January 2013 | Too Big Has Failed

Monthly Archives: January 2013

Sheila Bair Tim Geithner Quotes

Sheila Bair Tim Geithner Quotes - Background

In January 2009, Geithner was voted in as Treasury Secretary, even though he had failed to pay Social Security and Medicare taxes for several years.

Around that time, Geithner claimed before Congress that he had “never been a regulator,” even though he’d just served as president of the NY Fed, which has the explicit duty to regulate Wall Street. In other words, as president of the NY Fed Geithner had been willing to use Fed money to assume the risk of loss on $30B worth of bad mortgages at Bear Stearns, but he wasn’t willing to view his job as a regulator of Wall Street. It’s no wonder then why one top banker, according to Ron Suskind’s book Confidence Men, referred to Geithner as “our man in Washington.”

According to former FDIC Chariman Sheila Bair, Geithner took every opportunity to bailout the megabanks. In fact, Bair went so far in her critique of Geithner to label him ”bailouter in chief,” and assert that Geithner “was by far the most generous in wanting to, for every solution, throw money at the problem.”

Two excerpts from Sheila Bair’s book, Bull by the Horns

About Obama’s appointment of Geithner: “I did not understand how someone who had campaigned on a “change” agenda could appoint someone who had been so involved in contributing to the financial mess.”

“Tim seemed to view his job as protecting Citigroup from me, when he should have been worried about protecting the taxpayers from Citi.”

(And one excerpt from a CNBC interview)

“I think [Geithner] viewed the problems through the prism of the large financial institutions, particularly Citigroup, and his worldview was if you help them out of their troubles you’re going to help out the economy. I wanted to impose some market accountability. I wanted bondholders to take losses, I wanted those who had lent money to these institutions, the investors, to share more of the pain and share more of the risk. I think it was just a constant conflict throughout…There was just a philosophic disagreement throughout my tenure.”

John Reed Quote: “I would compartmentalize the industry”

Former Citigroup CEO John Reed Quote: “I would compartmentalize the industry for the same reason you comparmentalize ships. If you have a leak, the leak doesn’t spread and sink the vessel.”This is one reason why switching from the megabanks to a local lender is healthy for the overall economy. If politicians won’t compartmentalize the industry, the next best thing is for the citizens to do it.Reed is just one of many former bankers openly expressing disgust over “too big to fail.” Here are a few others:David Komansky, former Merrill Lynch CEO: “Unfortunately, I was one of the people who led the charge to get Glass-Steagall repealed. As I sit here today, I regret those activities and wish we hadn’t done that.”

Phil Purcell, former Chairman and CEO of Morgan Stanley: “There is one benefit of breakups that hasn’t gotten much publicity: Shareholders would get greater value from their investments.”

Wilbur Ross, CEO of WL Ross & Co: “Running an insurance company is not the same thing as running a retail bank. We don’t think there’s any logic in them being in the same entity.”

Scott Shay, founder of Signature Bank: “Fixing the banking system and reinstating Glass Steagall should be the highest priority.” Also: ”We wouldn’t trust our national defense to four military bases, but we trust our national economic security to four big banks.”

Roy Smith, former partner at Goldman Sachs: “Based on changing markets and increasing regulatory pressures, it is time to unwind the mega-banks into smaller, simpler, less risky business models.”

Dan Tarullo, governor of the Fed:”To the extent one can fairly induce an underlying principle, it is that the moral hazard associated with too-big- to-fail institutions should be counteracted in a variety of ways.”

Paul Volcker, former Fed chair: “There is an expectation that very large and complicated financial institutions will not be allowed to fail. Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits.”

Sandy Weill, former Citi CEO: “What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.”

See the full list.

Lanny Breuer Frontline: PBS Forced Breuer To Retire Early

Lanny Breuer Frontline

Lanny Breuer announced today that he will step down from his position at the Department of Justice. Those who saw the Frontline documentary last night might not be too surprised at this news, since the documentary does such a powerful job of showing Breuer’s soft efforts in prosecuting fraud on Wall Street after the financial crisis.

Person after person in the documentary says that there are certainly criminal cases. But Breuer says that “too big to fail” is a factor in deciding not to prosecute a megabank. Specifically he said, “if I bring a case against institution A, and as a result of bringing that case there’s some huge economic effect… it’s a factor we need to know and understand.”

This isn’t the first or the only time Breuer has made this argument. Last September, in a speech given to the New York City Bar Association, he said,

I personally feel that it’s my duty to consider whether individual employees with no responsibility for, or knowledge of, misconduct committed by others in the same company are going to lose their livelihood if we indict the corporation. In large multi-national companies, the jobs of tens of thousands of employees can be at stake.

It sounds innocent enough, right? (“It’s my duty to consider…”)

Here’s the problem, though: if we can’t prosecute people who commit crimes at international firms because we’re worried about the jobs of innocent employees—or if this worry is even a factor in the prosecution—then we’ve got a separate set of justice for people who belong to multinational firms and people who don’t. It means that people in megabanks are less likely to be prosecuted for crime. And that isn’t justice.

One way to fight for justice is to only support financial institutions that aren’t immune from criminal prosecutions (i.e. local lenders). This way we can work towards a system where “too big to fail” firms no longer exist and where they’re no longer a factor in our justice system.

JPMorgan Chase Lending: Laughable When It Comes To Small Business

JPMorgan Chase Lending

JPMorgan boasts that they’re #1 in SBA loans with $1.1 billion in SBA loans, but if you look at their total deposits ($1.1 trillion), the $1.1 billion doesn’t seem nearly so generous—since it’s only 0.1% of total deposits.

In fact, JPMorgan Chase scores an F on BankingGrades.com, which divides the total amount of small business loans by the total amount of deposits. So JPMorgan Chase hardly has room to boast.

Local lenders uniformly score far higher and are far more likely to support small businesses.

This is especially bad because JPMorgan Chase has grown tremendously in the past decade.

The change in the size of the megabanks has been dramatic over the past decade. The other “big four” commercial banks have also grown at about the same rate over the past decade. Source

Here’s an excerpt:

The big banks are bigger than ever. According to a table prepared by SNL Financial and cited by the Wall Street Journal last week, the “big four” U.S. Banks—including JPMorgan Chase, Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo—have a larger combined market share than they did ten years ago. The SNL data is limited to bank holding companies with deposits funding at least 25% of total assets.

JPMorgan Chase had $2.3 trillion in total assets as of June 30, nearly tripling in size over the past ten years, including the purchase of the failed Washington Mutual from the Federal Deposit Insurance Corp. in September 2008, the fire-sale purchase of Bear Stearns in March of 2008, which was brokered by the Federal Reserve. Among the largest 50 U.S. banks, JPMorgan had an 18.33% share of assets as of June 30, increasing from 12.51% in June 2002.

Regulatory Capture Definition (Wall Street Edition)

Regulatory Capture Definition: When private entities get so much power that they’re able to capture the very government meant to regulate them.

It’s a downside that comes with “too big to fail” firms, since the size of these megabanks alone can be used as leverage in crises to demand special treatment (bigger bailouts, more direct access to government officials, etc.).

The quote above comes from a recent report (pdf) from a UK think tank, the Institute for Public Policy Research (h/t Demos). The report recommends, among other things, breaking up the banks to end “too big to fail,” so that these firms aren’t able to as easily capture regulators. Here’s an excerpt:

Efforts by financial firms and lobby groups representing their interests to influence government policy, the interchange of staff between financial firms, regulators and government (in all directions) contributed significantly to less onerous and therefore inadequate regulation of finance. As financial firms grew in size, this problem was exacerbated. A firm that is ‘too big to fail’ is in a powerful position to dictate its terms to regulators and government.

A related problem is the tendency of politicians to listen to people who have massive incomes or who generate massive profits in the belief that they have some special knowledge or talent. If this is simply a talent for rent extraction and the opportunity is used to lobby for changes that will widen the scope for such behaviour then the outcome is likely to be far from optimal for society.

If you want to know more about the connections between Washington and Wall Street, the go-to source is OpenSecrets.org. You can see that the list of top finance contributors to politicians is full of megabanks.

Local lenders don’t have this kind of power. When people move their money to a local lender, they therefore help fight regulatory capture in Washington.

AIG Lawsuit

The NYTimes reports that according to court records, AIG is considering joining a $25 billion lawsuit against the US government because its shareholders lost a lot of money in the aftermath of the crisis.

While it’s true that the shareholders lost money, what’s galling is that AIG (and the shareholders) would have been in financial ruin without the aid of US taxpayers. Indeed, AIG would be suing the US government after the government gave AIG a $182 billion bailout (a portion of which went to executive bonuses) plus billions of dollars in tax breaks.

An excerpt from the NYTimes piece:

Should Mr. Greenberg snare a major settlement without A.I.G., the company could face additional lawsuits from other shareholders. Suing the government would not only placate the 87-year-old former chief, but would put A.I.G. in line for a potential payout.

Yet such a move would almost certainly be widely seen as an audacious display of ingratitude. The action would also threaten to inflame tensions in Washington, where the company has become a byword for excessive risk-taking on Wall Street.

Some government officials are already upset with the company for even seriously entertaining the lawsuit, people briefed on the matter said. The people, who spoke on the condition of anonymity, noted that without the bailout, A.I.G. shareholders would have fared far worse in bankruptcy.

So, if there’s a firm out there looking to generate public outrage, this is how they could do it.

1. Demand a $182 billion bailout

2. Use the bailout for bonuses + paying off Wall Street banks

3. Hold a meeting to consider suing the government because your shareholders didn’t get a large enough cut of the money

flickr photo: jdiggans

Bank of America Fine: On average, Bank of America has been fined every other month since 2010

Bank of America Fine

Bank of America got hit with two multi-billion dollar fines, one for foreclosure abuse and one for selling questionable mortgages to Fannie Mae.

The Wall Street Journal has been running a total of Bank of America’s constant fines since 2010, and on average the megabank has been dinged at a rate of at least every other month. Here are 3 fines listed in a earlier WSJ article that stand out:

December 2011 – $335 million to settle allegations Countrywide discriminated against minority borrowers.

May 2011 – $20 million to Department of Justice over allegations Countrywide wrongly foreclosed on active-duty members of the military.

February 2011 – $410 million to checking-account customers who were charged overdraft fees.

It’s a wonder why BofA customers stick with them. They score the worst on customer survey indices:

When their customers take the time to write reviews online, the reviews ain’t pretty. You can see the results yourself by typing “Bank of America reviews” in Google. Or you could just look at the image below, which shows that 1515 reviews totaled an average of 1.2 of 5 stars. It’d be exceptionally difficult to score much worse than that. I mean, you’d have to be trying really hard to do much worse.

Bank of America Most Hated

Bank of America is also the most hated of all banks, according to a study from the Conversation Report, which tracks the sentiment on social media toward different companies. Bank of America has the most disdain and the most intensity. Read the full study here.

Goldman Sachs Government: The Revolving Door

This chart shows Goldman Sachs Government: The Revolving Door. It should go without saying that whenever a single company has such a presence in government, the will of that company will receive special attention from government policies. It’d be far better if there were a strong diversity of companies represented from all states and all sizes. Instead Washington seems to favor big corporations that have a dominant presence in places like New York.

Goldman Sachs government lobbying has increased dramatically since 2000—from under $1 million to nearly $5 million.

SOURCE (see lobbying)

Bloomberg published an article about how Goldman Sachs has taken advantage of a loophole that allows them to continue to bet with taxpayer-insured money, and Neil Barofksy went on Bloomberg TV to talk about it.

Barofsky warns that we need simpler legislation—as opposed to 30,000 pages of rules, riddled with caveats—and that without simpler legislation megabanks will “drive their Mack truck through all of these loopholes.”

The principle here is that megabanks shouldn’t be allowed to make wagers with taxpayer-backed money. Unfortunately, that rule isn’t in place, even after the recent financial crisis. We agree with Barofsky that it should be, and we propose that one way that citizens can voice their opinion on this issue is by leaving the megabanks (which continue to gamble with taxpayer-insured money) and supporting local lenders instead.

Here is more from Barofsky:

“We need a clear Volcker Rule at the very minimum that doesn’t have all these exceptions and loopholes so they can drive these trucks through them. Or an even better idea: let’s spin these things off entirely. Let’s go back to a form of Glass-Steagall so we’re not subsidizing risky bets.”

Also: “We should be critical of the power and influence [Goldman] had to create the loophole in the first place.”

flickr image from bionicteaching

The Bankers’ New Clothes Quote

Anat Admati, economics professor at Stanford, and Martin Hellwig, director at the Max Planck Institute, wrote an forthcoming book called The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. The preface is available online, and we’ve added the book to our queue after reading this quote from it:

“Do not believe those who tell you that things are better now than they had been prior to the financial crisis of 2007–2009 and that we have a safer system that is getting even better as reforms are put in place. Today’s banking system, even with proposed reforms, is as dangerous and fragile as the system that brought us the recent crisis.

But this situation can change.”

It’s hard to sum up what is motivating SwitchYourBank.org more clearly than that quote does. We agree that the financial system is still full of risk, and we agree that simple solutions (not thousands of pages of detailed rules, riddled with loopholes) can help the situation.

Importantly, the preface claims that the book aims to reach a public audience, with the authors claiming that “you do not need any background in economics, finance, or quantitative fields to read and understand this book.” Our theory and hope is that if more of the public understands these issues, they’ll make better voting decisions, and better decisions about where they bank.

In sum, the book looks promising. After we read it, we’ll review it and add it to our growing reading list.

Flickr image from othermore

Paul Volcker ATM Quote: “I wish someone would give me one shred of neutral evidence…”

Here’s a trenchant quote from Paul Volcker, former Fed chair. He even goes so far as to say that “The only thing useful banks have invented in 20 years is the ATM.”

Volcker is criticizing the rigamarole in the megabanks. The so-called “innovations” like:

Credit-Default Swaps

Credit default swaps can serve as a form of insurance, but they also allow traders to bet on whether a firm or a country (e.g. Greece) will default on its debt. In such cases, Trader A bets that the firm or country won’t default and Trader B bets that it will. Trader B makes regular, small payments to trader A, unless the default occurs, in which case trader A makes an enormous payout to trader B. It’s a gamble.

See our full writeup on credit-default swaps here.

Mortgage-Backed Securities

Everyone understands that the housing market tanked in 2007-08. What’s harder to grasp is how Wall Street was involved with it all. It’s complicated. But essentially it boils down to what Nate Silver pointed out in The Signal and the Noise: “For every dollar that someone was willing to put in a mortgage, Wall Street was making almost $50 worth of bets on the side.” The boring, technical name for these bets is “mortgage-backed securities.”

See our full writeup on mortgage-backed securities here.

Over-the-Counter Credit Derivatives

Derivatives are financial instruments whose value is derived from an underlying asset (stocks, bonds, commodities, etc.). Traders can swap interest rates, take bets on whether a firm will go bankrupt, safeguard against future asset price increases, etc—all under the ugly umbrella termderivative. The concept of a derivative has been around for centuries, but their use has recently exploded.

See our full writeup on derivatives here.

Rather than leading to net economic growth, each of these “innovations” have led to enormous economic losses.

- Source for the Volcker quote. Also here.