Who Wants to Break Up Too Big to Fail Banks?

Quite a few former Too Big to Fail bank CEOs, actually.

h/t Simon Johnson.

Too Crooked to Fail

With the vampire squid having been dealt perhaps the long awaited, but much need mortal PR blow this week, the Rolling Stone's Matt Taibbi has transitioned his sights on Too Bigger to Fail Bank of America:

At least Bank of America got its name right. The ultimate To Big to Fail bank really is America, a hypergluttonous ward of the state whose limitless fraud and criminal conspiracies we'll all be paying for until the end of time. Did you hear about the plot to rig global interest rates? The $137 million fine for bilking needy schools and cities? The ingenious plan to suck multiple fees out of the unemployment checks of jobless workers? Take your eyes off them for 10 seconds and guaranteed, they'll be into some shit again: This bank is like the world's worst-behaved teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt's funeral. They're out of control, yet they'll never do time or go out of business, because the government remains creepily committed to their survival, like overindulgent parents who refuse to believe their 40-year-old live-at-home son could possibly be responsible for those dead hookers in the backyard.

The rest here.

Video: Bank Transfer Day, Bravo!

Very nice to see consumer activism working to solve Too Big to Fail. My SeekingAlpha article encouraging something similar last year can be found here.

For more info about Bank Transfer Day the link to the Facebook group is here.

"Dexia Has a Problem of Liquidity, Not Solvency"

In a move eerily reminiscent of 2008 Belgium and France have agreed to bailout Dexia, with a French official apparently claiming that Dexia "has a problem of liquidity, not solvency".

Ok, so it looks like Bear Stearns would have made for a better metaphor than Lehman.

But now that it's been decided to backstop the Brussels-based megabank (again) Belgium's caretaker government might have to explain in the not too distant future whether the country itself is having a liquidity or solvency problem. Per the below chart Dexia's assets are almost 200% of Belgian GDP.

(click to enlarge)

(Note: the above chart from ZeroHedge does not appear to include France's GDP in the calculation of Dexia's ratio, just Belgium's. However, it does give a sense of just how big Dexia is relative to the size of Belgium's economy, along with other large banks in Europe.)

If Not Obama, Who Does Secretary Geithner Take Orders From?

Here's the story about how Treasury Secretary Tim Geithner, perhaps emboldened by his ability to get away with tax evasion, decided in March 2009 to ignore President Obama's directive to dissolve Citibank.

As MIT Professor Simon Johnson and others have pointed out, the most recent financial crisis marked the third time in the last three decades that Citibank has needed a taxpayer financed bailout. In other words, once every 10 years on average Citibank goes bust.

Obama, perhaps aware of this fact, maybe thought it was time to put an end to the joke that Citibank and its lackluster management can stand on its own two feet without government backing. Why didn't Geithner agree with his boss?

Friends of Bob: Summers, Orszag and Geithner

Yves Smith has a theory. Another possibility is that dismantling Citibank would have put an end to the #1 preferred post-government destination for officials looking to cash-in like Robert Rubin, who pocketed hundreds of millions of dollars in compensation as Chairman of Citibank following his position as Treasury Secretary, and Peter Orszag, who left the Obama administration for a similar lucrative position with the megabank.

And what consequences has Geithner suffered for his supposed insubordination? Apparently none based on the fact that Obama purportedly had to beg him to stay on through the 2012 election.

Bailing Out Too Big to Fail: Here We Go Again

The sorry state of Bank of America's financial position, which is trading at less than half its book value, may necessitate yet another bailout.

From Bloomberg's Jonathan Weil:

Ask anyone what the most immediate threats to the global financial system are, and the obvious answers would be the European sovereign-debt crisis and the off chance that the U.S. won’t raise its debt ceiling in time to avoid a default. Here’s one to add to the list: the frightening plunge in Bank of America Corp. (BAC)’s stock price. 

At $9.85 a share, down 26 percent this year, Bank of America finished yesterday with a market capitalization of $99.8 billion. That’s an astonishingly low 49 percent of the company’s $205.6 billion book value, or common shareholder equity, as of June 30. As far as the market is concerned, more than half of the company’s book value is bogus, due to overstated assets, understated liabilities, or some combination of the two.

But wasn't Dodd-Frank supposed to prevent us from having to bail out the megabanks again?

Until we embrace comprehensive financial reform, such as well thought through proposals like 'Limited Purpose Banking' outlined by Professor Laurence Kotlikoff, we will continue to be faced with the prospect of bailing-out reckless and/or incompetent Too Big to Fail megabanks.

FDIC's Bair: "They Should Have Let Bear Stearns Fail"

Today's must-read interview is with just-departed FDIC Chairwoman Sheila Bair, who sets the record straight on:

• where Paulson, Bernanke, and Geithner went wrong (e.g., bailing out Bear Stearns)
• the disconnect between President Obama's 'heart' and the people he chose for his economic team 
• what the future holds for Too Big (or more accurately 'Too Bigger') to Fail

Bair's argument on letting Bear fail is that it would have sent a strong signal to the larger, more systemically integrated firms, like Lehman, that they should raise capital because the government was not going to bail out everyone. Whether Lehman could have in fact raised sufficient capital in the wake of Bear being allowed to fail is a great counterfactual question. 

One has the impression from reading Sorkin's Too Big to Fail that Dick Fuld and Co. either expected Paulson to bail Lehman out, or that the storm would pass soon enough for the prices of Lehman's assets to recover. Paulson purportedly appealed directly to Fuld to raise capital on numerous occassions in 2008. However, given the Federal Reserve's bailout of Bear, Fuld's skepticism that the systemically more important Lehman would be allowed to go under is understandable. If Bear had been allowed to fail Fuld likely would have come away with an entirely different interpretation of how things might play out should his back get pushed up against the wall, as it did during that fateful September of almost three years ago.

The interview also makes reference to former CFTC head Brooksley Born. For anyone who hasn't watched it already I highly recommend Frontline's profile of her battle with Greenspan, Rubin and Summers on the regulation of derivatives, a Wall Street product which Warren Buffet has called "financial weapons of mass destruction".

Video: Simon Johnson Rips Too Big to Fail at Bretton Woods

Mervyn is the Man

Anyone following the ongoing financial crisis (yes, it's not over yet) closely these past few years has probably noted the markedly different rhetoric coming from two central banks on opposites sides of the Atlantic.

BoE Governor Mervyn King

Governor Mervyn King is Ben Bernanke's equivalent at the Bank of England. This weekend he again excoriated Too Big to Fail banks, which predictably led to HSBC threatening to leave town (again).

Is Mervyn out of his mind? I mean, however will London's economy and the U.K.'s tax receipts survive if megabanks like HSBC relocate to Singapore?

The oft-repeated threat by Too 'Bigger' to Fail megabanks that they'll leave town for lax regulatory and lower tax enclaves in Switzerland, Asia, etc. shouldn't scare anyone. If in fact they do carry through on this threat I for one would be at the airport to wave them off goodbye.

For starters, many megabanks don't pay much in the way of local taxes. But that's not the main reason we should call the Too Bigger to Fail bankers' bluff.

With respect to megabanks' threatening to leave town, author Michael Lewis recently made the following analogy:

Your local utility is found to be poisoning the community's water supply, which is making people sick. However, in order to continue providing electricity the utility says that it has to be allowed to poison the water. If the community doesn't allow it to keep poisoning the water then it will leave town for another location which is ok with this. 

The obvious response to this lunacy is to tell the utility to take a hike -- our community can find someone else to provide non-polluting electricity!

Banks are like utilities. They both fulfill important functions. However, Too Big to Fail megabanks are not the only firms capable of providing banking services. If Too Big to Fail firms leave town then other smaller banks, which don't poison the local water, would gladly step into their place. There is nothing so special that Too Big to Fail banks do that can't be easily and quickly replaced. In fact, they are much, much easier to replace than an electricity utility.

Megabanks pose a risk to the health of the economy, just like the water-poisoning utility poses a risk to the well being of the community. When something goes wrong at the Too Big to Fail banks, like it did in 2007-2008, everyone suffers in the form of bigger deficits, higher taxes and lost jobs.

Meanwhile, it looks to be another record setting year for banker bonuses.

Between Governor King and the Independent Banking Commission's Sir John Vickers it would appear that the U.K., unlike the U.S., has the right people in the right place at the right time.

Bravo, Mervyn! Keep up the good fight!

P.S. Interestingly, Mervyn in his pre-BoE life was Michael Lewis' tutor at the London School of Economics.

Photo of the Day: Paul Volcker Puffing Away Circa 1980

From Floyd Norris' optimistic piece on the implementation of the Volcker Rule, which aims to ban proprietary trading at systemically important financial institutions (aka Too Big Too Fail) in today's NY Times.

Former Federal Reserve Chairman Volcker testifying
before the U.S. House Banking Committee, 1980

You might be smoking like a chimney too if you had to explain to Congress how you were going to avoid causing massive unemployment (and cost pols their re-election) while slaying double digit inflation.

Bravo Sir John Vickers, the 'Too Big to Fail'-Slaying Hero

Sir John Vickers

As so often has been the case Great Britain is once again leading the way.

Sir John Vickers, head of the U.K.'s commission on banking reform, is making it clear that Too Big to Fail's days are numbered.

And the change can't come soon enough. Following Iceland's financial collapse, Britain's economy arguably became the world's most overbanked and vulnerable to an even greater systemic financial crisis than the most recent one.

The City of London is home to three of the world's five largest banks by assets (Royal Bank of Scotland, HSBC, and Barclays), and the total assets of the U.K.'s banking sector are approximately 5X the size of the nation's GDP (Iceland's banks' were 10X before its banks collapsed).

We wish Vickers luck with his efforts to put a stake through the heart of what I call 'Too Bigger to Fail' as it won't be easy sailing. Encouragingly, Sir John has proven himself to be capable of driving controversial and difficult institutional change; previously he was responsible for eliminating the notorious three hour exam on a single word at Oxford's ultra traditional All Souls College.

And we further hope that England's former compatriots across the Atlantic are taking note, for Britain can't do this alone. International cooperation and solidarity are crucial to solving this problem.

Wall St. & Obama's $1 Billion Presidential Re-Election Fundraising Goal

News came last month of the unprecedented amount of money President Obama will seek to raise for his 2012 reelection campaign.

And now with Obama's recent appointments of officials drawn from 'Too Big to Fail' institutions like Bill Daley of JP Morgan Chase and Gene Sperling of Goldman Sachs to key posts in his administration, we can see where Obama expects to raise that $1 billion.

Wall Street is home to perhaps the biggest pile of campaign contributions. As Inside Job Director Charles Ferguson explains, while Obama's decision to give in to Wall Street is depressing it's entirely rationale in terms of his re-election fundraising goals.

In fact it's a pretty safe bet that both Democrats and Republicans will be aggressively courting Wall Street and the now 'Too Bigger to Fail' banks for massive 2012 presidential campaign contributions.

And I'm sure there will be no strings attached to any such contributions, right Lloyd and Jamie?

Video: David Einhorn on Bloomberg TV

The David Einhorn December media tour continues.

Topics in the below Bloomberg interviews include: European debt crisis, Too Big to Fail, Apple's stock price and importance of Steve Jobs, when David first got an iPhone, and the unemployment problem. Much of this will be familiar to anyone who has seen some of David's other recent media appearances  (which have also been posted on this site).

Wall Street Collusion: Secretive Banking Elite Rules Trading in Derivatives

Must read NY Times article on how the Too 'Bigger' to Fail megabanks control and manipulate the multi-trillion derivatives market.

An excerpt from the article:

“On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk. In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available.”

and the money graphic:

Video: Famed Investor David Einhorn on CNBC

Great to see David speaking publicly recently (more recent Einhorn here). Wide ranging interview covering his expectations on the price of gold, and even some positive, upbeat thoughts from the legendary short seller.



The below video features David Einhorn (who was guest hosting on CNBC this morning) sparring with Fed insider Larry Meyer from Macroeconomic Advisors.

Maverick Fed Governor Hoenig: Too 'Bigger' to Fail Alive and Growing

The maverick of the Federal Reserve, Governor Thomas Hoenig, states the following in his NY Times op-ed:

There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight.

Last summer, Congress passed a law to reform our financial system. It offers the promise that in the future there will be no taxpayer-financed bailouts of investors or creditors. However, after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.

Too 'Bigger' to Fail

At risk of causing my high school grammar teacher to roll in her grave, I've started calling what Hoenig describes above as 'Too Bigger to Fail'. The below chart helps illustrate the 'Too Bigger to Fail' concept.

The grey circles represent banks which failed and then were merged with the 'bigger fish' in the banking pond. By eating smaller fish the big fish grows, and that's precisely what's happend at the world's already Too Big to Fail megabanks (hence the new name Too 'Bigger' to Fail).

Regulators — not just in the U.S. but across the globe — activated their Too 'Bigger' to Fail strategy with the hope that the crisis would be solved by spreading toxic assets across a larger, and in theory healthier set of balance sheets. The same toxic assets still exist, but it was hoped that the bigger banks could better cope with the toxic asset losses.

Too 'Bigger' to Fail has one further element: megabanks would have time to lick their wounds and heal by a) generating increased profits due to fewer competitors (the small fish that were eaten), and b) through bank profit and banker bonus friendly programs like unlimited zero interest central bank lending to mega banks and QE2.

Ultimately, any hope for a solution to the Too 'Bigger' to Fail problem depends on whether sufficient political will and leadership can be mustered. Can it?

Small is Beautiful

The U.S. based megabanks -- Chase, Citibank, Bank of America, Wells Fargo, Goldman Sachs, and Morgan Stanley -- will not voluntarily shrink themselves out of a sense of patriotic duty. Hopefully this week's news of the Fed's foreign bank lending of perhaps as much as $1 trillion at nearly 0% interest rates to banks like UBS (Switzerland), Deutsche Bank (Germany), Barclays (U.K.) and BNP Paribas (France) puts to rest any lingering doubt of whether the megabanking establishment is loyal to any one nation's flag.

Turning to our current political leadership, unfortunately Inside Job Director Charles Ferguson may be right in his assessment that the Obama administration is unwilling to step up to the plate and drive the necessary stake through the heart of Too Big to Fail once and for all.

If our politicians can't fix the problem, what hope remains? Thankfully an arguably even more effective solution to Too Bigger to Fail exists completely outside of the Washington D.C. political black hole.

Lost Customers: The Only Language Megabanks Understand

Most of us are bank customers, which makes putting an end to Too 'Bigger' to Fail quite simple: all we have to do is take our banking business somewhere else.

For those customers at one of the above Too 'Bigger' to Fail banks, move your account to a smaller bank. Also never use an ATM at a Too 'Bigger' to Fail bank. Plenty of smaller banks now offer free ATM fee reimbursement, so this won't saddle you with extra fees. While moving your account will require a little extra work it's a relatively simple process. If enough of us pull together and do this it will go a long way towards solving the problem.

And for anyone who works at one of the aforementioned megabanks and has read this far, you can perhaps make one of the biggest contribution of all by seeking out another employer, or career. I did.

Democratic capitalism has many shortcomings. But one of the beautiful things about the marketplace in this particular instance is that it can successfully achieve what D.C. can't and Wall Street won't — cutting the Too 'Bigger' to Fail banks down to an appropriate size.

Disclosure: No positions; I bank primarily with the recently divested from BofA (NYSE: BAC) and IPO'd First Republic Bank (NYSE: FRC) and USAA Savings Bank (private).