact, as many top economists and
financial analysts have said, the "too big to fails" are actually
stifling competition from smaller lenders and credit unions, and
dragging the entire economy down into a black hole.

The Giant Banks Have Recovered, And Are No Longer Insolvent?

Have the TBTFs recovered, so that they are no longer insolvent?


The giant banks have still not put the toxic assets hidden in their SIVs back on their books.

The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.

overhang of derivatives is still looming out there, and still dwarfs
the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).

Indeed, Nobel prize winning economist Joseph Stiglitz said recently:

U.S. has failed to fix the underlying problems of its banking system
after the credit crunch and the collapse of Lehman Brothers Holdings


“In the U.S. and many other countries, the too-big-to-fail banks
have become even bigger,” Stiglitz said in an interview today in Paris.
“The problems are worse than they were in 2007 before the crisis.”


Stiglitz’s views echo those of former Federal Reserve Chairman
Paul Volcker, who has advised President Barack Obama's administration
to curtail the size of banks, and Bank of Israel Governor Stanley
Fischer, who suggested last month that governments may want to
discourage financial institutions from growing “excessively.”


While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to "creative accounting", such as Goldman "skipping" December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

very smart people say that the big banks - even after many billions in
bailouts and other government help - have still not repaired their
balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can't prove they are solvent, they should be broken up.

The Government Lacks the Power to Break Them Up?

Does the government lack the power to break up the TBTFs?


One of the world's leading economic historians - Niall Ferguson - argues in a current article in Newsweek:

[Geithner is proposing that] there should be a new "resolution
authority" for the swift closing down of big banks that fail. But such
an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as "too big to fail" banks.

And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and
Law) - says that the Prompt Corrective
Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government
to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.

Whether or not the banks' holding companies can be broken up using the PCA, the banks themselves could be. See this.

And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.

FDR seized gold during the Great Depression under the Trading With The Enemies Act.

and Bernanke have been using one loophole and "creative" legal
interpretation after another to rationalize their various
multi-trillion dollar programs in the face of opposition from the
public and Congress (see this, for example).

And the government could use 100-year old antitrust laws to break them up.

don't give me any of this "our hands are tied" malarkey. The Obama
administration could break the "too bigs" up in a heartbeat if it
wanted to, and then justify it after the fact using PCA or another
legal argument.

Is Temporarily Nationalizing the Giant Banks Socialism?

Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.

may be true. But government regulators in the U.S., Sweden and other
countries which have broken up insolvent banks say that the government
only has to take over banks for around 6 months before breaking them up.

contrast, the Bush and Obama administrations' actions mean that the
government is becoming the majority shareholder in the financial giants
more or less permanently. That is - truly - socialism.

them up and selling off the parts to the highest bidder efficiently and
in an orderly fashion would get us back to a semblance of free market
capitalism much quicker.

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

So what is the real reason that the TBTFs aren't being broken up?

Certainly, there is regulatory capture, cowardice and corruption:

  • Joseph Stiglitz
    (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the
    financial industry because it is politically difficult, and that he
    hopes the Group of 20 leaders will cajole the U.S. into tougher action
  • Economic historian Niall Ferguson asks:

    which institutions are among the biggest lobbyists and campaign-finance
    contributors? Surprise! None other than the TBTFs [too big to fails].

  • Manhattan Institute senior fellow Nicole Gelinas agrees:

    too-big-to-fail financial industry has been good to elected officials
    and former elected officials of both parties over its 25-year life span

  • Investment analyst and financial writer Yves Smith says:

    Major financial players [have gained] control over the all-important over-the-counter debt markets...

    It is pretty hard to regulate someone who has a knife at your throat.

  • William K. Black says:

    There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

    Instead, the Treasury and the Fed are urging us not to
    examine the crisis and to believe that all will soon be well. There
    have been no prosecutions of the chief executives of the large nonprime
    lenders that would expose the “epidemic” of fraudulent mortgage lending
    that drove the crisis. There has been no accountability...

    The Obama administration and Fed Chairman Ben Bernanke have
    refused to investigate the nature and causes of the crisis. And the
    administration selected Timothy Geithner, who with then Treasury
    Secretary Paulson bungled the bailout of A.I.G. and other favored “too
    big to fail” institutions, to head up Treasury.

    Now Lawrence Summers, head of the White House National Economic
    Council, and Mr. Geithner argue that no fundamental change in finance
    is needed. They want to recreate a secondary market in the subprime
    mortgages that caused trillions of dollars of losses.

    neo-classical economic theory, particularly “modern finance theory,”
    has been proven false but economists have failed to replace it. No
    fundamental reform can be passed when the proponents are pretending
    that there really is no crisis or need for change.

  • Harvard professor of government Jeffry A. Frieden says:

    agencies are often sympathetic to the industries they regulate. This
    pattern is so well known among scholars that it has a name: “regulatory
    capture.” This effect can be due to the political influence of the
    industry on its regulators; or to the fact that the regulators spend so
    much time with their charges that they come to accept their world view;
    or to the prospect of lucrative private-sector jobs when regulators
    retire or resign.

  • Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.

But there is an even more interesting reason . . .

The number one reason the TBTF's aren't being broken up is [drumroll] . . . the 'ole 80's playbook is being used.

As the New York Times wrote in February:

the 1980s, during the height of the Latin American debt crisis, the
total risk to the nine money-center banks in New York was estimated at
more than three times the capital of those banks. The regulators,
analysts say, did not force the banks to value those loans at the
fire-sale prices of the moment, helping to avert a disaster in the
banking system.

In other words, the nine biggest banks were all insolvent in the 1980s.

And the Times is not alone in stating this fact. For example, Felix Salmon wrote in January:

the early 1980s, when a slew of overindebted Latin governments
defaulted to their bank creditors, a lot of big global banks, Citicorp
foremost among them, became insolvent.

So the
government's failure to break up the insolvent giants - even though
virtually all independent experts say that is the only way to save the
economy, and even though there is no good reason not to break them up - is nothing new.

William K. Black's statement that the government's entire strategy now - as in the S&L crisis - is to cover up how bad things are ("the entire strategy is to keep people from getting the facts") makes a lot more sense.

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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?