Break up the banks!
posted at 10:00 pm on June 4, 2012 by Mike Rathbone
James Pethokoukis is right. It’s time to break up the big banks. Now, I’m not an Occupier. While I do live with my parents (rent is cheaper), I contend that my hygiene is much better than your average occupier and I’m not prone to raping people. However, there are still good reasons to break up the big banks.
Many libertarians and market purists would contend that there is no such thing as “too big too fail” and that it is no business of Washington to tell a business how big a bank should get if it reaches that size through legal means. Normally, I would agree with them. However, the financial sector is a tricky beast. Psychology plays much more of a role than normal in the market. That’s why there are such things as panics. Things can spiral out of control very quickly and even good actors can be taken down by irrational fears. For something so subject to the fears of its least rational members, the fact that the financial sector is the beating heart of the economy makes this situation all the more troubling. This fact is not lost on our elected officials, hence the bailouts (I’m sure the motives for bailouts are less than pure, but even if one didn’t take a cent from the banks, when confronted with a financial collapse, a lot of people would be hard pressed to say no).
The Pethokoukis piece describes how this “break-up” process should occur and I encourage you to give it a look. However, I’d also like to look at this from a more political angle. What would happen if Romney called for just this remedy? Would he take a hit with Wall Street donors? Probably. Would it be a smart move? I think so. What the Obama Campaign tried (and failed miserably) to do with their Bain attacks is to portray Governor Romney as some kind of vulture capitalist that liked to make money screwing over the working man. Romney did a good job of deflecting those attacks, but I believe that a good offense beats a great defense.
If he announces (at the Convention wouldn’t be bad, I’m only afraid Obama would beat him to the punch) that he intends to break up the big banks, he would do a lot to dispel the notion that he is a tool of Wall Street. It’s an issue that would put him to the “left” so to speak of Obama. A lot of liberals, who would never vote for Romney, would further be disgusted with Obama if he fought against this and maybe sit out for November. A lot of tea-party types would be for it because they’re sick of bailouts and too-big to fail. If Obama agreed with Romney, it wouldn’t change the fact that the economy is in rough shape and that Obama had a full term to push for this, but he’s failed to deliver. Either way, Romney comes out on top.
It also allows Romney, if he were to be elected, to push through a lot of deregulation with the chance at bipartisan support. Sun-Tzu said, “Build your opponent a golden bridge to retreat across”. I agree. A flat out repeal of Dodd-Frank and Sarbanes-Oxley would be very difficult, even with full control of Congress. However, if you give your opponent a way to declare victory, then you can accomplish your objectives. Tack on a repeal of Dodd-Frank and/or Sarbanes-Oxley to a bank break-up bill and you can get some moderate (for Democrats at least) to jump on board because you let them go home and say, “See what I did, I stuck it to those evil Wall Street fat cats!”.
Pushing for breaking up the big banks, in my humble opinion, is both good policy and good politics. I believe that Governor Romney would be wise to push for this and make this a central plank of his economic plan for the campaign.
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Yeah I was. The regulations of the time, and even now, told the banks where they were allowed to put their assets, how much reserves they needed in the vault for each and every type of investment they made. Because of the regulations and the numbers attached to those regulations, each and every single bank could put those numbers into an equation and come up with the exact same investment strategy that maximized profits for them. It took the thinking out of the bankers and all the large banks followed the same strategy. Buy up massive amounts of mortgage backed securities, because that is where regulations forced them to invest to make the biggest gain for their shareholders and the government told them they were AAA rated to boot! No thought required, just punch government MANDATED numbers into your equation and invest as instructed.
astonerii on June 5, 2012 at 9:33 AM
Hum… very interesting.
mmcnamer1 on June 5, 2012 at 10:03 AM
What is it with you people thinking the banks were forced into CDOs? At best Congress wanted CRA and offered CDOs to the banks as a method to move the inevitable risk off their balance sheets. However, thinking they were forced is stupid. Imagine me having to hold a gun to your head to “force” you to pick up a roll of 100 dollar bills off the ground. How much force do you think I’m going to have to apply?
DFCtomm on June 5, 2012 at 10:13 AM
Completely false.
Dante on June 5, 2012 at 10:28 AM
So you’re saying that if we had did nothing and allowed the banks to fail then nothing at all would have happened? There would have been absolutely no repercussions? Would the DOW have lost a little teensy bit? Don’t get me wrong allowing the banks to fail was the correct action, however I’m in no way deluded enough to believe it wouldn’t have had terrible costs.
Hmmm, perhaps this is the wrong way to approach your stone wall. There is one nation that chose to allow their banks to fail and prosecute the bankers. We can use Iceland as an example of what would have happened. It was very tough, there were repercussions, but now they are in a recovery. Imagine that but exponentially larger.
DFCtomm on June 5, 2012 at 10:50 AM
You’re wrong. It’s completely true. In fact, it would have happened quickly (within weeks). Let’s discuss the meltdown than bank-runs that were occurring. Let’s discuss the fact that the federal money wire system almost broke down.
blink on June 5, 2012 at 10:50 AM
I totally disagree that the failure of, say, BoA and/or Citi, the two banks who were in the most trouble, would have caused a sever depression.
Contrary to popular belief, there were banks with good balance sheets that could have taken on the accounts of the losers. Also, JM Morgan/Chase and Wells were in no danger at all. They took TARP because the feds insisted on it. Had they not, it would have caused a run on the other two. (Please note the main reason Citi was in trouble was because they were talked into buying Coutrywide.)
The largest bank to fail (or come within 72 hours of failure) was National City out of Cleveland. The government used some TARP money to entice PNC to buy them. The transition was seemless. Without the TARP funds, NAtional City fails and the FDIC steps in and likely hands the bank to PNC or some other bank.
In the Doomsday scenario, the worst issue we would have had would have been a temporary limbo that many depositors would have been in if the FDIC had needed to step in and break up BoA or Citi. There would be no way they would give the whole firm to another of the monsters. I would think economic impact would have lasted for a matter of a few months.
In order for a depression to have occurred, it would have to be caused by a much more calamitous drop in liquidity in the market then we saw. As you may recall, these banks were not doing much new lending at the time anyway, so the effect would not have been severe. Depositors have FDIC insurance (at the time up to $100,000 and anyone with more than $100,000 in the bank is probably smart enough to spread it around to take advantage of the insurance at multiple institutions) so the vast majority of people would have been covered.
Ironically, the biggest risk during that time period was not that there might be runs on banks, it was that the bank’s did not trust their brethren enough to lend them money, even overnight. This caused some short term variable rates to skyrocket but that was likely to have calmed down as well.
oconp88 on June 5, 2012 at 11:47 AM
Did not force them into them, but coerced them, inticed them, and the stock holders coerced them and enticed them. In the end, government REGULATIONS gave the banks a very limited number of opportunities to make a good profit, and because of that, many banks, particularly as seen by the melt down, the big ones, fell lock step into it and caused the financial crisis.
Of course they did not force them to do anything, they just made every other option worthless and thus their choice was leave or join in on the government instigated orgy that drove house prices beyond most people’s reach, pushing workers ever further from their places of employment, setting them up for massive gasoline price crisis and the eventual bursting of the bubble. But hey, the answer is MORE regulations, that limit even further the possible outlets for people’s money to earn a profit which will drive even larger and more destructive bubbles to emerge.
What is it with you people who think the government is the answer to all their problems? Grow the hell up and take care of yourself.
astonerii on June 5, 2012 at 11:53 AM
So, make it up as you type is your approach?
The banking problems were brought on by collusion between the largest banks to bypass both laws and regulations. See my earlier post on fraudulent MBS’s.
ALL of the subprime mortgages combined are a tiny sliver of the bad risks taken by the TBTF in the run up to September 2008.
Lehman Brothers was engaging in reverse 105 repo’s to intentionally misrepresent their balance sheet for their quarterly filings. The CEO and CFO should be in jail since they signed their annual assurance letters required under Sarbanes-Oxley stating the quarterly financial statements were true and accurate.
Are subprime mortgages beyond the pale of stupidity – yes! Is that they reason the banks were bankrupt? NO
Mark-to-market rules are handy UNLESS you want the banks to be able to commit fraud. They were supposedly going to be set aside for 6 months to let the markets settle. Unfortunately, they are still set aside because if they were put back in place every single TBTF would be bankrupt now.
The solution is to put the normal accounting rules that served us well for 70+ years back in place.
Let the FDIC examine the TBTF and take over those that are effectively bankrupt.
FYI, FDIC takeover does not mean they replace every teller, etc – they take over the management of the bank to get a true value of liabilities & assets and then find someone else to take over the manangement of the bank or manageable pieces of the bank.
Ignore the BS Fear, Uncertainty and Doubt propagated out of Washington by people like Barney Frank and Maxine Waters and “Tear down the Too Big Too Fail Banks, Mr. Romney!”
(If he did, the Democratic losses up and down ticket would make 2010 a fond memory for the Democratic establishment.)
Oh yeah, economies of scale is Econ 101 thinking. In a world awash in $ 1,000 trillion doillars of CDS’s, CDO’s, CDO’s squared and other derivatives – economy of scale means jack compared to the systemic risk the TBTF have created.
PolAgnostic on June 5, 2012 at 12:35 PM
You don’t get it. The trouble went well beyond the individual balance sheets of each bank. Stop thinking that good banks would have been fine and bad banks would have quietly gone away.
Everyone always owes money to everyone else, and everyone always has money owed to them. When the meltdown was occurring, entities decided that liquidity was suddenly a huge problem. So, what did they do? They decided to hold on to their cash even if it meant defaulting on payments that it owed. This meant that entities suddenly weren’t getting the cash that they were counting on. So, what did they do? They refused to make the payments that THEY owed. So, what did the entity that they owed do? That’s right, they refused to make the payments that they owed, too.
Now, the individual balance sheets of anyone didn’t matter. Every company out there was suddenly a credit risk. Even companies with a billion dollars in cash was a credit risk, because nobody knew if their $ billion was locked up in a faulty institution.
This was completely obvious to everyone in the finance sector. Paulson knew this so Paulson assured the financial markets that he was going to get a “fix” passed within a very short period of time. This immediately allowed money to start flowing again. Trusting Paulson, entities started making their payments. However, when the first fix failed to make it through Congress, the money flow immediately started to tighten up again until TARP passed.
Choose to believe whatever you want, but I’m telling you that if nothing had been down people’s ATM cards would have stopped working. People’s checks would have bounced regardless of the amount of funds in their accounts. People would have failed to get their paycheck direct deposit. It would have been very ugly.
blink on June 5, 2012 at 12:44 PM
Getting rid of the large part of the regualtions is EXACTLY what was done by President Clinton and the Congress with the repeal of Glass-Steagall.
There is an ENORMOUS number of objective articles which connect today’s problem to the repeal of Glass-Steagall.
The HUMONGOUS banks have used their size to move in on the small banks, undercut their market share with predatory pricing, drive them under and then, when the field is cleared – stick it to their customers with rapacious fees.
Have you been hiding under a rock for the last 14 years?
PolAgnostic on June 5, 2012 at 12:45 PM
Forced was definitely the wrong word, but the government put the $100 on the ground for the banks to pick up.
blink on June 5, 2012 at 12:47 PM
You make the assumption that there were no available players standing ready to take up the slack. Certainly there would be pain, but the solid, healthy banks weren’t going to suddenly disappear. And, you make the assumption all 5 would have failed…I’m not buying that based on what knowledge I have of the situation, but you might be right.
To use an analogy, Obama “saved” the auto industry because GM and Chrysler were too important to let go. Why? Would people suddenly stop driving, buying, needing cars just because GM shuttered its doors? Absolutely not. The remaining healthy manufacturers would have stepped in and taken up the slack and the jobs, profits, etc would have flowed to those companies. Some people would have been displaced, no doubt. But, if the company they work for is inefficient and doesn’t have what it takes to survive, then they should be displaced. It costs some individuals more, but as a whole society is better off and suffers less.
We may be in the abyss…I have posted elsewhere that I believe we are. If so, the only way out is to return to free market, capitalism where individual ingenuity and hard work is rewarded by the market. If we are not, more government intervention like that in Oct 2008 and shortly thereafter is pushing us closer, not saving us from it.
The Hammer on June 5, 2012 at 12:48 PM
Yes, that deregulation wasn’t a good idea.
But the housing bubble and subsequent meltdown would have occurred even with Glass-Steagall in place.
blink on June 5, 2012 at 12:49 PM
What bank is “healthy” if everyone that owes the bank is defaulting on its obligations?
blink on June 5, 2012 at 12:50 PM
If not for the interventions since September 2008 most of the TBTF would have gone bankrupt, had their operational control ceded to the FDIC, their true assets & liabilities determined and would then have been sold off as a whole or a variety of parts to more stable and solvent banking entities.
The banks needed liqidity because they had engaged is suicidal amounts of leverage of their assets. Let do a quick lesson here:
If Bank A leverages their assets under management (AUM) by a factor of 10:1 then they can ride out any collection of losses that total less than 10% of their profits.
If Bank B leverages their assets under management (AUM) by a factor of 30:1 then they can ride out any collection of losses that total less than 3.3% of their profits.
If Bank C leverages their assets under management (AUM) by a factor of 30:1 , engages in establishing derivative hedges to theoretically make any loss impossible but can’t accurately track or assess the risk they do and do not have hedged – then you have a bank the government deemed TBTF and made the American taxpayers make whole rather than letting their shareholders and bondholders take the loss the way the market is supposed to function.
I have no delusions. There is no path out of this withoput substantial pain … but the pain now is going to be MUCH WORSE because of the attempts made to frustrate the way markets work. I have never had ANY use for the purveyors of Fear, Uncertainty and Doubt. But those discussions can wait for another day.
PolAgnostic on June 5, 2012 at 1:08 PM
Hmmmm
What do you think Glass-Steagall regulated?
What was its pupose?
Would it have allowed banks to make sub-prime and no-doc loans?
Which of the current TBTF were not banks prior to 2008?
Which of the TBTF requested bankholding status in 2008 and why?
PolAgnostic on June 5, 2012 at 1:15 PM
Which of those banks were not banks prior to 2008?
Why did they request bank holding status?
What is the normal role of the FDIC with regard to a bank failure?
What type of adult in the real world thinks ife does not normally have times that HURT?
Who is lying to themself to let themself sleep at night?
PolAgnostic on June 5, 2012 at 1:20 PM
Hello, F.U.D.
What is the peak mortgage default rate that has been experienced since 2008?
What is the percentage difference between that number and 100%?
The resultant number is the percentage of performing loans, FYI. Please note – it is much larger than zero.
Addition, subtraction, multiplication & division are concepts not just functions on a calculator.
PolAgnostic on June 5, 2012 at 1:26 PM
We agree up till the last sentence. Re-presented for your consideration:
The TBTF DID cheat and steal.
When you set up the M.E.R.S. system to bypass having to pay county recorder fees for tens of millions of real property transactions over a 10+ year time period – you are, by God, cheating and stealing.
When you then use the same M.E.R.S. system to facilitate the process of bundling a single mortgage into more than one tranche of debt in a Mortgage Backed Security (MBS) trust document, thereby falsifying the risk stated for each tranche of debt, you have committed a felony.
When you further compound your perfidy by using M.E.R.S. to facilitate the process of assigning that same singular mortgage into more than one MBS, you have committed another felony actionable on both the state and federal level.
PolAgnostic on June 5, 2012 at 1:32 PM
It regulated what the Fed’s interpretation allowed it to regulate.
Why does it’s purpose matter? Regardless of its purpose, the its regulatory scope was limited by the regulatory authority.
Of course.
It depends on your definition of TBTF. Is AIG TBTF?
Which? Many banks, but, again, a thorough answer depends on your definition of TBTF.
Why? Because it was a vehicle for getting liquidity.
blink on June 5, 2012 at 1:37 PM
What does this have to do with it?
Sometimes life has to HURT? Certainly, you have nothing against the concept of private insurance, but couldn’t I argue against private insurance by claiming that sometimes life has to HURT?
And are you against FDIC? Because doesn’t FDIC prevent HURT?
blink on June 5, 2012 at 1:39 PM
Here’s the reality. Under your scenario Bank A and Bank B are unable to ride out a meltdown because they get screwed by Bank C and other entities that are relying on Bank C.
That being said, I’m in favor of breaking up TBTF entities. I’m just backing up the earlier statements I’ve made about 2008.
blink on June 5, 2012 at 1:43 PM
None of these questions addresses what occurred in 2008.
blink on June 5, 2012 at 1:44 PM
Lying or dumber than a sack full of hammers, which one do you want to choose?
I don’t know of a single government regulation which requires any corporationto make the biggest gain for their shareholders.
It is the underpinning of capitalism and publicly owned companies – which probably explains why you don’t know that is the case.
Oh, by the way, the government does not assign credit ratings to boot! Credit rating companies do.
Let’s just go with the sack full of hammers.
PolAgnostic on June 5, 2012 at 1:47 PM
Not knowing or being willing to look up ANY of the answers with regard to YOUR assertion
Where YOU are stating what was/is wrong makes the answers to those questions absolutely relevant to whether you have a clue of what you are talking about.
Here’s your sack full of hammers.
PolAgnostic on June 5, 2012 at 1:54 PM
Since you have limited reading skills, let me help you out here.
My reply underscored a number of fallacies in his statement since:
A) Private investment firms had requested to be allowed classification as bank holding companies precisely so their potential default became a government problem rather than the working of the free market. They did not like the results of teir actions in the free market and did not want to face the consequences of their actions.
B)The real world is full of HURT. His use of the term suggested the person he was responding to did not understand there might be some HURT if the five big banks were to go bankrupt. It is a straw man statement frequently used by people of limited faculties (like yourself) in the mistaken belief it makes then the ADULT in the conversation. In reality, it just comes across as arrogant and pretentious. My use of the word HURT was to highlight his arrogace and pretention.
FYI, your use of the word HURT above is another straw man statement that makes you look … dumb.
In the real world, the FDIC does not prevent HURT. The FDIC provides an orderly process of taking insolvent banks into receivership (you may need to look up the legal definition of that word), assessing the value of their assets & liabilities , and determining if they can find another legal entity willing & able to take over the running of the bank. The bank’s shareholders, bondholders, and directors go through a WORLD of HURT.
PolAgnostic on June 5, 2012 at 2:20 PM
NOTHING. Not one single thing you’ve written addresses my assertions at all.
You’re the one dumber than a sack of hammers.
Your omission in this sentence is a fatal flaw. You omitted the fact that FDIC does MUCH more then dictate an orderly receivership process for a bank. It backstops depositor accounts.
Stop being an idiot. It was obvious that he mean big hurt. Not just some hurt. He had already used the term “sever depression.”
It’s a strawman for YOU to pretend that his term “hurt” could have been implying a modest amount of pain.
Grow up. Stop being so arrogant so that I can teach you something.
blink on June 5, 2012 at 2:33 PM
Are you literally unable to visualize the fact that people can read back up through all the posts I have made on this topic and not see for themselves whether I have ALREADY referenced the FDIC making individual depositors WHOLE up to their liability limit?
In your little world, do you tell yourself the readers on here can’t see things for themselves, weigh arguments and will only be enlightened by what you chose to put forward in any post to the exception of all others?
You’ve spent too much time in the “its the effort not the results” special education camps.
With regard to your assertions:
This one is a doozy. Completely false to fact – but that doesn’t bother you in the least bit, does it? This sounds good inside your head but it did not happen … who are the “entities” you are saying “did this” and “did that”
We DID have an afternoon when certain, still unnamed parties tried to take $ 2 trillion USD and more out of a variety of money market funds in the space of a few hours. They FED and the TReasury know who they are but they are not willing to share that information.
PolAgnostic on June 5, 2012 at 2:55 PM
You know, I just realized you have not even read Mike Rathbone’s post or James Pethokoukis’s linked article.
You are under the impression you are discussing “interpretive dance” or some other non-quantifiable, opinion based topic.
WOW !!!
PolAgnostic on June 5, 2012 at 3:02 PM
No, it’s not false at all. This is EXACTLY what was occurring. Additionally, it was occurring very quickly.
I dare you to claim that it wasn’t happening in the days just prior to Paulson announcing that he would implement a comprehensive fix.
And you think that this was the only problem that was experienced? Seriously? You mention this as if investors/depositors weren’t making massive withdrawals from all types of accounts throughout the financial industry. You mention this as if all financial entities continued to pay their bills and meet their financial obligations.
You’re a joke.
blink on June 5, 2012 at 3:13 PM
I read both the post and the linked article. I’ve already stated that I favor breaking up TBTF entities. I agree with the James except for his suggestion regarding FDIC. Let me know if I need to explain why FDIC is necessary.
blink on June 5, 2012 at 3:18 PM
Here’s the trouble, buckaroo. This post
is the one that shows up the lie in this post
since the list of 20 banks grouped as the TBTF are available through a link in James article. Which banks constitute the TBTF is not open to subjective interpretation or re-definition.
This isn’t “interpretive dance”. We are done here.
PolAgnostic on June 5, 2012 at 3:35 PM
You’re incredibly strange.
1. I read the post and the linked article. I never claimed to have read every link on this page or on the page for James’ article.
2. The term TBTF is used exactly once in James’s article. TBTF is not in quotes (which would suggest a hard definition), is not defined, and is not linked to a definition.
3. There was nothing wrong with me asking for your definition of TBTF. Obviously, many consider entities other than banks to be TBTF. So, merely breaking up TBTF banks doesn’t eliminate America’s exposure to the risks associated with TBTF entities.
4. Instead of reacting strangely about it, you could have merely provided your definition.
blink on June 5, 2012 at 4:04 PM
The government doesn’t actually have to actively break up the banks. All they have to do is this:
1. Take away the obnoxious level of regulation.
1a. Don’t create a market, as they did with Fannie and Freddie and the mortgage paper, for bad risks.
2. Let banks fail, no matter how big. Manage the break ups as you would manage the assets of any bankrupt company.
3. Let the public know it’s buyer beware above their FDIC limits.
4. The vast majority of the public will find the safest place to put their money.
5. Make it a crime for a “news” organization to stand in front of a perfectly solvent bank and warn about impending bank collapses, even if they don’t mention the bank behind them specifically.
95% of those banks that failed in 2008 because of bad mortgages wouldn’t have issued those mortgages in the first place if the government hadn’t said “Don’t worry, Fannie and Freddie will buy them up, and what they don’t we will bail you out from”. Those banks would never take a corporation destroying risk like that without the government’s assurance that they would be bailed out if they did.
Stop bailing them out. Stop regulating to the point that you have to be big to handle the regulation. People will find the safest, most rewarding place for their money and tiny, small, medium and big banks will all survive on their merits, not their ability to comply with 5,000 page laws.
PastorJon on June 5, 2012 at 5:36 PM
I also argue that the Democrats are actually the party of BIG business, not the Republicans. The Democrats love to pile on and regulate every small business out of existence because they lack the size to keep up with it!
Big companies love the Democrats because they have the resources and market share to comply with regulations. The little guys fail or get swallowed up by the big boys.
Should there be rules against companies being fraudulent or truly harming people or the environment? Yes. But there shouldn’t be rules about how much health insurance you have to provide to employees, for instance. So much of the regulation out there would be handled by market forces. The reason we have group insurance to begin with is market forces, then the state and federal governments came in and mucked it up.
PastorJon on June 5, 2012 at 5:48 PM
Why not break up the banks now a la AT&T in the 1980s?
blink on June 5, 2012 at 5:52 PM
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