Anyone who is not serious about fixing Too-big-to-fail and thinking about the implications of big banks and their size is not serious about reform. Just plain not serious.
Surprise: Hedge Fund Managers made a killing last year with help of Treasury. Shows that big investors perceive Wall St. as a game of people’s lives, the sneaky win the money and the outcome for regular people is inconsequential. April 1 joke is always on us.
Top from left: David Tepper, George Soros, James Simons, John Paulson, Steve Cohen; Bottom from left: Carl Icahn,
At least the notion of TBTF is gaining traction and the word on the street is that more insider people are going to attack size. “Speeches by central bankers tend to be dry affairs. For this reason alone, remarks by Andrew Haldane, the Bank of England’s executive director in charge of financial stability, deserve attention. In a discussion about bank size, he made reference to the limits of Facebook friendship and the structure of Al Qaeda. Rhetorical flourishes aside, Mr. Haldane delivered a serious message: regulators are thinking increasingly radical thoughts about tackling big banks.”
Geithner says “it’s “deeply unfair” that some financial institutions that got taxpayer-paid bailouts are emerging in better shape from the recession than millions of ordinary Americans.” Well, we have a sense that he might push harder now that health care is over in Congress. He should have some leverage to go after size and if he doesn’t, he’s not being sincere about fixing the disparity.
To know who else is not serious about the interests of a safe/fair/prosperous economy, look at who is in bed with Wall Street. This is a great article that chronicles Wall Street’s “best hope” (Clinton and Obama have chummed up with them in the past too):
Republicans are stepping up their campaign to win donations from Wall Street, trying to capitalize on an increasing sense of regret among executives at big financial institutions for backing Democrats in 2008.
In discussions with Wall Street executives, Republicans are striving to make the case that they are banks’ best hope of preventing President Barack Obama and congressional Democrats from cracking down on Wall Street.
GOP strategists hope to benefit from the reaction to the White House’s populist rhetoric and proposals, which range from sharp critiques of bonuses to a tax on big Wall Street banks, caps on executive pay and curbs on business practices deemed too risky. [Wall Street Journal, 2/4/10; emphasis added]
More Lies from Obama? by ANWF member, Nate Powell
Last week, Obama announced a surprise head turner: had the sane voices of reason represented by Paul Volcker prevailed over the loot-the-riches Robber Baron Larry Summers and his crackpot team from Chicago? Or, could this possibly be too good to be true given Obama’s proven knack for saying what we want to hear, then going in a completely opposite direction. This has been true in the past, so, for our protection, let us vet his proposal before giving it consideration. Obama needs to be pushed in the right direction since he seems so prone to manipulation by the wrong crowd… so it is imperative that it is we the people that do the pushing.
As the recent Scott Brown electoral victory shows, Americans are sick and tired of Wall Street giveaways as the national priority. Geithner himself gave approval for the 100% payout on collateralized debt obligations (CDOs) and credit default swaps (CDSs) to Goldman Sachs, and the personal OK to hide it from the public reports, as the latest press reports indicate. Independents and liberals voted Republican to send a message to the Democratic “leadership” that we’re tired of betrayal.
The leadership is unfortunately blind to reality and is suicidally pressing forward with more irresponsible schemes. Take for example the recent agreement reached where Obama will create, by executive order, a panel whose duty will be to make cutbacks to our standard of living. I’m not making this up. Recommendations will then be voted on as an entire package, with an up or down vote, and will be impossible to amend. Sniff, sniff, do you smell that? Smells like our constitution is burning away. So, instead of cutting off the bailouts and taking the money back, President Obama is going to propose that we continue feeding the vampires on Wall Street. Talk about going off the deep end.
The answer is not draconian austerity; the answer is to leverage the power of our (still) sovereign currency and create loans for improvements to the physical economy, instead of the near zero interest loans given to large banks specifically to buy the near worthless “toxic assets” called derivatives.
Derivatives are instruments that derive their value from other things, such as mortgages, as in the famous “mortgage backed security,” or commitments from institutions, such as CDOs and CDSs. They are basically valueless in and of themselves, but were used by banks to claim as assets upon which they used as collateral to make other leveraged financial “investments” like when the speculators drove the price of gas up. See, the banks have really bankrupt all along, but they have used derivatives to hide it. When the house of cards came falling down, they ran to the taxpayer to bailout their little scheme, so they could start all over again… Now instead of rebuilding the nation and the world, they continue to trade derivatives. Talk about a waste of time and money. Rome is figuratively burning while the bankers trade worthless “assets” on the public dime.
Meanwhile, the still somehow prevailing delusion is that the speculators must be protected! Why do we even need to protect them at all? The Federal Reserve Board, Inc. created trillions of dollars in loans to trade for these financial instruments at nearly 0% interest. Their measures have allowed the big banks to “earn” so much profit at taxpayer expense under the various bailout programs. Let’s instead use the awesome power of money creation to create trillions of dollars in loans for fantastic new technology and infrastructure for the nation and the world. We can eventually wipe poverty, hunger, and disease out of existence if we can make this decision. We’ll build a real recovery so we don’t need to make austerity cuts like those that were forced upon Haiti, for example, by the IMF.
The Four Disingenuous parts of the Obama/Volcker Proposal
Smokescreen #1, More gambling with your money in tow: An article in the Financial Times explains why Obama’s putative “war on Wall Street” is no threat to the Casino Economy. As concerns “proprietary trading,” banks will be able to continue proprietary trading related to their customers’ business (i.e., on behalf of their customers). “Glass-Steagall [Act] largely banned proprietary trading with certain exemptions for safety and soundness concerns. The trading, in which a bank buys and sells stocks and other securities from its own account, led to big profits at institutions after Gramm-Leach-Blilely allowed the transactions…. But implementation of Obama’s plan for proprietary trading could be messy since banks often conduct trading on behalf of clients from their own account.”
The Economist says, “Commercial banks may be unfazed by curbs on trading. Most have already pared their prop-trading desks. JPMorgan Chase derives a mere 1% of its revenues (and 3-5% of its investment bank’s) from such business. But having to divest Highbridge, a big hedge-fund firm, would be “horrible”, says a JPMorgan insider. The bank thinks that may not be necessary since its capital is not invested directly in Highbridge’s funds. But no one is sure.”
Smokescreen #2, Risky bets will continue: While banks would be forced to spin off or close proprietary trading desks, they could continue to take risky bets on their own account as part of market-making activities, as counterparties to derivative and structured credit products demanded by clients, and in securitization activities. As the Economist goes on, “Enforcement could be tricky, too. Regulators will struggle to differentiate between proprietary trades and those for clients (someone is on the other side of every trade) or hedging. Getting it wrong would be counter-productive: preventing banks from hedging their risks would make them less stable.”
Smokescreen #3, Cover-up for investing in hedge funds: Prohibiting banks from investing in hedge funds means nothing: banks would still be able to lend to hedge funds and private equity funds — and could structure these loans in ways that mimicked equity participation, in much the same way as shariah-compliant securities provide debt-like exposure without violating Islamic prohibitions on interest. The Economist says, “Nor would they be able to engage in “proprietary” trading—punting their own capital—though they could continue to offer investment banking for clients, such as underwriting securities, making markets and advising on mergers.”
Smokescreen #4 No real break up plans: According to Simon Johnson,
“The White House background briefing is that their proposals would freeze biggest bank size “as is” — this makes no sense at all. The Bush and Obama administration’s solutions to banking failure was to federally subsidize the already behemoth banks, and encourage them to eat their competition.
Twenty years of reckless expansion, a massive crisis, and the most generous bailout in human history are not a recipe for “right” sized banks. There is a lot of work the administration hasn’t done on the details — this is a classic policy scramble, in which ducks have not been lined up. But we should treat this as the public comment phase for potentially sensible principles — and an opportunity to propose workable details. The banks are already hard at work, pushing in the other direction.
It’s a big potential policy change, and my litmus test is simple – does it, at the end of the day, imply breaking Goldman Sachs up into 4 or 5 independent pieces?
The same Economist article says, “Moreover, the plan is unlikely to help much in solving the too-big-to-fail problem. Even shorn of prop-trading, the biggest firms will still be huge (though also less prone to the conflicts of interest that come with the ability to trade against clients). As for the new limits on non-deposit funding, officials admit that these are designed to prevent further growth rather than to force firms to shrink.”
John Carney notes “The banks are hesitant to speak out in any official capacity, although Goldman Sachs did say they thought less than 10% of their business would be affected. How is this going to really going to break up the banks?
This caused one executive at a competitor to scoff: “Goldman thinks it can still be Goldman, huh? Well, if they’re right, nothing changes. But I’m not sure Obama really can get away with leaving Goldman untouched,” the person scoffed.”
What actually needs to be done
Banks that we deposit our money into should be commercial banks, and do things that commercial banks do, you know, like lend commercially to the community. I don’t see any need for banks larger than community and regionally sized banks. The big national/international banks don’t know how to address the needs of the community. Roosevelt’s Glass-Steagall Act was banking modernization. The 1999 “Banking Modernization Act” was demodernization.
In order to achieve this, first, the scoundrels surrounding the President must be removed. This includes Summers, whose removal along with Geithner, Bernanke, Orszag, and the Emanuel brothers will probably be the first step away from careening over the edge of a pit of no return. This is essential because they will vehemently oppose what reforms that must be done. The President is apparently not capable of thinking for himself. We must therefore remove all corrupting influences whispering into his ears. We must completely split commercial banks from investment banks so banks will return to traditional banking activities, such as making investments in the community, in the physical economy. They may presently make more profit risking our deposits as leverage to speculate rather than produce. This is why we must separate them– in order to remove the temptation and turn them yet again into good servants of our communities.
Wealth is in production, not paper. Speculation produces no true wealth. Yet, strangely, investment banking functions are valued over commercial lending. This activity actually threatens us all because it dries up credit for the real economy– the place where we all live and work. This is why we need a true return to Glass-Steagall, because it will largely eliminate the derivative trade which is toxic to growth of the real economy.
Most of the credit in the world is now controlled by the big banks, thanks to the Bush-Obama bailout. This credit is being tied up by these toxic investment banking activities, like derivative trading that is actually counterintuitive to the health of the real economy, and there is little leftover for any traditional banking functions. Either we force Obama to implement the true Glass-Steagall and really break up the banks, or it’s the austerity panels for all of us.