LETTERS TO THE EDITOR – Profit centres too big to fail.
By YRA HARRIS.
30 August 2002
Financial Times
(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 Glass-Steagall should never have been repealed without a bank forfeiting its right to Federal Deposit Insurance Corp insurance.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.
Tags: Bernanke, FDIC insurance, Fed, fiscal cliff, Glass-Steagall, Goldman Sachs, Jamie Dimon, JPMorgan, portfolio balance channel, systemic cliff, too big to fail
May 14, 2012 at 8:35 pm |
This was the best piece you’ve written this year!
The more money they make, the more arrogant and thoughtless they become.
May 14, 2012 at 9:35 pm |
Yra,
A wonderful, right on piece. Thank you.
For an amateur like me, it seems that perhaps the only way out (god forgive me) is for the government to nationalize the too big to fail banks for a very precise–say two year–period for breakup and sale. The TB to F guys will never do it on their own. Question: would this cause the derivative and related markets to vaporize and drown the global edifice? If so, where might a solution come from? And if not…what?
May 15, 2012 at 6:56 am |
canute,
Markets as nature abhors a vacuum.Other traders will fill the needs of the market and do it in a responsible way for the money at risk will be their’s so the risk management will be better–no fdic insurance will mean less systemic risk.The argument about vaporizing the derivative markets is drivel from the lobbying groups who are paid handsomely to obfuscate and confuse
May 15, 2012 at 9:18 am |
Thanks Yra for the clarity and for the hope that a genuine self correcting process is still possible.
Now if we can only facilitate the turnaround with the addition of credible prison terms for some of the slime balls….So far–really–only Martha Stewart has been duly (perhaps overly) corrected. If we add to this the loss of 7 years of past income, per Jim Grant, and say then allowing their victims to seek libel, even against their primary gargantuan residence, who knows….
May 15, 2012 at 7:09 am |
I find myself increasingly convinced that these issues surrounding too big to fail banks exploiting the ability to use other people’s money (OPM, pronounced opium) to somewhat carelessly place massive bets are part of a broader problem surrounding the ethical duties, conflicts of interest, etc. of modern day executives in many industries. In some large respects I think there are 3 culprits at hand…1. people (myself included) have a poor/incomplete understanding of monopolies and at what point a firm begins to develop market power in a way that is unhealthy for the consumer and society as a whole, 2. the FTC is inept at regulating industry such that unethical behavior has been allowed to compound sometimes inch by inch and sometimes mile by mile, and 3. modern day corporate executives have exploited chrony capitalism to a point of perfection which has allowed them to consolidate all walks of industries to a point of unhealthy size and in many instances too the neglect of shareholder value all the while warranting (in the eyes of the company’s board) increased pay for the executives as they are now responsible for managing a company 10x bigger than it used to be. In the instance of the financial industry, the consequence is a system that could largely evaporate in the event of one messy default.
Possible solutions:
The short term solution (at least in financial’s and probably most industries): reverse the industry consolidation that has built up over the past 30 years.
The long term solution: establish a cultural code of conduct that it is wrong to trick F* people for a living.
May 15, 2012 at 11:13 am |
It would appear the solution is clear cut: end globalization (overhaul US corporate tax code), undermine China economy and make banking a utility business. If Obama wins, the US must be on the right course
May 15, 2012 at 11:16 am |
usikpa—sorry I must be missing something for that is not the outcome at all—globalization is a good thing sudsidizing bank risk is another story.Seems like you have been drinking from the Sandy Weil fountain–but I agree with you to overhaul the “tax Code” which is most taxing when trying to comrehend it
May 15, 2012 at 1:20 pm |
Much lower oil price and AAPL accumulating cash and paying taxes onshore – whats not to like?
Financial industry overhaul (“down with the TBTF banks”) will be much easier then, me thinks
May 15, 2012 at 11:16 am |
Yra,
Your words are prophetic as usual. Past warnings of the consequences of eliminating GS and passing GLB were ignored, as are the current warnings related to Dodd-Frank. At best, these measures give us all a false image of oversight, but in actuality, are nothing more than opportunities to exploit monopoly rents at society’s expense. The current ZIRP is yet another example of society paying for the banking sector’s ability to recapitalize their shaky balance sheets at every saver’s expense.
I take exception with your proposal of eliminating FDIC insurance for these leaches though. If we examine the action of our “regulators” to similar problems in money market mutual funds, we can see the same path of socializing risk and privatizing profits.
The revolving door between government and big business is a very unhealthy relationship that society is paying for. Read the words of Dwight D. Eisenhower from his 1961 farewell address. (See: http://mcadams.posc.mu.edu/ike.htm ) Just replace the word, “military-industrial complex” with “business-political complex” and you can see everything he warned against now having happened.
Feel free to borrow my tagline: “Never in the history of our country, has so much been transferred from so many to so few.”
Kevin
May 15, 2012 at 11:18 am |
Thanks Kevin–again everyone should read Simon Johnson’s piece the silent coup
May 15, 2012 at 12:23 pm |
[…] More… […]
May 15, 2012 at 2:04 pm |
Yra,
I agree, the Simon Johnson article in The Atlantic was a timeless piece of advice. Readers can access it at:
http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/
Kevin
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