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Guest Post: Too Big to Fail: Championing the Slow Decline
Submitted by FMX Connect
Too Big to Fail: Championing The Slow Decline
The recent implosion of MF Global has reignited the debate over Too Big to Fail (TBTF) and the adequacy of U.S. regulatory safeguards. It has also contributed to a broader decline in investor sentiment, many of whom believe the market structure does not afford them sufficient protection and fair competition. Many MF Global clients still have assets frozen and even if they ultimately recover the money, the short-term consequences can be devastating.
Historically, when firms fail to generate a profit or when one division damages the revenue stream of the whole firm the unprofitable assets are divested. Companies that can’t operate under the weight of their own size end up spinning off the parts that caused the pain. This is normal in the business cycle. The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market.
The Final Four
Is concentrating this much risk the hands of so few banks good for the market?
At its root, TBTF is a triumph of lobbying over market structure. When Congress passed the No Child Left Behind Act in 2001, no one expected it would create a perfect safety net. Fast forward to 2011 and the legislation is intensely criticized for its design flaws and implementation. In short, the Act failed to live up to its lofty title. Too Big to Fail is a similar misnomer. TBTF is nothing but a marketing ploy masquerading as a market reality, a costly illusion expedited by bank lobbyists and political insiders. If anything was really too big to fail, there would be no need to label it as such because it would be self-evident. No firm was too big to fail, and no firm is too big to fail. The future will prove this out.
The official (and unofficial) recognition of TBTF firms has led to a number of unsavory and unsafe business practices. Businesses overvalued balance sheets, and engaged in questionable practices to grow even bigger and support non-profitable divisions. The Federal Reserve tacitly encouraged these maneuvers through its monetary policies. The end result was consolidation upstream and a loss of diversity in financial counterparties. In the end the Federal Reserve will be the only counterparty, backstopping one huge bank or an exchange that is partially owned by the banks. When 80% of a firm’s business comes from 20% of its clients the business is too dependent on too few counterparties. The financial industry has been consolidating for the last decade, and the systemic risk is larger than ever before.
As the market continues to trend towards a small number of large, homogenous counterparties we will see OTC and floor locals go out of business and mid-sized firms over-leverage and struggle. Clients without political connections have assets frozen and lost. Liquidity will suffer.
The decreased liquidity is notable already and the CME Group recently lowered margin requirements in an attempt to facilitate an improvement. This is the equivalent of a central bank lowering interest rates and will create more volatility in exchange for liquidity (but does not reduce risk). Similarly, much like the infamous liquidity trap, it will also face a point of diminishing returns.
We expect the consolidation upstream to continue as championed firms eat the client books of their smaller counterparts.
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For some reason, looking at this graph reminded me of Stephen King's The Langoliers, where Citi, JPM, BofA and Wells Fargo are the langoliers eating up all of the other smaller banks.
i thought it was march madness
Looks like we're in the semi-finals.
Bozo on Kudlow report just said to buy banks, "fantastic strong businesses" Especially JP Morgan and BY Mellon, and I wouldnt be afraid of European banks either"
LMFAO!
Just like a 3rd World nation. It is time to learn Spanish.
My bets are on CitiMorgan winning by $2 trillion on the final TARP to Wells-BankofAmericaMerrillFargoCountriwide
It will be March Madness, and BoA will be the next to go.
Where's Kentucky in the bracket? Don't they have Ft Knox and the gold? I like them to win it all.
It's the retail banking division. That's why you don't see Goldman Sachs on there either.
Ironic, eh?
The banks are too big to fail, but clients with seg accounts places like MFG don't even get their own property back.
And there's a crisis of confidence?
Hemingway would love it. Irony and pity wrapped in hopeless misdirection, or maybe that cabernet was a little stale tonight.
The Reserve Fund....brings back bad memories of that disaster....
I think the Federal (or sorry Fraud) reserve is the sole entity that is too big to fail. I really want it to fail to hell.
Hey, catchy title...Fraudulent Reserve Bank...I like! Well, I don't really due to the reality, but it IS catchy.
The bigger they get the less they are worth.
Dont you get it? The goal all along was for the banks to have ALL the money. And they do. The us has 50 TRIL in debt, all owned by the banks. There are only 5 Tril in circulation with much of it overseas in the coffers of China, Saudi Arabia, and with the drug cartels in south america. No one owns anything in america. Property is rented from the state etc etc.
True. B/1/502/INF.
Soon enough (all too soon unfortunately for those of you trying to plan your way out of being fucked), the entire facade will come crashing down. I used to think it would take years. Now I now that the "years" part is simply the introduction. One has to pay attention to when the show starts: It only lasts a minute or two.
If the money is not backed by anything productive, it is worthless. Debt alone is worthless.
Italy 9.30AM EST : vote on the budget. If it fails, Berlusconi is done.
Coalescence of fraud and corruption
Daily Kos and OWS are with us on this one. Please help.
Please try to get all your friends to move money out of the big banks.
There is anecdotal evidence this is starting to hurt them and it has resulted in huge numbers of people transferring their accounts. Yes your single rinky dink account matters. We need your help. Please joun us.
Socialists, libertarians, christian fundies, and wacked out gold bugger survivalists unite! Please tell your friends. Yes we fucking can!
This is sarc, right TCT?
Heh, I'll give you one guess at who gave you your lone (so far) green triangle... Shit, scratch that; I'll give you one too for being so astute.
PS. that's not a tongue in tct's cheek.
I hate the big banks too.
And its a lolipop.
sweet talker
Yes, Done. Fuck you Bank America, JP, Wells. Include names of big banks in note too, surprise some people don't know.
Pleasantly surprised today to see how many people in my office had done this already. :)
I haven't moved my account out. PITA, since all my direct deposits and automatic payments are linked to that account. Instead, I maintain a balance of under $100 and use every paycheck to buy more PMs.
finally - no rogue trader - just a bunch of bernie made-offs
i look it as this way, 4 is alot less than 37 fuckers for us to have to take down.......thanks for making it easier
TBTF - Does that include the good old USA?
Just pass a rule stating that only state charters are allowable. The four would quickly become 4 x 50!
Some good news from europe, Dow to the moon!
Greece Runs Into Trouble Picking a New Prime Ministerteach MillionDollarBonus
Failure occurs when financial gravity exerts its ineluctable pull on overpriced asset values thereby vaporizing capital. Size matters not. It is a merciless killer of companies and countries.
I wasn't aware that we had any "regulatory safeguards" or any regulatory anything. Isn't the game (scam) to take from the people and give to bankers? Safeguatrds would get in the way of that wouldn't it?
"The government has disrupted the business cycle of creative destruction by championing TBTF firms over a more competitive market."
The privately held Federal Reserve is the top regulator of to big to fail banks. If you want to gain regulatory power over the banks and institute Free Market principles first you have to eliminate the most pernicious corrupting force of all. END THE FED.
See:
Money Power And The Central Bank: Life Is But A MEME
END THE FED: THE FIRST STEP IN RESTORING OUR CONSTITUTIONAL REPUBLIC
The Fed's oversight committee logs another negative article.
- Inflection Point
the federal reserve banking system, running/ controlling our financial well being for nearly a century has made america a joke to the world - we are no better off than the people of egypt, afghanistan, china, russia, somalia, libya, syria, greece, ireland, portugal, n. korea, burma, mexico, venezuela, cuba, haiti, nigeria, bangladesh, angola, pakistan, rwanda,... on, and on -
are european neighbors abhor our ignorance, and stupidity!
we are a fascist controlled state - we have had dictator's since Jekyll island's creation that can call to arm,... endless war's without congressional approval that even russia, nor china would dare subjugate upon their proletariat - and we just sit back and wait for the other guy to make the change,... well the 'OWS' have, and i salute them as i have participated!
jmo
That was a brand new tire!
http://youtu.be/CqUZ04UWRk4
We should start a "Fanatasy Bank" competition around here. Too bad there's no off-season to bilking the American people.
When Congress passed the No Child Left Behind Act in 2001, no one expected it would create a perfect safety net.
My niece's grammar school stopped teaching spelling because it wasn't going to be part of No Child Left Behind testing. The parents flipped out and they actually had to fight with the Board of Education to have spelling reinstated.
i hate fuking banksters
that chart is really a sad commentary on the anti-trust laws and the requlatory process. you can see where the mergers started just before glass-steagall was repealed in 1999, in anticipation of the sucessful lobbying efforts
if we were to examine the crime scene we would find several sets of fingerprints: greenspan, clinton, rubin, graham, leach, bliley. there are youtoobs of the bill signing! sandy weil wanted citi to bag travellers and got the merger approved in '98, before it was legal! rubin resigned the Treasury a few days before the bill was signed which was "spun" as maybe him not approving of the merger & the new "law", then he landed the chairmanship of the citi executive board with a $40 million yearly salary. what a country!
we are freaking doomed!
Just read this on Bloomberg. Any feedback on the Author?
http://www.bloomberg.com/news/2011-11-08/mf-signs-death-warrant-for-shor...
obviously a troll
Markets are nothing more than a Casino. The house always win's. I wouldn't be in the markets right now anyway. Israel is about to bomb Iran with US help. Middle East will go Ape Shit. I'm waiting to see what will happen in the next 3 weeks.
think -- america has never seen, or felt the devastation of a world war or conflict on its soil - can you imagine when, an if that day comes,... with the wmd's we've got stock-piled on our very soil, as do the myriad of enemies we've accumulated over the last century - such, pent-up anger -
think
THERE CAN BE ONLY ONE
In the old days businesses could be granted a charter from the King, giving them exclusive rights over markets and access to restricted goods, in other words monopolies with vertical integration. That is what TBTF is: a chartered company that need not compete since it has been granted exclusive access to taxpayer money, legal cover and immunity from accounting practices.
The economic model which we now have in practice (not theory) in the US is state sponsored private enterprise, which is a form of light fascism. As the trend extends, deepens and becomes accepted practice there is the danger that we get authoritarian centralized power to enforce the rules on citizens without political connections. And undo 235 years of freedom.
hey, C_E!
you have that exclusive appointment to blog here from HRH The Prince of Whales, right?
Legally, the last thing we need to know is that some people are, and some people are not, having money impounded after a comingling event. No legal system involvement in a crime. All the money was co mingled, there is thus no way to know who's was stolen.
Someone is choosing who profits, and who tanks. No judge has been named or suggested overseeing this. I wonder when they will create a court order backdated to the liquidity crisis allowing the law to be trampled? Looks like a national security issue here folks. Only way you can get so many crimes in the same room.
Which judge? Does it matter?
http://news.yahoo.com/judge-oks-410m-settlement-bank-america-214423478.html
Compatishun, bitchz.
This article succinctly captures the neglected reality in one sentence. “If anything was really too big to fail, there would be no need to label it as such because it would be self-evident”. Strange that no concerted effort to challenge government’s apodosis in Too Big To Fail, and the contention of it being the only path to salvation ever resulted in “meaningful debate,” prior to intervention. Although not adjusted for inflation, an ounce of prevention is worth a pound of intervention. We are all about to witness an excellent teaching in Newton’s laws physics, more specifcally the laws of gravity and objects in motion verses an inept attempt in delevering perpetual motion. More later… first I need to grab a government student loan prerequisite to obtaining a PhD (piled higher and deeper) in economics and become educated far beyond my ability to understand.
The US will very foolishly throw all it's wealth into trying to maintain the status quo, when the reality is written on the wall. These corporations are doomed in the long term. Pity Americans have become too dumb to read.
http://www.amazon.com/Simple-Wealth-Mr-Andrew-Costello/dp/1463523017/ref
every empire crubles because of the financial cost of it's army trying to keep their borders intact.
dinosaurs coming watch out
that only covers the retail side. most of the tbtf risk is coming from the IB divisions. where's salomon brothers, bear and stearns, lehman?
FOUR horsemen of the apocalypse
talking about FOUR
who knows -- that there are:
4 surviving Mayan books
4 Vedas
4 canon Christian gospels - Matthew, Mark, Luke, and John
4 Nations of the UK
4 Yugas (India)
4 - Aztec Calendar," it is a symbolic portrayal of the four disasters that led to the demise of the four prior Universes in Aztec cosmology
4 main traditions of Tibetan Buddhism
4 = Death in Chinese
4 rivers in Garden of Eden
4 human blood groups A, B, O, AB
4 nucleobase types in DNA
4 "races" of man - black, yellow, white, brown
4 Arch Angels in Islam are: Jibraeel (Gabriel), Mikaeel (Michael), Izraeel (Azrael), and Israfil (Raphael)
4 Tetragrammaton is the four-letter name of God.
4 food groups (Meat products, dairy products, grain products, and fruits/vegetables
4 crown princes of Hell
4 Noble Truths of Buddhism
4 seasons
an exercise in pattern finding, or something more...who wants to see the big picture? It's a right-brain exercise....
There is no such thing as creative destruction. It's a fascist fantasy.
Glass-Steagall