big to jail
The Size of the Big Banks Is –
Literally – Destroying the Rule of Law
21, 2012 "Information
Clearing House" --
journalist Ron Suskind
quotes Treasury Secretary Timothy Geithner as saying:
confidence in the system is so fragile still… a disclosure
of a fraud… could result in a run, just like Lehman.
words, Geither said that the big bankers are “too big to jail”,
because disclosing any portion of their
massive fraud would cause bank runs.
economist Simon Johnson
The main motivation
behind the administration’s indulgence of serious
criminality evidently is fear of the consequences of taking
tough action on individual bankers.
The message to bank
executives today is simple: build your bank to be as big as
possible – and then keep growing. If you manage to become
big enough, you and your employees are not just too big to
fail, but also too big to jail.
justify this lack of accountability for the nation’s
wealthiest lawbreakers, the all-too-familiar excuses long
used to shield the politically powerful are trotted out on
cue. Once again, we are told that prosecutions are too
disruptive; that it’s more important to fix the system than
to seek retribution for the past; that because the
wrongdoers’ reputation is in tatters, they have already
suffered enough; that we need the goodwill of financial
titans to ensure our common prosperity; and so on.
the Obama administration has made it
official policy not to
economists, on the other hand, completely contradict Geithner
and the rest of the administration … saying that
fraud caused the Great Depression and the current financial
crisis, and that the economy will
never recover until fraud is prosecuted.
economists and experts on fraud say that fraud is not only
widespread, it is actually the business model adopted by the
giant banks. See
unless the big banks are broken up, financial fraud will grow
exponentially like cancer, and the economy
will be destroyed.
Their Size Allows Them to Rig the Market
“father of free market economics” – Adam Smith – knew that
monopolies hurt the economy.
Libor scandal shows, the size and concentration of the biggest
banks allows them to commit
massive manipulation in the world’s biggest markets, and to
insider trading on a scale never before seen in history.
addition, Richard Alford – former New York Fed economist,
trading floor economist and strategist –
showed that banks that get too big benefit from “information
asymmetry” which disrupts the free market.
prize winning economist Joseph Stiglitz
noted in September that giants like Goldman are using their
size to manipulate the market:
main problem that Goldman raises is a question of size: ‘too
big to fail.’ In some markets, they have a significant
fraction of trades. Why is that important? They trade both
on their proprietary desk and on behalf of customers. When
you do that and you have a significant fraction of all
trades, you have a lot of information.”
Further, he says, “That raises the potential of conflicts of
interest, problems of front-running, using that inside
information for your proprietary desk. And that’s why the
Volcker report came out and said that we need to restrict
the kinds of activity that these large institutions have. If
you’re going to trade on behalf of others, if you’re going
to be a commercial bank, you can’t engage in certain kinds
of risk-taking behavior.”
(especially Goldman Sachs) have also used high-frequency program
trading which not only
distorted the markets – making up more than 70% of stock
trades – but which also let the program trading giants take a
sneak peak at what the real (aka “human”) traders are buying and
selling, and then trade on the insider information. See
this. (This is
frontrunning, which is illegal; but it is a lot bigger than
garden variety frontrunning, because the program traders are not
only trading based on inside knowledge of what their own clients
are doing, they are also trading based on knowledge of what all
other traders are doing).
admitted that its proprietary trading program can
“manipulate the markets in unfair ways”. The giant banks have
also allegedly used their
Counterparty Risk Management Policy Group (CRMPG) to
exchange secret information and formulate coordinated mutually
beneficial actions, all with the
words, a handful of giants doing it, it can manipulate the
entire economy in ways which are not good for the American
political system. No wonder Nobel prize-winning economist
Paul Krugman thinks that we have to
break up the big banks to stop their domination of the political
If We Break Up the Giants, Smaller Banks Will
Thrive … And Loan More to Main Street
Do we need
to keep the TBTFs to make sure that loans are made?
that received federal assistance during the financial crisis
reduced lending more aggressively and gave bigger pay raises
to employees than institutions that didn’t get aid, a USA
TODAY/American University review found.
amount of loans outstanding to businesses and individuals
fell 9.1% for the 12 months ending Sept. 30, 2009, at banks
that participated in TARP compared with a 6.2% drop at banks
Santiago – CEO and Managing Director of Institutional Risk
Analytics (Chris Whalen’s company) –
really shocking numbers are in the unused line of credit
commitments of banks to U.S. business. This is the canary
number I like to look at because it is a direct expression
of banking and finance confidence in Main Street industry.
It’s gone from $92 billion in Dec -2007 to just $24 billion
as of Sep-2010. More importantly, the vast majority of this
contraction of credit availability to American industry has
been by the larger banks, C&I LOC from $87B down to $18.8B
by the institutions with assets over $10B. Poof!
reports that smaller banks are stepping in to fill the
lending void left by the giant banks’ current hesitancy to make
loans. Indeed, the article points out that the only reason that
smaller banks haven’t been able to expand and thrive is that the
too-big-to-fails have decreased competition:
for the nation’s smaller banks represents a reversal of
trends from the last twenty years, when the biggest banks
got much bigger and many of the smallest players were
gobbled up or driven under…
banks struggle to find a way forward and rising loan losses
threaten to punish poorly run banks of all sizes, smaller
but well capitalized institutions have a long-awaited chance
banks struggle, community banks are stepping in to offer
loans and lines of credit to small business owners…
congressional hearing on small business and the economic
recovery earlier this month, economist Paul Merski, of the
Independent Community Bankers of America, a Washington
(D.C.) trade group, told lawmakers that community banks make
20% of all small-business loans, even though they represent
only about 12% of all bank assets. Furthermore, he said that
about 50% of all small-business loans under $100,000 are
made by community banks…
Indeed, for the past two years, small-business lending among
community banks has grown at a faster rate than from larger
institutions, according to Aite Group, a Boston banking
consultancy. “Community banks are quickly taking on more
market share not only from the top five banks but from some
of the regional banks,” says Christine Barry, Aite’s
research director. “They are focusing more attention on
small businesses than before. They are seeing revenue
opportunities and deploying the right solutions in place to
serve these customers.”
Governor Daniel K. Tarullo
importance of traditional financial intermediation services,
and hence of the smaller banks that typically specialize in
providing those services, tends to increase during times of
financial stress. Indeed, the crisis has highlighted the
important continuing role of community banks…
example, while the number of credit unions has declined by
42 percent since 1989, credit union deposits have more than
quadrupled, and credit unions have increased their share of
national deposits from 4.7 percent to 8.5 percent. In
addition, some credit unions have shifted from the
traditional membership based on a common interest to
membership that encompasses anyone who lives or works within
one or more local banking markets. In the last few years,
some credit unions have also moved beyond their traditional
focus on consumer services to provide services to small
businesses, increasing the extent to which they compete with
pointed out in a speech at a U.S. Chamber of Commerce summit
the recent financial crisis, losses quickly depleted the
capital of these large, over-leveraged companies. As
expected, these firms were rescued using government funds
from the Troubled Asset Relief Program (TARP). The result
was an immediate reduction in lending to Main Street, as the
financial institutions tried to rebuild their capital.
Although these institutions have raised substantial amounts
of new capital, much of it has been used to repay the TARP
funds instead of supporting new lending.
other hand, Hoenig pointed out:
2009, 45 percent of banks with assets under $1 billion
increased their business lending.
about 45% morethan the amount of increased lending by
the too big to fails.
some very smart people say that the big banks aren’t really
focusing as much on the lending business as smaller banks.
Specifically since Glass-Steagall was repealed in 1999, the
giant banks have made much of their money in trading assets,
securities, derivatives and other speculative bets, the banks’
own paper and securities, and in other money-making activities
which have nothing to do with traditional depository functions.
that the economy has crashed, the big banks are making very few
loans to consumers or small businesses because they still have
trillions in bad derivatives gambling debts to pay off, and so
they are only loaning to the biggest players and those who don’t
really need credit in the first place. See
don’t really need these giant gamblers. We don’t really need
JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan
Stanley. What we need are dedicated lenders.
Fortune article discussed above points out that the banking
giants are not necessarily more efficient than smaller banks:
largest banks often don’t show the greatest efficiency. This
now seems unsurprising given the deep problems that the
biggest institutions have faced over the past year.
actually experience diseconomies of scale,” Narter wrote of
the biggest banks. “There are so many large autonomous
divisions of the bank that the complexity of connecting them
overwhelms the advantage of size.”
Governor Tarullo points out some of the benefits of small
community banks over the giant banks:
community banks have thrived, in large part because their
local presence and personal interactions give them an
advantage in meeting the financial needs of many households,
small businesses, and agricultural firms. Their business
model is based on an important economic explanation of the
role of financial intermediaries–to develop and apply
expertise that allows a lender to make better judgments
about the creditworthiness of potential borrowers than could
be made by a potential lender with less information about
small, but growing, body of research suggests that the
financial services provided by large banks are
less-than-perfect substitutes for those provided by
simply not true that we need the mega-banks. In fact, as many
top economists and financial analysts have said, the “too big to
fails” are actually stifling competition from smaller lenders
and credit unions, and dragging the entire economy down into a
We Do NOT Need the Big Banks to Help the
Do we need
the Too Big to Fails to help the economy recover?
following top economists and financial experts believe that the
economy cannot recover unless the big, insolvent banks are
broken up in an orderly fashion:
addition, many top economists and financial experts, including
Bank of Israel Governor
Stanley Fischer – who was Ben Bernanke’s thesis adviser at
MIT – say that – at the very least – the size of the financial
giants should be limited.
Bank of International Settlements – the
“Central Banks’ Central Bank” – has slammed too big to fail.
summarized by the Financial Times:
report was particularly scathing in its assessment of
governments’ attempts to clean up their banks. “The
reluctance of officials to quickly clean up the banks, many
of which are now owned in large part by governments, may
well delay recovery,” it said, adding that government
interventions had ingrained the belief that some banks were
too big or too interconnected to fail.
was dangerous because it reinforced the risks of moral
hazard which might lead to an even bigger financial crisis
And as I
noted in December 2008, the big banks are the major reason
why sovereign debt has become a crisis:
points out in a new
report that the bank rescue packages have transferred
significant risks onto government balance sheets, which is
reflected in the corresponding widening of sovereign credit
The scope and magnitude of the bank rescue packages also
meant that significant risks had been transferred onto
government balance sheets. This was particularly
apparent in the market for CDS referencing sovereigns
involved either in large individual bank rescues or in
broad-based support packages for the financial sector,
including the United States. While such CDS were thinly
traded prior to the announced rescue packages, spreads
widened suddenly on increased demand for credit
protection, while corresponding financial sector spreads
other words, by assuming huge portions of the risk from
banks trading in toxic derivatives, and by spending
trillions that they don’t have, central banks have put their
countries at risk from default.
a study of 124 banking crises by the International Monetary Fund
found that propping banks which are only pretending to be
solvent hurts the economy:
Existing empirical research has shown that providing
assistance to banks and their borrowers can be
counterproductive, resulting in increased losses to banks,
which often abuse forbearance to take unproductive risks at
government expense. The typical result of forbearance is a
deeper hole in the net worth of banks, crippling tax burdens
to finance bank bailouts, and even more severe credit supply
contraction and economic decline than would have occurred in
the absence of forbearance.
Cross-country analysis to date also shows that accommodative
policy measures (such as substantial liquidity support,
explicit government guarantee on financial institutions’
liabilities and forbearance from prudential regulations)
tend to be fiscally costly and that these particular
policies do not necessarily accelerate the speed of economic
too often, central banks privilege stability over cost in
the heat of the containment phase: if so, they may too
liberally extend loans to an illiquid bank which is almost
certain to prove insolvent anyway. Also, closure of a
nonviable bank is often delayed for too long, even when
there are clear signs of insolvency (Lindgren, 2003). Since
bank closures face many obstacles, there is a tendency to
rely instead on blanket government guarantees which, if the
government’s fiscal and political position makes them
credible, can work albeit at the cost of placing the burden
on the budget, typically squeezing future provision of
needed public services.
banks have been bailed out to the tune of many trillions,
dragging the economy down a bottomless pit from which we can’t
this. Unless we break them up,
we will never escape.
The Failure to Break Up the Big Banks Is
Dooming Us to Depression
independent experts agree that unless we rein in derivatives,
will have another – bigger – financial crisis.
big banks are preventing derivatives from being tamed.
also pointed out that derivatives are still
very dangerous for the economy, that the derivatives
“reform” legislation previously passed has probably actually
weakened existing regulations, and the legislation was “probably
written by JP Morgan and Goldman Sachs“.
Bradley – who oversees almost $2 billion in assets as chief
investment officer at the Kauffman Foundation –
told the Reuters Global Exchanges and Trading Summit in
New York that a cabal is preventing swap derivatives from
being forced onto clearing exchanges:
There is no incentive from the moneyed interests in
either Washington or New York to change it…
believe we are in a cabal. There are five or six players
only who are engaged and dominant in this marketplace
and apparently they own the regulatory apparatus.
Everybody is afraid to regulate them.
Litan of the Brookings Institute wrote a
paper (here’s a
summary) showing that – even if real derivatives legislation
is ever passed – the 5
big derivatives players will still prevent any real change.
notes that Litan is no radical, but has previously written
in defense in financial “innovation”.
summary from Rortybomb, showing that this is yet another
reason to break up the too big to fails:
is worried about the “Dealer’s Club” of the major
derivatives players. I particularly like this paper as the
best introduction to the current oligarchy that takes place
in the very profitable over-the-counter derivatives trading
market and credit default swap market. [Litton says]:
have written this essay primarily to call attention to
the main impediments to meaningful reform: the private
actors who now control the trading of derivatives and
all key elements of the infrastructure of derivatives
trading, the major dealer banks. The importance of this
“Derivatives Dealers’ Club” cannot be overstated. All
end-users who want derivatives products, CDS in
particular, must transact with dealer banks…I will argue
that the major dealer banks have strong financial
incentives and the ability to delay or impede changes
from the status quo — even if the legislative
reforms that are now being widely discussed are adopted
— that would make the CDS and eventually other
derivatives markets safer and more transparent for all
Here, of course, I refer to the major derivatives
dealers – the top 5 dealer-banks that control virtually
all of the dealer-to-dealer trades in CDS, together with
a few others that participate with the top 5 in other
institutions important to the derivatives market.
Collectively, these institutions have the
ability and incentive, if not counteracted by policy
intervention, to delay, distort or impede clearing,
exchange trading and transparency…
Market-makers make the most profit, however, as long as
they can operate as much in the dark as is possible – so
that customers don’t know the true going prices, only
the dealers do. This opacity allows the dealers to keep
In combination, these various market
institutions – relating to standardization, clearing and
pricing – have incentives not to rock the boat, and not
to accelerate the kinds of changes that would make the
derivatives market safer and more transparent.
The common element among all of
these institutions is strong participation, if not
significant ownership, by the major dealers.
Litan is waving a giant red flag that the top dealer-banks
that control the CDS market can more or less, through a
variety of means he lays out convincingly in the paper,
derail or significantly slow down CDS reform after the fact
if it passes.
thought we’d at least get our arms around credit default
swap reform from a financial reform bill, you should read
this report from Litan as a giant warning flag. In case you
weren’t sure if you’ve heard anyone directly lay out the
case on how the market and political concentration in the
United States banking sector hurts consumers and increases
systemic risk through both political pressures and
anticompetitive levels of control of the institutions of the
market, now you have. It’s not Matt Taibbi, but it’s much
further away from a “everything is actually fine and the
Treasury is in control of reform” reassurance. Which should
scare you, and give you yet another good reason for size
caps for the major banks.
the big banks are still dumping
huge amounts of their toxic derivatives on the taxpayer.
And see this.
extreme concentration of power and control over the entire
global economy of a handful of large banks means that the
entire system is
Why Aren’t They Be Broken Up?
So what is
the real reason that the TBTFs aren’t being broken up (and why
30% bigger now than before the financial “reform”
law was was passed)?
regulatory capture, cowardice and corruption:
Guess which institutions are among the biggest lobbyists
and campaign-finance contributors? Surprise! None other
than the TBTFs [too big to fails].
William K. Black
There has been
no honest examination of the crisis because it would
embarrass C.E.O.s and politicians . . .Instead, the
Treasury and the Fed are urging us not to examine
the crisis and to believe that all will soon be
well. There have been no prosecutions of the chief
executives of the large nonprime lenders that would
expose the “epidemic” of fraudulent mortgage lending
that drove the crisis. There has been no
administration and Fed Chairman Ben Bernanke have
refused to investigate the nature and causes of the
crisis. And the administration selected Timothy
Geithner, who with then Treasury Secretary Paulson
bungled the bailout of A.I.G. and other favored “too
big to fail” institutions, to head up Treasury.
Summers, head of the White House National Economic
Council, and Mr. Geithner argue that no fundamental
change in finance is needed. They want to recreate a
secondary market in the subprime mortgages that
caused trillions of dollars of losses.
neo-classical economic theory, particularly “modern
finance theory,” has been proven false but
economists have failed to replace it. No fundamental
reform can be passed when the proponents are
pretending that there really is no crisis or need
is an even more interesting reason . . .
one reason the TBTF’s aren’t being broken up is [drumroll] . . .
the ‘ole 80′s playbook is being used.
As the New
1980s, during the height of the Latin American debt crisis,
the total risk to the nine money-center banks in New York
was estimated at more than three times the capital of those
banks. The regulators, analysts say, did not force the banks
to value those loans at the fire-sale prices of the moment,
helping to avert a disaster in the banking system.
words, the nine biggest banks were all insolvent in the 1980s.
Richard C. Koo – former economist at the Federal Reserve Bank of
New York and doctoral fellow with the Fed’s Board of Governors,
and now chief economist for Nomura –
confirmed this fact last year in a speech to the Center for
Strategic & International Studies. Specifically, Koo said that
-after the Latin American crisis hit in 1982 – the New York Fed
concluded that 7 out of 8 money center banks were actually
“underwater” and “bankrupt”, but that the Fed hid that fact from
the American people.
government’s failure to break up the insolvent giants – even
though virtually all independent experts say that is the only
way to save the economy, and even though there is no good reason
not to break them up – is nothing new.
Black’s statement that
entire strategy now – as in the S&L crisis – is to cover up
how bad things are (“the entire strategy is to keep people from
getting the facts”) makes a lot more sense.