Monthly Archives: December 2012

William Dudley Speech: “We are a long way from the desired situation”

William Dudley

Last month’s William Dudley speech on “too big to fail” started by stating that “we cannot tolerate a financial system in which some firms are too big to fail” and he add that “we are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society.”

Some people might write Dudley off completely because he’s the president of the NY Fed and too closely connected to Wall Street (which he is), but this speech has a lot of smart ideas, as well as an open admission that breaking up the megabanks may be one good answer to solve the problem of TBTF going forward.

What’s most important to us is that Dudley acknowledges that “too big to fail” still exists and that it’s unacceptable. He even goes so far as to state that in the financial crisis of 2007-08 “TBTF contributed to the underpricing of risk in the system and did create a bad set of incentives, and if not addressed comprehensively, would likely be an even larger problem in the future.” It’s precisely because “too big to fail” (and all it implies) has the potential to be an even larger problem in the future that we’re fighting for people to switch to a local lender. You can help end “too big to fail” by switching.

Here’s an excerpt, speaking of the problem of “too big to fail”:

The problem has become more significant since that time for several reasons. First, the biggest financial institutions have become much larger, both in absolute terms and relative to the overall size of the banking system. This reflects many factors including the end of prohibitions on interstate banking, the repeal of the Glass-Steagall Act restrictions separating investment from commercial banking, the rapid growth of the capital markets, and the globalization of the economy—all of which created intense competitive pressures to expand in order to gain economies of scale and scope. …

Second, the complexity and interconnectedness of the largest financial firms increased markedly. Factors behind this include the adoption of a universal banking model by some commercial bank holding companies and the rapid growth of trading businesses, especially the over the counter (OTC) derivatives market. In the early 1980s, there were no true U.S. “universal banks” that combined traditional commercial banking with capital markets and underwriting activities. By 2007, there were several operating in the United States, including Citigroup, J.P. Morgan, UBS, Credit Suisse and Deutsche Bank. Also, the OTC derivatives business in foreign exchange, interest rate swaps and credit default swaps had exploded from its start in the early 1980s. The total notional value of the OTC derivatives outstanding for the five largest banks and securities firms currently totals about $200 trillion.


5 Worst Wall Street Moments of 2012

5 worst wall street moments 2012 hsbc

The megabanks were constantly in the news in 2012, often for unpleasant activities. Here are a list of 5 moments that seemed particularly egregious to us.

1. JPMorgan’s London Whale loss: Early in 2012, a derivatives trader named Bruno Iskil lost an enormous bet and ended up costing JPMorgan Chase $6 billion. While the nature of this loss isn’t as criminal as many of the other banking scandals of 2012, it proves that a single derivatives trader can do major damage to a financial firm—despite the passage of the Dodd-Frank Act.

Why it matters: The London Whale stands out for what it symbolizes: If a firm can unexpectedly lose $6 billion from their derivatives positions, surprising even the CEO of the firm, what is to stop a single rogue trader at any of these Wall Street firms from doing even more damage in the future, damage that may eventually require another government bailout? Derivatives trades have blown up frequently in the last two decades, and the London Whale is proof that that the problem of megabanks gambling with depositor’s money isn’t fixed.

2. HSBC and drug cartels: HSBC was fined $1.9 billion for several misdeeds over the course of several years, including helping drug cartels launder money. The prosecutors found that the cartels had built special boxes to fit the teller windows at HSBC, and that the cartels sometimes pumped “hundreds of thousands of dollars in cash, in a single day, into a single account.”

Why it matters: The $1.9 billion fee is steep, but it seems like it would have made even more sense to prosecute the bank managers who were directly responsible for these cartel transactions. If a manager at a local lender were to commit these same crimes, they would likely go to jail. Why should it be different for a manager who works for a too-big-to-fail bank?

3. Libor manipulation: This year the public discovered that megabanks had been manipulating global interest rates for personal gain. The lawsuit revealed some egregious statements, with one UBS trader saying, “I need you to keep it as low as possible… if you do that… I’ll pay you, you know, 50,000 dollars, 100,000 dollars… whatever you want…” and another saying, “JUST BE CAREFUL DUDE… i agree we shouldnt ve been talking about putting fixings for our positions on public chat.” (Yes, those words were actually caught on record.)

Why it matters: Planet Money showed that during 2007-09 these megabanks manipulated the global interest rate downward to make themselves look more stable than they actually were. In addition, these lower interest rates hurt people with pensions. The real point here, however, is that the Libor manipulation harmed trust in the markets. The Planet Money article asks, “If banks will lie so casually about one of the benchmarks of the financial world, what else will they lie about?”

4. Knight Capital loss: A computer glitch cost Knight Capital $440 million when an algorithm that was supposed to do a series of trades over the course of several days ran all the trades in under an hour. The firm’s stock then fell 73%.

Why it matters: Glitches like this one from Knight Capital symbolize the possibility that crashes on Wall Street can happen very quickly, and that certain trades are outside of human control. All of this high-frequency trading allows some players to make big money when things go well, but when a computer algorithm has a bug like this and millions of dollars are rapidly lost, it doesn’t help the public trust the markets. What’s more, this Knight Capital loss means that there’s the possibility that another, much larger flash crash could lay in the future unless the system changes.

5. Mortgage settlement for megabanks: Five megabanks—Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Ally Financial—faced a collective $25 billion settlement over charges that they “routinely signed foreclosure related documents outside the presence of a notary public … without really knowing whether the facts they contained were correct.”

Why it matters: When specific lenders at megabanks are caught breaking the law, then those specific lenders should be prosecuted.  If a banker at a small bank would likely be prosecuted for breaking the law, why should a banker at a megabank be immune?

These five moments represent why “too big to fail” has failed. The megabanks make enormously risky decisions that compromise the integrity of the financial system and have the potential to spill over to the taxpayer.

Do you agree with the list? What would you add?

Flickr image above from Will Survive

See our previous posts on HSBC and UBS

Wells Fargo Overdraft Lawsuit

wells fargo overdraft fee

In 2010, Wells Fargo joined other megabanks—including JPMorgan Chase and Bank of America—who have been sued for rigging overdraft fees in a way that hurt customers the most.

Here’s how they rig overdraft fees. Let’s say you had $500 in your account and throughout the day you ran 10 transactions that added up to $75, putting your account at $425. But just before the end of the day, a check you’d written last week for $525 was processed, putting your account at negative $100.

Instead of running the day’s transactions chronologically, these megabanks would process the day’s transactions from the highest amount to the lowest amount, making it so you would be charged overdraft fees for all 11 transactions instead of just the $525 transaction that put your account in the negative. If the overdraft fee were $35, those 11 fees would add up to $385—all because the megabank intentionally processed the transactions in a way that hurt you most.

It’s clear why customers sued these megabanks for rigging overdraft fees.

A court in San Francisco led the way for a class-action lawsuit against Wells Fargo, demanding that the megabank pay more than $200M in restitution. But this week an appeals court overturned the suit, saying that national law trumped state law and that it’s not against national law for a bank to rig overdraft fees in this way.

Source: Chicago TribuneWSJ

Link request from Flickr user

Chris Dodd Corrupt - Wall Street Edition

Chris Dodd profile

This post is the first in a series on corruption in the finance industry. We’re spotlighting Chris Dodd, the previous chairman of the Senate Banking Committee.

We highlight Dodd because of his high-ranking position as the chairman of the Senate Banking Committee and because his scandals seemed so frequent at the end of his senatorial career.


Fannie and Freddie campaign donations -

Dodd’s top contributors since 1989 -

Ethics panel examines lawmaker’s Countrywide loans - Reuters

Dodd and Countrywide - WSJ

Chris Dodd Wikipedia article

Dodd lied about AIG bonuses - New Haven Register

Excerpt: “We’re not going to mince words. Chris Dodd is a lying weasel. It is hard enough to swallow that the senator had no idea that he got preferential treatment on his home mortgages that saved him thousands of dollars. Or that, simply out of friendship, a wealthy New York man, who was later convicted in a huge stock swindle, picked up much of the cost of a condo Dodd bought in Washington; or that the stock swindler’s business partner out of a love of Ireland did the same for Dodd when the senator bought a waterfront house in Ireland.

Now, Dodd flat-out has lied about his role in legislation that is allowing employees of American International Group to receive $400 million in bonuses despite receiving $173 billion in taxpayer money to keep the failed financial giant alive. …”


Text on image above:

• Received over $285,000 in campaign contributions from AIG since 1989

• Placed a loophole in the 2008 bailout, allowing AIG executives to receive bonuses from taxpayers



• Received special treatment and discounts on loans through VIP treatment from Countrywide

• Pushed for a bill to help Countrywide in the aftermath of the financial crisis


• Received over $165,000 in campaign contributions from Fannie & Freddie since 1989

• Claimed Fannie & Freddie were “fundamentally strong” two months before they collapsed

Bank Cyber Attacks

cyber attacks on big banks

Certain large banks in the US—including Bank of America, PNC, JPMorgan Chase, US Bank, Wells Fargo, and SunTrust—have been targeted in ongoing cyber attacks. The first wave of these attacks started in September, with a second major wave hitting yesterday, December 20th. These attacks have focused on large banks and have consisted of flooding each bank’s website with traffic so as to render each site unavailable.

These attacks highlight one downside to increased concentration in the banking industry: cyber attackers only have to choose a few targets to cause widespread customer frustration. Given the choice among the thousands of lenders in the United States, these attackers have consistently chosen the largest targets.

Read more about these attacks here:

Major banks hit with biggest cyber attacks in history (CNN, Sept 28th)
Largest banks under constant cyber attack, feds say (CSO, Nov 2nd)
Major banks under renewed cyber attack targeting websites (Bloomberg, Dec 20th)

An excerpt from the last link above:

We know from all reports that the financial services market continues to be a primary target for cyberattacks, specifically, attacks designed to deny financial services,” said Michael Versace, an analyst for IDC.

DDoS is just one kind of attack banks must contend with. Hackers are stealing customer credentials through malware installed on mobile phones and PCs in phishing attacks.

Defending against cyberattacks accounts for a significant portion of the $25 billion banks worldwide spend annually on security technology, Versace said. IDC estimates financial institutions on average spend between 7% and 9% more each year on security.

Banks have managed to reduce the amount of data lost to hackers. Last year, the financial and insurance industry accounted for 10% of data stolen from breaches, compared to 22% in 2010, according to Verizon’s latest Data Breach Investigation Report. In 2011, 174 million records were compromised across industries in 855 incidents.

Demos: Wall Street Took a Sledgehammer to the Intermediation Pipeline

All images in this post are from Demos.

wall street demos

At the most basic level, a primary purpose of Wall Street is to connect people with money (investors) to people who can use that money to build new things (as shown in the image above). Wall Street is an intermediator, and as an intermediator it serves a positive function for the economy.

However, as a new report from the advocacy group Demos shows, Wall Street unnecessarily syphons money strictly for themselves, making this intermediation process less effective. It’s as though Wall Street created a pipeline to transfer money (a good thing) and then took a sledgehammer to that pipeline so some of the money would leak out to themselves (a bad thing).

While Wall Street should be paid for building metaphoric pipelines to connect investors to builders, they shouldn’t be paid for making the intermediation process less effective. But that’s obvious, isn’t it?

According to Demos, one piece of evidence (of many) that Wall Street is syphoning money for themselves is that intermediation costs have risen dramatically in recent decades—above the levels reached right before the Great Depression.

Financial Intermediation Costs (data from Phillipon 2012)

financialization cost index demos

What’s noteworthy is that the technological improvements and better quantitative analysis over the past decades should have made the intermediation process more effective and less costly. Instead, costs have risen. One possible reason for this is that a concentrated financial market has near-monopoly power. In the words of the article,

The financial sector is now dominated by a small number of large banks that enjoy tremendous market power. Because of powerful shared interests in the structure and process of the markets, these banks act as an oligopoly. Concentrated market power allows the oligopoly to use its information advantages and massive capital to extract value from the intermediation process on a large scale.

(See the Demos article for a lengthy list of additional reasons.)

The purpose of is to help break up this oligopoly and return banking to the simple role of serving as an intermediator between investors and builders. We want to help reverse the trends of the past few decades, bring down intermediary costs, and end the speculative nature of Wall Street—all of which end up hurting the economy as a whole.

Demos TBTF 1970 2010 Dallas Fed

Data from the Dallas Fed, 2010

wall street banks wall street banks wall street banks wall street banks

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