Too Big to Fail
PIM of SPAIN | October 19, 2009 at 10:20 amby
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Between 1990 and 2008, “according to Wall Street veteran Henry Kaufman, the share of financial assets held by the 10 largest U.S. financial institutions rose from 10 percent to 50 percent, even as the number of banks fell from more than 15,000 to about 8,000. By the end of 2007, 15 institutions with combined shareholder equity of $857 billion had total assets of $13.6 trillion and off-balance-sheet commitments of $5.8 trillion—a total leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $216 trillion. These firms had once been Wall Street's "bulge bracket," the companies that led underwriting syndicates. Now they did more than bulge. These institutions had become so big that the failure of just one of them would pose a systemic risk.”
What should have been undertaken before paying any bailout money, is to split-up those giant institutions into smaller and more specialized entities.
But even none of the regulatory reforms proposed so far do anything to address the central problem of the big banks that failed. Treasury Secretary Timothy Geithner proposed over the summer:
• The Fed should become the "system risk regulator" with power over any "systemically important" institutions, a.k.a. TBTFs. But wasn't it that already?
• The originators of securitized products should be required to retain "skin in the game" (5 percent of the securities they sell). What, like Bear and Lehman did?
• There should be a new Consumer Financial Protection Agency. So what were the other regulatory agencies doing? Oh, yes, protecting the banks too big to fail.
• There should be a new "resolution authority" for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
• And "federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value." I can't wait to hear what those will be.”
“Congress approved a large-scale bailout for Wall Street. Treasury Secretary Henry Paulson had told potential buyers of Lehman Brothers there would be "no government money" to sweeten any takeover deal. Even after the Lehman failure, it still took two attempts to secure passage of the $700 billion Troubled Asset Relief Program through Congress. Since then we've witnessed the fiscal equivalent of a dam bursting. We're now looking at $9 trillion of new federal debt in the decade ahead.”
At the latest G20 finance ministers' meeting the only significant modification was a call for The Big Banks to raise more capital and become less leveraged "once recovery is assured." Even that has extracted protests from the big bankers. Before the ink was dry on the G20 communiqué, “JPMorgan published a report warning that proposed regulatory changes would reduce the profitability of the investment-banking operations of Deutsche Bank, Goldman, and Barclays by as much as a third.”
The compensation issue is too delicate to reach a final resolution. Politicians like to focus on bankers' bonuses, “because everyone can be shocked by the fact that Lloyd Blankfein, the Goldman CEO, gets paid 2,000 times what Joe the Plumber gets.” But that's a symptom, not a cause, of the deep-rooted problem. The Big Banks are able to pay crazy money because they reap all the rewards of risk-taking without the cost, or simpler said, the risk of going broke. How did Goldman make those handsome second-quarter profits of $3.4 billion? They did that by leveraging up and taking on more risk.
Politicians, who were supposed to be regulating Fannie and Freddie, are now claiming that they are going to regulate the big banks more tightly.
What really is needed are a serious antitrust law to the financial-services sector and a speedy end to institutions that are "too big to fail." - “In particular, the government needs to clarify that federal insurance applies only to bank deposits and that bank bondholders will no longer protected, as they have been in this crisis. In other words, when a bank goes bankrupt, the creditors should take the hit, not the taxpayers.”
To complete the picture, here the assessments of two big banks too big to fail:
Goldman announced its quarterly earnings. Goldman, you'll recall, is the firm that former Treasury Secretary Henry Paulson, a former Goldman chairman of this bank, called 13 times before breakfast during the financial crisis of last September. And Goldman is also the firm with its men in key posts in Washington, helping the feds figure out what to do with trillions of dollars in bailout funds.
Well, that was a coincidence, but now the firm says its latest profit is four times what it was a year ago. The bank's "activities have become more profitable after the crisis reduced competition and governments injected funds in the banking system," says The Financial Times.
Goldman can borrow the funds at almost no cost. Then, it can use the money in a variety of ways, such as lending it back to the government for guaranteed profits, or speculating on oil or gold, or whatever. Not for nothing is gold is up 17% in the last six months. If a bank can borrow at zero cost does a lot of speculating the profits come instantly. Many speculators are using the government's money to bet against the US dollar, making a lot of money in the process.
The Wall Street firm that was bailed out by the feds a year ago reported income of $3.6 billion in the 3rd quarter. The International Herald Tribune says, “The bank's profits are just another sign that a major recovery is underway.” Investors seem to believe it, too. "Earnings optimism," is behind the buying, says a broker.
But how did JPMorgan earn so much money in such a bad economy?
It acted in exactly the same way Goldman did.
The Financial Times confirms that Morgan's "US consumer businesses continued to bleed, with its credit card unit losing $700 million in the quarter and its retail bank...barely breaking even." It wrote off $7 billion in uncollectible consumer loans - more than twice as much as last year.
“The news reports attribute the huge profits to "trading." But trading is a broad category. And our guess is that if you look more closely you will find that JPMorgan made its money the old fashioned way - by ripping off the government.”
“ JPMorgan took the feds' money and now is showing huge profits because it is just lending money back to the people they got it from.”
The papers tell, "bonuses explode on Wall Street to a new record."
They can pay such huge bonuses because there is no risk for them, and if a next crisis comes and they won’t have any money left in the tilt, the Government will bail them out again. They are still too big too fail!
So far the US government has put $24 trillion of the nation's money and credit on this line. More precise that's the quantity the feds have at risk from all those bailed-out banks in toxic asset purchases, loans and guarantees. Apparently, Goldman and JP Morgan get their share too.
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