"Those whom the gods would destroy, they first encourage to borrow cheaply"

Today's must read on the next financial panic.

All About 'The Blob'

Read it and weep.

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.

Happy Free Positive PR for UK Banks Day!

One somewhat peculiar difference between the U.S. and UK is how in the UK (and Ireland) official public holidays are referred to as 'bank holidays'. From Wikipedia:

A bank holiday is a public holiday in the United Kingdom or a colloquialism for public holiday in Ireland. The first official bank holidays were the four days named in the Bank Holidays Act 1871, but today the term is colloquially...used for public holidays which are not officially bank holidays, for example Good Friday and Christmas Day.

I have no idea whether Brits on whole form any positive associations towards banks because of this, but if nothing else it strikes me as some nice free, positive advertising for our friendly, neighborhood Too Big to Fail banks.

Here's an idea: perhaps renaming 'bank holiday' to 'public holiday', or something similar, would allow a pol to campaign on a symbolic, anti-banker message that also poses low-to-no risk to the establishment.

Video: Review of 4-Part Frontline Financial Crisis Series 'Money, Power, and Wall St.'

The PolyCapitalist is kicking May off with a number of must watch videos, and this epic 4-part Frontline special follows the crisis from what is arguably its point of genesis: a 1994 JP Morgan retreat in Boca Raton, Florida which of led to the creation of the first credit default swaps.

Frontline has done an incredible job getting many of the key players and insiders, including a number of top Wall St. bankers, to go on record about what happend. Even if you've read all the books, seen the earlier Frontline financial crisis special, and think you know all you need to about the financial crisis, this is still must watch.

The big new item for me, and I'm a bit surprised this has not received more ink, was the March 2009 battle between Larry Summers and Tim Geithner over what to do with the megabanks. My prior understanding was that Summers and Geithner were two peas in a pod. Not always it turns out.

According to Frontline, in March 2009 Summers, along with fellow economist Chritina Romer, pushed for what was called 'Old Testament Justice', meaning firing a bank CEO and or possibly nationalizing one of the megabanks. In contrast, Geithner, who it would appear is more of a protege of Bob Rubin than Summers, fought hard to treat the banks with kid gloves and use stress tests to help instill confidence back into the marketplace.

Obama ultimately sided with Geithner, which seems to contradict earlier reporting that Geithner had ignored Obama's instructions to dissolve Citigroup. Frontline definitely presents Summers in a better light and Geithner and Obama in a worse one.

I have only a minor gripe with this Frontline series, which is the annoying editing. In a multi-part, complex story, reusing clips to aid telling the story is probably unavoidable. However, I felt they recycled too many from within the four part series, as well as from an earlier Frontline special on the financial crisis from a couple years ago. But this is a minor, forgivable quibble given the extraordinary job the Frontline team did to compile and document the crisis up through present day.

Overall, perhaps the key point made in the series - and one I could not agree more with - is that the financial crisis still has not ended. Where it will go from here is as much dependent now on politics as markets or economics.

Video: Debt and Redemption Documentary

At the risk of sounding trite it's often helpful to put a face and voice behind the news.

This short documentary by VPRO, which does excellent work overall btw, has some good coverage of the fallout from the dealings by both small and large Italian municipalities in derivatives like interest rate swaps. And if terms like 'derivative' turn you off but you're still interested in learning more and trying to understand the financial crisis, then video is particularly recommended.

Interviews include the Rolling Stone's Matt Tabibbi, Brooklyn based investor-blogger Reggie Middleton, and former IMF Chief Economist and Professor Simon Johnson.

The most interesting fact from the documentary for me was learning how the City of Milan agreed to be on the hook financially to a bank in the event of a debt default by Italy (the nation state).

Are there any other municipalities which have contractually guaranteed the debt of a sovereign state?

'Government Bank Bailout Was Profitable' Myth Receives Another Nail in the Coffin

Bravo to Jonathan Weil of Bloomberg, who uses the U.S. Treasury's own footnotes and figures to dispel the myth that the bank bailouts were profitable to taxpayers here.

Video: Simon Johnson's White House Burning

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: Michael Lewis on 'Financial Innovation'

Eurozone QOTD: "You've got insolvent banks supporting insolvent sovereigns and insolvent sovereigns supporting insolvent banks"

Quote is from Bridgewater, which with an estimated $122 billion in assets under management is the world's largest hedge fund.

Previously Bridgewater founder Ray Dalio said he didn't expect the next major crisis to hit until 2013, but it appears his firm is positioned for a rocky 2012.

The Fed's $1.2 Trillion in Secret Bank Loans

Interactive chart detailing previously secret Federal Reserves loans to each bank here. Bloomberg deserves an award for their doggedness and reporting on this issue.

Image of the Day

(click to enlarge)

In case you missed the video.

More on the story and fallout here.

Educational Site: If you are concerned about political reform, you might be interested in taking courses as a political science major.

Quote of the Day: On the Megabank-Government-Central Bank Axis

Portuguese President Anibal Cavaco Silva is calling for the ECB to go beyond just being a lender of last resort to banks and to become one for his and other European governments. Specifically, he's calling on the ECB to make "unlimited" purchases of EU sovereign debt. This may be the first time one of Europe's leaders has publicly asked the ECB to take this step.

Would such a move by the ECB be a sound one? From a recent editorial in the FT:

"If governments stand behind banks and banks stand behind governments and the central bank lends freely to both and also underwrites financial markets, then financial asset prices become completely detached from economic reality. In this “system”, the central bank implementing more quantitative easing is no different, in economic terms, from Bernie Madoff marking up his client accounts every month."

From 'Circular commitments lead to a Ponzi economy'.

More on the distinction between what is meant by being a lender of last resort to banks versus the governments here and why lender of last resort to sovereign countries is the proper role for the IMF.

World's Most Dangerous Banks and Their Host Countries

Below is the Financial Stability Board's list (by host country) of systemically important financial institutions (SIFIs), alternatively known as the 29 banks which are simply Too Big to Fail.

Twelve different countries are home to these 29 banks. Half of those countries host just one Too Big to Fail institution, and the other half host anywhere from two (Germany and Switzerland) to the U.S.'s eight.

Continue reading the full article at SeekingAlpha 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.)

Video: Meltdown - Documentary (all 4 parts) on the Financial Crisis

h/t Barry R.

Why the Vickers Report on Banking Reform Failed the UK and the World

Kotlikoff rips the Vickers commission's final recommendation:

The Independent Banking Commission’s final report is a grave disappointment. The ICB (chaired by Sir John Vickers) seeks to reinstate Glass-Steagall by ring-fencing good banks and letting bad banks do their thing and, if they get into trouble, suffer the consequences. This proposition was tested by the collapse of Lehman Brothers, whose failure nearly destroyed the global financial system. 

The commission retains the current system apart from some extra requirements primarily imposed on the good banks (the retail banks). The main impact of this is likely to be to foster more financial intermediation to run through the bad banks, i.e. if you impose more regulation on financial companies that call themselves X and less on companies that call themselves Y, companies that call themselves X will start to call themselves Y. In short, the commission has in effect taxed good banking while sanctifying shadow banking. The commission has also chosen to regulate based on what a bank calls itself, rather than on what it does.

A year back, Mervyn King, Bank of England governor, described the current banking system as the “worst possible.” In a speech, delivered at the Buttonwood Conference in New York, he called for the analysis of Limited Purpose Banking — a reform plan that I developed, which replaces traditional banking with mutual fund banking and makes no distinction between financial intermediaries.

At the end of last year, I travelled to London and met the commission staff to discuss Limited Purpose Banking. I had thought the commission would take the proposal and my discussion with them seriously. That was not to be. In fact, the commission spent very little space discussing the proposal, despite Mr King’s urging that it be carefully studied, and notwithstanding its remarkably strong endorsement by economics Nobel Laureates George Akerlof, Robert Lucas, Edmund Phelps, Edward Prescott, and Robert Fogel as well as by former US secretary of state and former US secretary of the treasury, George Shultz, by Jeff Sachs, Simon Johnson, Niall Ferguson, Ken Rogoff, Michael Boskin, Steve Ross, Jagdish Bhagwati, and many other prominent economists and policymakers.

Do the opinions of the governor of the Bank of England and all these prominent authorities on finance and economics deserve to be dismissed in seven sentences? For seven sentences is all the commission was able to spare when it came to discussing Limited Purpose Banking, notwithstanding the 358 page length of its report.

Full article here.

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.