Too big to Fail?

Dallas Fed president Richard Fisher, who’s otherwise known as a conservative budget hawk,
has embraced the radical cause of breaking up the nation’s largest banks and forever ending “too big to fail.”

In its annual report for 2011, issued on Wednesday, the Federal Reserve Bank of Dallas released a startling report revealing that 52 percent of all the assets held by the entire banking industry have now become aggregated into the hands of just five companies, and
the top 10 institutions have swollen so large that they possess wealth
that equates to roughly half of America’s annual gross domestic product (GDP).

BUST THEM UP!
Link

I don't think breaking banks up is a good solution. The assets banks hold is what make them secure. By making those assets smaller by breaking the banks up, you're only going to decrease consumer confidence (what's left of it).

I think you'd be better off going down the path of tougher regulation and tighter scrutiny of procedures within the banks. Whether it's self regulation or government regulation would be up to the people I suppose, but you live in a country that espouses the notion of less government.

The irony is that it seems everyone cries foul and wonders why the government didn't fix it when something goes wrong.

Actually, the size of the banks is what allowed them to successfully pressure Congress to allow them to have far too few assets to be secure.

Ideally, you would be correct that size would give stability. But banking culture is so screwed up now that the largest banks are more leveraged than a small-time bookie, and all their size does is make sure that everyone is hurt if they make a bad bet.

I really liked the following from the pdf article which followed the original link (emphasis my own):

wrote:

An unfortunate side effect of the government’s massive aid to TBTF banks has been an erosion of faith in American capitalism. Ordinary workers and consumers who might usually thank capitalism for their higher living standards have seen a perverse side of the system, where they see that normal rules of markets don’t apply to the rich, powerful and well-connected.


Here are some ways TBTF has violated basic tenets of a capitalist system:

Capitalism requires the freedom to succeed and the freedom to fail.
Hard work and good decisions should be rewarded. Perhaps more important, bad decisions should lead to failure—openly and publicly. Economist Allan Meltzer put it this way: “Capitalism without failure is like religion without sin.”

Capitalism requires government to enforce the rule of law. This requires maintaining a level playing field. The privatization of profits and socialization of losses is completely unacceptable. TBTF undermines equal treatment, reinforcing the perception of a system tilted in favor of the rich and powerful.

Capitalism requires businesses and individuals be held accountable
for the consequences of their actions. Accountability is a key ingredient for maintaining public faith in the economic system. The perception—and the reality—is that virtually nobody has been punished or held accountable for their roles in the financial crisis.

The idea that some institutions are TBTF inexorably erodes the foundations of our market-based system of capitalism.

I could not agree more about the importance of accountability and how the lack of it has turned the management of big financial institutions and other major corporations into a free for all.

Communist systems of government suffer from a this same failure of responsibility. If a nationalized business is inefficient and fails to produce, who cares? The government will simply pour increasingly worthless yen (as in the case of China) onto the problem as Government supported banks prop up everything from construction companies that are unable to build a viable national infrastructure to manufacturers turning out contaminated baby formula to corporate polluters who pour so many toxins into the air over Beijing that birds fall dead from the sky.

Capitalist countries are supposed to be better than that. Yeah, right.

It's all a part of the continuum of government sponsored disasters from small to large which seem to be occurring in countries all over the globe. The fat cats get pay raises, stock options, or at worst; golden parachutes - all as a reward for their greed, irresponsibility, and inability to run so much as a lemonade stand, never mind an outfit like Goldman Sachs.

The rest of us are still struggling with high unemployment, low wages if we are lucky enough to still have a job, and a highly uncertain future.

"Too big to fail" is simply Orwellian double-speak, not a viable governmental policy. :mad:

SamIam;802854 wrote:

Communist systems of government suffer from a this same failure of responsibility.

Absolutely.

Well, under Stalin and the NKVD, if the train's bearings wore out, they shot the engineers for sabotage.

Of course, the trains bearings wore out because the commissars forced the engineers on pain of death to overload them ...

SamIam;802854 wrote:

I could not agree more about the importance of accountability and how the lack of it has turned the management of big financial institutions and other major corporations into a free for all.

Communist systems of government suffer from a this same failure of responsibility. If a nationalized business is inefficient and fails to produce, who cares? The government will simply pour increasingly worthless yen (as in the case of China) onto the problem as Government supported banks prop up everything from construction companies that are unable to build a viable national infrastructure to manufacturers turning out contaminated baby formula to corporate polluters who pour so many toxins into the air over Beijing that birds fall dead from the sky.

Capitalist countries are supposed to be better than that. Yeah, right.

It's all a part of the continuum of government sponsored disasters from small to large which seem to be occurring in countries all over the globe. The fat cats get pay raises, stock options, or at worst; golden parachutes - all as a reward for their greed, irresponsibility, and inability to run so much as a lemonade stand, never mind an outfit like Goldman Sachs.

The rest of us are still struggling with high unemployment, low wages if we are lucky enough to still have a job, and a highly uncertain future.

"Too big to fail" is simply Orwellian double-speak, not a viable governmental policy. :mad:

[SIZE="1"]I'm Urbane Guerrilla and I approve of this message.[/SIZE]

... and the seventh seal is opened.

Hee hee.

Wait, WHAT????



Dogs and cats - living together!

PBS Frontline, in a tradition of reporting facts often before most here have even heard them, has again reported on Money, Power, and Wall Street The first two of a four hour report is one of the best explanations of the corruption that created this recession - to enrich only the rich.

For example, CDO (or credit default option) is powerful tool to protect institutions from excessive risk. A tool to address what is most important and only relevant - the product. But as originators of CDOs realized, their instrument eventually was perverted into a tool to enrich the most corrupt and scam the naive. IBK Bank is cited as a perfect example.

These instruments were easily sold by and to people who were also some of the poorest students when you were in school. So that the public would only lose money. Bankers, stock brokers, etc typically enrich themselves - screw the counterparty. And call that acceptable. If they were not bankers, some probably would be bank robbers. Even JP Morgan, who invented the instrument, realized the problem and resulting corruption. And stopped selling this monster. See the people who invented the CDO discuss it.

Are derivatives and credit defaults evil? They are and are not. Anyone who knows in terms of good and evil is part of the problem. These instruments have important purposes. But since bankers are driven by wealth (rather then the purpose of bank), then these finance instruments almost caused a 40% world wide unemployment. CDOs are both evil and productive. You should know why. That means learning details. And ignoring sound bytes. Why do we have a Tea Party? People who would rather remain uneducated are even purchased by the corrupt on Wall Street. Its not hard when a party is based in staying dumb; not learning the details.

If you have any recommendation or criticism of the world financial system, then Frontline is a must watch. To have any opinion without details makes one just as evil. The show will be repeated often. And can be watched on the internet.

BTW, Frontline in four episodes also exposed the lies that justified Mission Accomplished and Shock and Awe. So many so hated the American soldier as to remains uneducated when even Frontline exposed the myths. Anyone who hates the middle class and themselves (or can be manipulated by Rush Limbaugh) also will avoid these episodes.

A bottom line remains. If deceived or foolish, then one thinks the purpose of a company is profits. Only mafiso types believe in profit – screw everything else. Corruption, openly advocated by George Jr and his wacko extremists, created this recession. The rich as still getting richer because so many do not even know these details. So many only parrot political spin.

Details behind this corruption are explained in interviews with people who were complicit in and enriched themselves. Why could Eastman Kodak get so much money from Wall Street when Kodak was only creating a buggy whip business? Money, Power, and Wall Street. A story of investment bankers, stock brokers, bond traders, derivative salesmen, sub-prime loan officers - greedy people whose wealth comes from scamming. Everyone should understand these details – how it works. How we all suffer a lower standard of living because these finance people enriched themselves by supporting an unproductive Kodak. To even do same even to European communities. To not understand means one remains an accessory to an ongoing crime.

Another fundamental fact. Financial instruments (CDO, derivative, etc) should be exchanged in open markets. Banks are now spending massively to continue hiding their scams. Bloomberg News had to appeal to the Supreme Court to discover and report this reality. Because banks want everything to remain secret. Even have the Tea Parry and wacko extremist Republicans supporting them.

During George Jr’s tenure, the nation’s largest banks were borrowing $trillions from the Fed to remain solvent. Sometimes borrowing $100billion a day. Banks played money games so their spread sheets reported mythical profits. New laws made this scam easier - hid the loans. Because deregulation was the political spin to encourage corruption. Same people were so corrupt as to even want Social Security invested in stock markets.

Many of the ‘too big to fail’ banks were on the verge of bankruptcy throughout a large part of George Jr’s reign. When political spin somehow was knowledge to so many.

Excellent show by Frontline, all 4 episodes can be seen online.

Capitalism requires businesses and individuals be held accountable
for the consequences of their actions. Accountability is a key ingredient for maintaining public faith in the economic system. The perception—and the reality—is that virtually nobody has been punished or held accountable for their roles in the financial crisis.

I almost agree with this. Unfortunately, though, some people have been punished for their roles in the financial crisis. It's just on the whole they weren't the financiers.

Capitalism requires the freedom to succeed and the freedom to fail.
Hard work and good decisions should be rewarded. Perhaps more important, bad decisions should lead to failure—openly and publicly. Economist Allan Meltzer put it this way: “Capitalism without failure is like religion without sin.”

I can't agree more, which is why the auto industry should never have received a bail out with tax payer dollars. The taxpayers are out billions on that deal.

DanaC;809797 wrote:

Unfortunately, though, some people have been punished for their roles in the financial crisis. It's just on the whole they weren't the financiers.

Who in the US was prosecuted? I must have missed that. :/

I said punished, not prosecuted.

TheMercenary;809822 wrote:

The taxpayers are out billions on that deal.

And then we add reality. The taxpayers made a small profit.

DanaC;809927 wrote:

I said punished, not prosecuted.

How do we punish someone who was making over $10million annually by selling stocks? And who pay almost no taxes? Fine them $1million? In the Money, Power, and Wall Street, even those who freely talked about the scam could not or would not say how much money they were paid. What was once public knowledge is now required (in contract) to be secret.

We had this argument about a decade ago between Lookout123 and me. He was recommending mutual funds mostly on spin and image. I cited the massive fees paid to stock brokers by investing in funds; due to fees and that typically underperform the market. I even noted a superior investment tool for the most naive - now commonly known as Exchange Traded Funds. But many here only understood what Wall Street was promoting. And foolishly put their money into mutual funds.

Others did the same thing with adjustable rate mortgages and credit card balances.

Some numbers. One analysis recently reported a mutual fund investor paid his stock broker and financial consultant who does almost nothing about 14% of his profits. An ETF investor paid something like two or three percent. And those who purchased stocks recovered almost 100% of his profits.

Punished were so many investors who still do not even understand that enriching the rich (tax cuts for the rich) destroy jobs. That reality is contrary to sound byte logic. Therefore many do not understand they are being punished for being complicit. This recession is traceable to so many who believed those lies. Many even wanted to put Social Security into the stock market. Everyone should remember those discussions.

So who got punished? The PBS series Money, Power, and Wall Street includes what I was discussing here over a decade ago. The people who got punished are the many who listened to Wall Street or the popular urban myths (ie a mutual fund investors). Who foolishly believed the purpose of a company (and the mafia) is its profits. As I have been saying here for decades: the purpose of every company is only its product - the advancement of mankind. Those who understood that were much less harmed or even earned a small profit during the recession.

I even cited examples of the problem by name even a decade ago - ie General Motors.

Of course the most corrupt got off and are now being protected by more urban myths from the easily brainwashed; such as the Tea party. Massive regulations are needed. We now have in politics people who want America to fail. So they stifle and attack regulations using ridiculous reasoning based only in a political agenda or Limbaugh logic. They continue to protect those most complicit. We can never over regulate finance people despite a political agenda that is still hyping deregulation and enriching the rich.

Most punished are those who most make this possible by listening to sound bytes rather then learn obvious facts. Economics takes revenge even on those so foolishly parrot that lower taxes for the wealthy will create jobs. We knew from the Kennedy Tax cuts that stimulus eventually causes economic harm. We know see what the George Jr stimulus did - history repeats itself. But ten years ago, those who are now punished listened to sound bytes. Even foolishly believed "Reagan proved that deficits don't matter." Punishment has been dealt.

The people who've been punished are the thousands of families who've lost their homes.

DanaC;809985 wrote:

The people who've been punished are the thousands of families who've lost their homes.

When a nation plays money games, then economics takes revenge. Someone kept saying that back when the economic games were being proposed. The leadership said "Reagan proved that deficits don't matter." If a majority were thinking logically, then the entire nation would have risen up in anger back when the problem was being created by a liar and his front man. Instead, those so many homeowners did what extremists wanted. They responded like lemmings.

And so they got what must happen. Economics took revenge.

When the same leaders said Saddam has WMDs, then those homeowners should have remembered that Nixon did the exact same thing. Lies in 1968 meant people lost jobs and homes in 1975-1979. History repeats.

George Jr lied about Mission Accomplished. Played money games. Even ‘Mission Accomplished’ costs were not put in the budget to hide those costs. Didn't Ross Perot say if he did the books that way, then he would be in jail? Of course he did. Instead homeowners remained ignorant and silent. They got what history says must happen. Economics has now taken revenge.

Anyone who remains uneducated is an anti-American. If you do not learn from history, then expect to relive the lessons of history. The uneducated person is quickly identified – a disciple of Fox News, Murdoch, and Limbaugh. They wait to be told how to think

Nothing is fair in reality. Either one learns, is educated, demands numbers, and is therefore a patriotic American (or Brit). Or one wants Limbaugh, Murdoch, et al to tell them how to think. That is the Tea Party. Wacko extremists tell the Tea Party to keep doing only what created this mess. Especially enrich the rich with massive tax cuts.

It could have been worse. We could have listened to wacko extremists who even advocated putting Social Security in the stock market. Then the number of lost homes would even be higher.

We got lucky. History says what we did to create the 2007 stock market crash should have resulted in 40% job losses by 2012. No way around a history well documented in economic history. Fortunately cooler heads took over in 2008. Did not make the mistakes of 1929. Now we have at least a decade of reduced living standards to fix a mess intentionally created by wacko extremist in the first 2000s.

Anyone can learn from this. Frontline even put their four hour report on-line. The same persons learned from four Frontline episodes ten years ago to see through WMD myths. If you choose to be a patriot, then you learn much from those four hours.

Appreciate why literally every major Senator and Congressman came out of Pelosi's office white faced and shaken. That was when I knew it was time to sell all investments. We literally came that close to losing the economy. A 40% loss of jobs is what economics does when bean counters rather than product people run an economy.

More examples of why homeowners must lose homes. So many Americans remain so uneducated as to even believe Saddam had WMDs. Not one fact said so. Or that global warming is a normal terrestrial cycle. Or that stem cell research is evil. Or that a Man to Mars is desirable because it creates a bigger penis. That Catholic and fundamentalist doctrine should be imposed on all Americans. Or that we need a Navy larger than the next 13 combined. Or that ... well how many more examples need demonstrate why so many Americans get punished when they let dumb political pundits talk a myth: liberal vs conservative. Reality is always wacko extremism vs moderates.

One moderate was very outspoken when these problems were being created. Expressions repeated. "Reagan proved that deficits don't matter." Deja Vue Nam. Anyone can fix an economy by requiring everyone to replant their lawn every year. Only innovation (not money) creates real wealth, jobs, economic prosperity, new markets, new products, etc.

So many still say the purpose of a company is profits - because mafioso on Wall Street, etc still have so many brainwashed. Therefore many must lose their homes. Economics takes revenge.

"Reagan proved that deficits don't matter." How many were educated and moderate enough to know that was a complete lie? And yet a majority remained silent. "Saddam has weapons of mass destruction." Where were the majority who looked at facts and numbers. Then said it was a lie. How many so advocated hate - remained silent - when George Jr all but protected bin Laden. He dismantled Alex Station whose only purpose was to get bin Laden. Our extremists here were repeatedly challenged to post this question: “When do we go after bin Laden?” They refused because it was contrary to a political agenda.

That ignorance and silence: just another reason why economics takes revenge.

The term Deja Vue Nam was posted when someone said they were lying $2billion for ‘Mission Accomplished’. Try $400 billion. Then wackos blew that away by created an insurgency. It cost well over $1000 billion. How many more homes must be lost? At least everyone can now learn from history when some president makes then same lies 30 years future.

Nixon did it in 1968. The resulting economic calamity is seven plus years later. Americans were punished by economics in 1975-1979 for remaining silent and uneducated. The world's third largest industrial base was sold to pay for Nixon's lies. Welcome to how economics work. Loss of homes: an example of how economics takes revenge.

Learn from history. 30 years from now, people will be advocating the same 'money game' lies again. Then ecomomics will again take revenge.

Frontline made another of so many 'we must all know' points. When the economy is healthy, A banker or financier's income is equivalent to that of utilities. After all, a finance person is only doing with money what utilities do with gas or electricity. Economic calamity - 1929 and 2008 - was preceeded by the finance people making more money than engineers or doctors. Just another lesson from history known only to those who are starved for facts with numbers - "Money, Power, and Wall Street".

Extremists in Congress have been trying to pass a bill to remove restrictions on trading of derivatives. Extremists pundits (ie Limbaugh) have been promoting this claiming that jobs will be lost if we do not enrich the rich.

"Money, Power, and Wall Street" quoted CDO creators (in JP Morgan) as realizing CDOs had become dangerous. So they stopped trading them ... in New York. Meanwhile, the business school concept of "profits no matter what" was fully ongoing in JP Morgan's London operations. It lost $2billion. Leaving everyone wondering how many more operations are still operating only for profits. Since JP Morgan must publically admit to all such trades in July, apparently they decided to admit early. Hoping that the fallout would be minor. To pretend to be honest.

It did not work. Due to public condemnation, Jamie Dimon fired three top executives. And decided it was better to admit to being an American criminal by implying blame on those executives. How Nixonian.

Too big to fail means banks this large must be heavily regulated - in direct contradiction to George Jr’s supporters and Tea Partiers in Congress.

Is there any major bank not exposed as outright corrupt? The only one I know of is Wells Fargo - maybe.

Meanwhile banks such as Goldman Sachs are claiming reduction in America's GDP (of between 0.15% and 0.5%) if derivatives are regulated and traded on open markets. Because trading on open markets means bankers might earn what bankers should earn – wages found in utility companies.

Some basic facts remain obvious. A company (or person) who says, “The purpose of a company is profits” will cause or encourage such scams. Financial instruments must be traded in open markets. These major transactions done 'opaque' are why we almost had 40% unemployment in 2012.

Unfortunately many political leaders are bought and paid for by bankers, Most of them are Republicans. Wall Street, etc want all transaction in private - opaque. So that regulations and free market forces can be subverted for their own self serving benefit. Big banks must be heavily regulated due to a corrupt philosophy. That the purpose of a company is its profits.

Why did we almost have 40% unemployment? Free markets were completely unaware how massive and corrupt the opaque transactions were on Wall Street. Even sub-prime mortgages were only one small part of world wide corruption to enrich the elite at the expense of all others.

Why did JP Morgan lose another $2billion? To understand starts with four hours of "Money, Power, and Wall Street". Those $2billion simply demonstrate again what should be obvious from that PBS documentary and other well understood concepts. Concept that most of us were told are too complex – when it was only simple and fraudulent. Concept that only exists because so many of us still foolishly think the purpose of a company is its profits.

classicman;802825 wrote:

BUST THEM UP!

I don't know man.... Not sure that is the best approach. Now letting them go bankrupt, that is another issue, not bailing them out as they fail? Hell yea, but if they can do the right thing and keep the economy rolling forward, eh, I am not sure....

but if they can do the right thing

When is that going to start? We've got mountains and years of proof they won't.

Keep holding your breath. I'll call 911 in 6 minutes.

A commentary from Barry Ritholtz on 19 May 2012 in the Washington Post:

JPMorgan's debacle, and its parallels to AIG
Finance has become a low-margin, high-leverage business. This is not surprising in an environment in which trading volumes are exceedingly low and interest rates even lower. In any other industry, a slowdown in economic activity sends management scurrying to cut costs, develop new products, become more productive. In short, to innovate. Companies can throw money at new products, marketing campaigns or discounted pricing, but a slowing economy brings down demand. What we have today is a deleveraging economy, and that is even more challenging - limiting the options that CEOs can take to increase their company revenue.

The world of finance refuses to accept that reality. Whenever Wall Street is confronted with a decrease in profits, we see the same response: Increase leverage. We usually don't hear about it until some market wobble causes the excessive leverage to blow up in someone's face. This time, the novelty cigar was smoked by Dimon, and the damage was inflicted on his reputation. The losses, we learned, were a "mere" $2 billion, described as manageable. ...

One thing that makes the JPMorgan trade look especially foolish is that it's nearly the same sort of recklessness that AIG exhibited: selling derivatives against zero reserves. As Doug Kass, who heads the hedge fund Seabreeze Partners Management, explained: "Under the knowledge of Dimon, the JPM investment office sold massive amounts of CDS [credit-default swap] premium on large U.S. corporations in 2011. Like AIG, they accumulated a large amount of reported profits in the three-year period ending 2011. In an equally familiar manner, the principals of the London investment office were handsomely rewarded. And so was Dimon."

Gee, why does that sound so familiar?

So how long did it take after AIG blew itself up selling derivatives until some trader came up short making the same reckless bet? Less than four years.

The parallels to AIG continue to mount, including on the JPMorgan risk management committee. Astonishingly, Ellen Futter, who was a director at AIG, was also on the risk management committee at JPMorgan. It's unclear what you need to do to get kicked off that committee, but the directorial equivalent of steering the Titanic into the iceberg apparently won't do it.

We can never over regulate people who foolishly and destructively think the purpose of a company is profits.

When finance is making America strong, its executive are paid just like any other utility executive. Finance companies move money for the same reason electric companies move electricity and water companies move water. So that other companies can innovate, create jobs, increase wealth, create new markets, and innovate.