LETTERS TO THE EDITOR – Profit centres too big to fail.
By YRA HARRIS.
30 August 2002
(c) 2002 The Financial Times Limited. All rights reserved
Sir, John Plender (“How banks got in a mix”, August 21) correctly identifies the systemic dangers that accompanied the passage of the Graham-Leach-Bliley act. The repeal of Glass-Steagall has pushed the US banking system to the brink of “moral hazard”. The conglomeration of all financial services under one roof has entangled banks in numerous ethical conflicts. Additionally, Graham-Leach-Bliley has made several institutions so large that the Fed cannot allow them to fail.
A single institution’s deep involvement in every facet of financial dealings does not create greater synergy but greater risk. These large, private profit centres know they are too big to collapse. This realisation adds great uncertainty to the entire financial landscape. Rewarding private profits while socialising the risk is a pathway to disaster. Glass-Steagall should never have been repealed without a bank forfeiting its right to Federal Deposit Insurance Corp insurance.
Well, U.S. bankers have done it again. The best of the breed, JPMorgan and JAMIE DIMON, was blindsided by a large loss in its “hedging” operation. It is amazing how, since the REPEAL OF GLASS-STEAGALL, we have seen story after story of bank trading operations bringing the global financial system to the edge of a “SYSTEMIC CLIFF.” Since the repeal of the Glass-Steagall, the international system teeters on the precipice of a calamity. Now if COMMERCIAL BANKS want to be aggressive and trade like the proverbial hedge fund, then BANKS that are holding companies have to surrender their FDIC INSURANCE and pay for the use of people’s money
A hedge fund uses other people’s money but at least investors are compensated for quality performance. In the case of the BANKS, the PUBLIC is saddled with the risk while the bank employees reap the greater share of the profits. If TOO BIG TOO FAIL BANKS had to shed the safety net of FDIC insurance and pay for funds based on market-determined risk, then the financial system would be much more stable. If banks wish to be proprietary traders, then their positions should be posted in a real-time manner and the appropriate risk factors assigned to its cost of money.
One of the biggest GAME CHANGERS FROM THE REPEAL OF GLASS-STEAGALL WAS THAT THE FINANCIAL SYSTEM LOST ITS FIDUCIARIES. When GOLDMAN was an investment banker rather than a peddler of trash DO YOU THINK IT WOULD HAVE EVER ADVISED A CLIENT TO PURCHASE SUBPRIME DEBT THAT WAS CONVENIENTLY AAA RATED? DODD-FRANK IS A SUPERFLUOUS PIECE OF LEGISLATION THAT IS LOADED WITH THE RANTINGS OF A HERD OF LOBBYISTS. HOW MANY BACK ALLEYS IS THE REGULATION CAN TO BE KICKED DOWN?
***HOW CAN YOU PORTFOLIO BALANCE CHANNEL WHILE STANDING ON A FISCAL CLIFF? This is the dilemma that Chairman Bernanke has left the market-challenged to resolve. At the post-FOMC press conference on April 25, Ben Bernanke warned the country that Congress needed to act in a responsible fashion to head off the coming “fiscal cliff” that would have a dramatic impact upon the economy. Economists are projecting that the FISCAL CLIFF could have a negative GDP effect of anywhere from 2-5%. It’s no small change to an economy striving to gain traction as it attempts to circumvent the headwinds of the European DEBT CRISIS.
It was a statement that Mr. Bernanke will come to regret as much as Alan Greenspan’s advising U.S. homeowners to utilize their residences as PIGGY BANKS. To offer up dire warnings and then offer little advice or leadership has done nothing but rattle the markets and shake investor confidence. As the election season commences and leadership takes a vacation, markets are deleveraging as RISK OFF is the daily clarion call.
If investors lose their confidence, Bernanke’s beloved PORTFOLIO BALANCE CHANNEL will be rendered null and void. Between Europe’s credit crisis and the coming fiscal cliff, the wealth effect is diminishing. The FED may not want another round of “LIQUIDITY ENHANCEMENT” but the ghosts of 1937 are rattling their chains in UNCLE BEN’S ATTIC. Wonder if there are any VINTAGE MODELS THERE.