Tag: Dodd-Frank

Since the 2008 financial crisis, the five Too Big Too Fail banks are 30% larger. Dodd-Frank has yet to be implemented and already banking lobbyists are working with congress to derail it. In March, Attorney General Eric Holder testified that some banks are just too large which makes them too hard to prosecute. Part of Holder’s justification that bringing criminal charges against large financial institutions would harm the economy, doesn’t quire hold water:

The U.S. Department of Justice appears to have neither conducted nor received any analyses that would show whether criminal charges against large financial institutions would harm the economy, potentially undermining a key DOJ argument for why the world’s biggest banks have escaped indictment.

Testimony by a top Justice official and fresh documents made public on Wednesday during a House financial services committee hearing revealed that financial regulators and the Treasury Department did not provide warnings to prosecutors weighing the economic consequences or fallout in the financial system of criminal indictments against large financial groups. DOJ also could find no records that would substantiate its previous claims that it weighed potentially negative economic or financial impacts when considering criminal charges, said Mythili Raman, acting assistant attorney general for the criminal division.

Wednesday’s revelations are likely to increase criticism of the Obama administration, which has been accused of a lackluster enforcement record against big banks in the financial crisis and other matters.

This week Treasury Secretary Jack Lew appeared at a Senate banking committee hearing where Sen. Elizabeth Warren (D-MA) questioned him on whether it’s time to cap the size of the banks deemed “too big to fail”:

Can we have more Liz Warrens? Like 60 of her?

Within one week Republicans are going to grab the national spotlight on two huge issues that should be the realm of the party who stands up for the little guy.  That party used to be the Democratic party.  How can they let this happen?

On Friday, at the CPAC convention, Federal Reserve Bank of Dallas President Richard Fisher is going to call for breaking up the big banks in the wake of a failed Dodd-Frank bill.

This is mind blowing. First a Republican, Rand Paul, filibusters to get answers about the targeted killing program and now at CPAC, a speech calling for breaking up the TBTF banks.  Where are the Democrats??  The last thing we heard from the party was that the executives can’t be held criminally liable, via Eric Holder and Lanny Breuer.

End “Too Big to Fail” Once and for All

In advance of his speech on Friday to the Conservative Political Action Conference, Federal Reserve Bank of Dallas President Richard Fisher writes with Harvey Rosenblum about the failure of the Dodd-Frank financial reform law to adequately address financial institutions that are “too big to fail.”

[…]

“Third, we recommend that the largest financial holding companies be restructured so that every one of their corporate entities is subject to a speedy bankruptcy process, and in the case of banking entities themselves, that they be of a size that is ‘too small to save.'”

[Emphasis added]

After the latest gambling losses by JP Morgan Chase with its “London Whale” deal, the FDIC is still trying to sell the fantasy that they can resolve the problems created by the megabanks. Yves Smith at naked capitalism takes on that myth that was propagated by acting FDIC Chairman, Martin Gruenberg to continue with business as usual:

The guts of the latest FDIC scheme is to resolve only the holding company and keep the healthy subsidiaries, including all foreign subsidiaries, going on a business-as-usual basis:

   …the most promising resolution strategy from our point view will be to place the parent company into receivership and to pass its assets, principally investments in its subsidiaries, to a newly created bridge holding company. This will allow subsidiaries that are equity solvent and contribute to the franchise value of the firm to remain open and avoid the disruption that would likely accompany their closings. Because these subsidiaries will remain open and operating as going-concern counterparties, we expect that qualified financial contracts will continue to function normally as the termination, netting and liquidation will be minimal.

The subsidiaries would be moved over to a new holding company; the equity in NewCo would become an asset of the holding company now in receivership. The old equityholders would likely be wiped out and the bondholders may wind up taking losses.

This all sounds wonderfully tidy and neat, right? Problem is it won’t work. [..]

Remember that in the US, banks (ex Morgan Stanley) have their derivatives booked in the depositary, which means any losses to depositors as a result of derivatives positions gone bad would be borne by taxpayers. And as we’ve written at excruciating length with respect to the Lehman bankruptcy, the magnitude of the losses cannot be explained by overvalued assets plus the costs resulting from the disorderly collapse. Derivatives positions blowing out (as well as counterparties taking advantage of options in how contracts can be closed out and valued) were a major contributor to the size of the Lehman black hole. [..]

It would have been much better for the authorities to make a full bore effort to discourage the use of products that have limited social value and contribute to the excessive integration of firms and markets. Credit default swaps and complex over-the-counter derivatives top our list. But despite the severity of the crisis, regulators and politicians were unwilling to challenge the primacy of the bankers, with the result that the FDIC continues to pretend that an inadequate approach like Dodd Frank resolutions will work. With distress in Europe rising and Morgan Stanley looking wobbly, we are likely to see sooner rather than later how much the failure to implement real reforms will cost us all.

If this sounds all too familiar, it’s because this is just a repeat of the old an stale propping up of TBTF that got the economy into this mess in the first place. In other words, the tax payers will foot the bill for the megabanks gambling losses once again. Obama needs a whole new council of economic advisors with people who have better ideas like Paul Krugman and Yves.

Felix Salmon, finance blogger at Reuters and Matt Taibbi, of ‘vampire squid” fame from “Rolling Stone“, were guests on “View Point with Eliot Spitzer“, discussing the implications JPMorgan’s $2 billion trading loss and why it should matter to anyone with a banking account at Chase, or any other to big to fail bank.

Taibbi and Salmon agree JPMorgan’s risk-taking has broad implications. “JPMorgan Chase takes deposits in from every single mom and pop, and small business and large business, in the world, and the President of the United States,” Salmon says. “They’re a utility bank and it is their job and their duty … to take those deposits and lend them out into the economy. And what do they do instead? They take $360 billion and put it in a hedge fund in London.”

Jamie Dimon’s failure

by Felix Salmon

Drew’s Chief Investment Office quadrupled in size between 2006 and 2011, reaching $356 billion in total, and it’s easy to see how that happened. On the one hand, it was incredibly profitable, with the London team alone, which oversaw some $200 billion, making $5 billion of profit in 2010, more than 25% of JP Morgan’s net income for the year. At the same time JP Morgan accumulated enormous new deposits in the wake of the financial crisis, both by acquiring banks and by attracting big new clients wanting the safety of a too-big-to-fail bank. Historically, JP Morgan has served big corporations by lending them money, but nowadays, as the cash balances on corporate balance sheets get ever more enormous, the main thing these companies want from JP Morgan is a simple checking account – one where they can be sure that their money is safe.

With lots of deposits coming in, and little corporate demand for loans, it was easy for all that money to find its way to the Chief Investment Office, which could take any amount of liabilities (deposits are liabilities, for a bank) and turn them into assets generating billions of dollars in profits.

Never mind the weak tea Volker rule, what is needed is a new, revised Glass-Steagal, the break up the TBTF and protection for investors and the economy.