Wall Street Isn't Fixed: TBTF Is Alive And More Dangerous Than Ever

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

Practically since the day Lehman went down in September 2008 Washington has been conducting a monumental farce. It has been pretending to up-root the causes of the thundering financial crisis which struck that month and to enact measures insuring that it would never happen again. In fact, however, official policy has done just the opposite.

The Fed’s massive money printing campaign has perpetuated and drastically enlarged the Wall Street casino, making the pre-crisis gamblers in CDOs, CDS and other derivatives appear like pikers compared to the present momentum chasing madness.  In a nutshell, the Fed’s prolonged regime of ZIRP and wealth effects based “puts” under risk assets has destroyed two-way markets. The market’s natural mechanism of risk containment and stabilization—-short sellers—has been driven from the casino. Accordingly, carry-trade speculators engorged with free money funding have taken the market to lunatic heights, while leaving it vulnerable to a violent collapse upon an unexpected drop because the market’s natural braking mechanism—short sellers taking profits—- has been eviscerated.

At the same time, the giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous. Indeed, JPM and BAC were taken to their present unmanageable size by regulators—ostensibly fighting the last outbreak of TBTF—who imposed or acquiesced to the shotgun mergers of late 2008.

So now these same regulators, who have spent four years stumbling around in the Dodd-Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their wards for not having sufficiently robust “living wills”. C’mon! This is just another Washington double-shuffle.

The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.

Indeed, it is utterly amazing that adult legislators and regulators could even take the idea of a “living will” seriously—-let alone believe that they could possibly thwart the recurrence of another outbreak of so-called “financial contagion”. Yet so thick is the beltway cynicism and so complete is the K-Street domination of policy-making that a trite bureaucratic gimmick like the “living will” has become a major component of so-called macro-prudential policy.

So there is nothing to do except go back to the fundamentals. First and foremost, the September 2008 meltdown was not a main street banking problem; it was a crisis confined to the canyons of Wall Street, owing to the fact that the gambling houses domiciled there had massively bloated their balance sheets with toxic assets and risky derivatives trades, and then funded these balance sheets leveraged at 30:1 with huge amounts of “hot money” in the form of repo and unsecured wholesale loans.

As I demonstrated in the Great Deformation, the “bank run” was almost entirely in the Wall Street wholesale market. By contrast, there was never any danger of retail runs at the corner branch bank offices, and the overwhelming majority of the 7,000 main street banks did not own the kind of toxic securitized assets that were roiling Wall Street.

In fact, the wholesale market runs in the canyons of Wall Street were actually a positive, economically therapeutic event. They had already taken out three of the reckless gambling houses—- Bear Stearns, Lehman and Merrill Lynch—-and were fixing to finish off the remainder, that is, Goldman and Morgan Stanley.

Had the market been allowed to finish off the work of the economic gods in late September 2008, the TBTF problem would have been substantially alleviated. Today there might have existed a half dozen “sons of Goldman” in the form of M&A, trading, investment banking and asset management boutiques—run by chastened veterans who lost their lunch during the 2008 Wall Street cleansing.

The excuse for Washington’s massive intervention against the free market in the form of TARP and the Fed’s monumental flood of liquidity, of course, is that the US economy was about to be annihilated by something called financial “contagion”.  But that is a specious urban legend invented by the crony capitalists who controlled the Treasury and the money-printers who had fueled the housing and credit bubble at the Fed.

As I have also shown, for example, AIG’s dozens of insurance subsidiaries were money good and would have been protected in bankruptcy by insurance regulators and capital maintenance rules, while settlement of the holding company’s fraudulent CDS insurance would have been parceled out pennies on the dollar by a Chapter 11 judge to the dozen giant global banks who had stupidly attempted to turn toxic CDOs into AAA credits. Likewise, FDIC could have liquidated Citigroup’s regulated bank, while allowing the gamblers who bought the stock, bonds and other obligations of the holding company to face their just deserts.

In short, TBTF became a “problem” to be ostensibly remedied with bureaucratic malarkey like living wills primarily because Washington made it a problem—- by means of its panicked bailouts of Wall Street in the fall of 2008. Indeed, the true solution to TBTF is always and everywhere to allow the free market to cleanse its own excesses and imbalances and to impose financial discipline and demise upon outbreaks of reckless gambling and leverage when they occur.

Unfortunately, even if Washington were to refrain from ad hoc bailouts, the free market cure would be perennially compromised by the giant moral hazard posed by deposit insurance and the Fed’s cheap money discount window. Owing to these policy institutions, which systematically encourage excessive gambling by their beneficiaries, US banks are inherent wards of the state—including the easily abused privilege of fractional reserve banking conferred by regulatory charters.  The right thing to do would be to abolish these sources of moral hazard and tell the K-Street financial lobbies to fold up their plush tents because their employers are now all expected to sink or swim on the free market.

Needless to say, the chances that Washington would permit the Wall Street gambling houses to be returned to the unfettered free market that they profess to defend—are somewhere between slim and none. Accordingly, a second best solution is warranted, and it could readily be done.  And it would be far more effective than the lunacy of living wills and all the other bureaucratic mumbo-jumbo that has come out of Dodd-Frank.

First, Washington should re-enact a strict version of Glass- Steagall. Only “narrow banks” which take deposits and make consumer and business loans would have access to the Fed’s discount window. By contrast, propriety trading, underwriting, merchant banking, asset management and all the rest of the financial services sectors would be banned at regulated banks and sent back to the free market where they belong.

Secondly, a ceiling on regulated bank size would be established—perhaps measured at 1% of GDP or $200 billion in terms of asset scale. There are no demonstrated economies of scale in deposit and loan banking above that size, anyway.

Stated differently, banks wishing to indulge in the moral hazard of deposit insurance and accessing the Fed’s discount window would not have to prove they were not “too big to fail” or that they had a viable “living will”. Instead, a TBTF law would do it for them in the form of a statutory cap on the size of regulated banks.

To be sure, Wall Street would scream that such a regime would interfere with the ability of small business and American consumers to get cheap loans. But in a national economy that has gone through a rolling 30-year LBO resulting in $60 trillion of credit market debt outstanding and which sports leverage ratios against income in all sectors that are off the historical charts—that complaint has no merit. Making debt more expensive and permitting it to be economically priced on the free market is, in fact, just what is needed to eventually cure the nation’s debt-ridden economic malaise.

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darteaus's picture

This time...three months from now, who really thinks Ebola will not be in the US?

Oh, wait, we imported it already-on purpose!

Haywood Jablowme's picture

it don't matta cuz if Owebama don't have to follow da constitushun, the cops don't hafta follow it eeda!



knukles's picture

Well, Paul Krugman says the Dodd-Frank financial reforms and something else is/are working.

Da Yooper's picture

Hey everyone I gots to axe a question


IF they are tooooooooo big to fail


Why do we ( tha taxpayers ) have to bail these asssholes



toady's picture

Wall street isn't fixed?

I was told the fix was in.....

CheapBastard's picture

Since Barry took office he's made history!

1) Historic record high Wall Street Banker Bonuses;

2) Historic record high flood of illegal immigrants; and,

3) Historic record high number of Ebola imports.

We're #1 !



Haywood Jablowme's picture

it don't matta cuz if Owebama don't have to follow da constitushun, the cops don't hafta follow it eeda!



seek's picture

Someone could drop dead with blood rushing from every orifice in NYC, and they'll say the results are negative. The CDC is already refusing to disclose where probable patients are located, it's not that big of a stretch to lie about results to prevent a panic.

fonzannoon's picture

well...if this guy has it, and they just covered it up, gawd help us all. Because if this another person sharts out their liver walking into Mt. Sanai no one is going to believe anyone about anything.

seek's picture

Fortunately the US media are complete lapdogs and/or they can whip out some secret interpretation of the Patriot act to get compliance from them.

If we actually have an outbreak in the US, it'll play out like the the beginning of The Stand. They'll initially deny it, and then there'll be sudden quarantines and transport shutdowns when it's already too late. Like the 2008 banking crisis, don't expect the truth to be told when it's their job to lie in order to keep people calm.

Most of us here already don't believe anyone about anything. ;-)

fonzannoon's picture

watch them take this guy with the two doctors in atlanta and the braod in Ohio and try to stage some weekend at bernies looking golf outing in two weeks. Look for the strings.

eclectic syncretist's picture

I think they should better establish whether or not survivors can be latent carriers of the virus before releasing them into the general population.

Winston Churchill's picture

Judging by the latest polling data , it seems the disbelief has gone mainstream.

Dr. Engali's picture

"Most of us here already don't believe anyone about anything. ;-)"

I can't believe you're saying that.

knukles's picture

So don't believe him or anybody else for that matter....

Winston Churchill's picture

Panic in the sheeple would spread it even faster.

So they will lie , for the children of course.

But as hardly anyone(36%) believes them anymore, they might get panic anyway.

He who panics first, panics.......

fonzannoon's picture

without blowing his spleen out his asshole....

KnuckleDragger-X's picture

In NYC bodies could be lieing in the streets and people would just step around them. We need a west coast city For some good old fashioned panic and rioting.

NOTaREALmerican's picture

Let's have a show of hands of all those who resented the SHACKLES put on the banks by REGULATIONS and thought Greenspan was right about the banks being self-regulating because bankers had very expensive suits?    Anybody remember having a Libertarian orgasm over that one?

Slave's picture

I remember when the regulations included subprime lending quotas.

NOTaREALmerican's picture

Wow,  we were Marxist before the current Marxist turned us into Commies.    It must have been horrible with banks unable to exersize their freedom like that!

Slave's picture

My thoughts exactly. =)

When you give the market a shit potato, don't chastise it for playing hot shit potato.

End the Fed and everything falls into place.

williambanzai7's picture

Indeed, it is utterly amazing that adult legislators and regulators could even take the idea of a “living will” seriously...

Why is this amazing?

You do what your paymasters tell you to do.


knukles's picture

Oh yeah... that was the other thingie I'd mentioned above, that Krugman thought the Living Will horseshit was working, too.  Along with whatever the other horseshit thing that was working, was, too.


Does anybody really pay any attention to the horseshit, listen to the King or any of that anymore?  I've concluded that 99% of the press is them nattering along about open sores, lesions and stuff making like there's really any other news than "Lookie ma, it's fucking broken, again."

KnuckleDragger-X's picture

A limited IQ and and a myopic view of the world tends to do that. If it doesn't use small words it doesn't get reported.

Ban KKiller's picture

We have no room for truth. Memory full. 

darteaus's picture

TBTF - Until Everthing Fails

Muh Raf's picture

Fixing it? If they could've they would've. Simple truth is they can't for two reasons 1) they're too stupid by half and 2) they're educated beyond their intelligence

frankTHE COIN's picture

My Cheat'in Ex Girlfriend once told me " Men are like Tiles. If you Lay them right the first time , you can walk all over them forever "
This is TBTF's strategy now.

Eyeroller's picture

And don't forget: 

Men are like dog shit.  The older they get, the easier they are to pick up.

Hence the fed being run by a bunch of old men (Mr. Yellen included).

ebworthen's picture

"The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period."

Bingo!  Restore Glass-Steagall, jail half of Wall Street, hang the top 1% in a public square broadcast.

knukles's picture

Betcha that not one "living will" contains any of the premises found in Glass-Stegal ....

NoDebt's picture

And break up the 5 largest banks.  Hell, most of them are worth more in pieces EVEN TODAY than they are as whole entities.

If there was ever an opportunity for Obama to do something that might have helped, he missed it in the first year of his presidency.  If he had dictated that the big banks be broken up, he could have gotten away with it in a way only a lib like him, fresh to the office, could.  Nope, he goes for the stimulus (giant pork fest) and changes none of the structure underlying the problem that "required" it in the first place.  I mean what and incredible missed opportinuty.  Reasons like this are why I feel absolutely no regret calling him the worst president in the last 100 years, probably ever.

blindman's picture

a "crash" is when the function becomes paramount
and all the tangents to the function collapse on
the function. today, all finance and "money" is
based on a tangent. some have taken a first order
tangent projection as a function, some have given
up and gone fishing.
most could care less and want to join the local
officer for a doughnut at the firehouse, sleeping
in the midday sun.
John Cale - Buffalo Ballet

Dr. Engali's picture

"If they are too big to fail, they are too big to exist. Period."

The problem is that they are so big and so intertwined, that there is no way to unwind them without taking the system down. Therefore that leaves only one solution, the system must come down and be allowed to reset. Only then can we start to rebuild.

eclectic syncretist's picture

If the banks that own the fed fail, what happens to the fed?  Once this question is answered, please ask youself if the fed would ever let these banks fail.

Downtoolong's picture

This is Stockman’s point too, implicitly. If you can’t dismantle a TBTF bank intentionally in an organized fashion without taking down the financial system, what are the chances they are ever going to do it in the midst of a financial crisis? The entire premise of these Living Wills having some utility as a safeguard is obviously false and misleading. They can’t possibly have any meaningful purpose. It’s just another sad diversionary joke on us.

are we there yet's picture

Too big to bribe a congressman? Nope. Then nothing will hapen.

are we there yet's picture

A living will? Don't you need a birth certificate first?

Not Goldman Sachs's picture

Corporations are people my friend

yogibear's picture

A banker acts as a corporate raider and off-shores the bank reserves into private accounts. Cooks the books, by the time it's discovered the bank needs a bailout it's too late. The Federal Reserve and the government covers up the fruad and the taxpayer comes to the rescue again.

Rinse and repeat. Infinite riches for the banksters and infinite bailouts for the banks.

TBTF means Too Big to Prosecute, Eric Holder said so.

novictim's picture

--> Housing prices will collapse first.

---> The Financial Sector/Stock market will collapse first.


This broken democracy in America lead to the banks getting away with TBTF and nothing has changed.

When is the shit going to hit the fan?  Anyone?  Sometime this year?  Spring, 2015? 

Some have predicted 2016 but that seems WILDLY optimistic at this time.

If housing collapses first as in 2006, how long will it take for Wall street and the Banking sector to tank? 


hibou-Owl's picture

this is my take on the situation technically.
GLD on the monthly time scale has massive bullish divergence, on the weekly a classic head and shoulders pattern has formed, and last night on the daily (more divergence, against momentum indicators) which is likely to approach the neckline of the H&S. put simply Gold has got a head of steam under its bum.

Both on the S&P500 and the Nasdaq have the strongest bearish divergence since for a number of years, we've had a small pullback to the long term trend line.

Summary: I am watching the equities to see if they hold the trend line support, but the way gold has setup I'm long Gold, and have small short position on CAC40, and ready to add if TL breaks.
Your question regarding timing seems to be indicating months, if we get TL break in the next couple of weeks a retest may happen but the charts are indicating a much shorter timeline. 1987 event declined nine days before gapping down, S&P500 just had nineth day from the top.

AdvancingTime's picture

Massive deficits have been propelling the economy forward, and it is not sustainable. Please note; Greatly compounding the problem is the realization that most people like infants, children, the disabled or unemployed could not pay their share if their life depended on it, this transfers the burden to the remainder of society.

Making the ugly math simple to understand is no easy task, the article below has a go at it. Not lying about the numbers to arrive at a clear picture of reality is important. Most Americans would be shocked at just how deep the debt is stacking up,