Too Big to Fail, Again...

A few days ago, Sandy Weill, the architect of the Citi explosion into TBTF status, came out in favor of Glass-Steagle.  Then former Obama adviser Steven Rattner (in the Times) told him he was, shall we say, wrong?

Personally, I wouldn't trust either of them as far as I could throw Bernie Madoff, but you have to admit: a return to Glass-Steagle would sharply reduce the likelihood of certain risk-addicted psychopaths gambling with federally insured deposits.  On the other hand, straightforward investment banks, as Goldman-Sachs was before it became a "holding company" to take advantage of government bailouts funds, were "too big to fail" even without government guarantees.  (Also, let us not forget AIG.)

Rattner is right when he says that Glass-Steagle would not have prevented the recent banking crisis and the current economic malaise — but he is wrong when he suggests more and better regulation could keep the banking industry under control.  The only regulation that might work would be to put strict limits on the sizes of all banks, both commercial and investment.  No commercial bank should be so large that it cannot be efficiently unwound by the FDIC, and no investment bank should be so large that allowing it and its investors to go broke would have a major impact on the whole economy.

So, how do you get from here to there?  Beats me.

Still "Too Big to Fail"

The TBTF [Too Big To Fail] institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. It is imperative that we end TBTF. In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Only then can the process of “creative destruction”— which America has perfected and practiced with such effectiveness that it led our country to unprecedented economic achievement— work its wonders in the financial sector, just as it does elsewhere in our economy. Only then will we have a financial system fit and proper for serving as the lubricant for an economy as dynamic as that of the United States.

Now that post-dot.com and post-Enron financial regulations have been rendered largely useless by passage of the so-called JOBS act, we really should see what we can do about salvaging what we can of Dodd-Frank before the Wall Street lobbyists decimate what little good it can do. As you may recall, its original intent was to end the threat of "too big to fail," but somehow the biggest banks remain TBTF and only continue to get larger.

Hence, it is interesting to note that the quotation above is from Richard W. Fischer, president of the Federal Reserve Bank of Dallas — considered among the most conservative of the Fed branches. It comes from his introduction to the Dallas Fed's 2011 annual report, most of which consists of an essay by Harvey Rosenblum entitled Choosing the Road to Prosperity: Why We Must End Too Big To Fail— Now.

Download it here. It's neither too long, nor too technical. It's definitely worth fifteen or twenty minutes of your time.

The Vickers Commission

Regular readers of this blog are familiar with my view on the repeal of Glass-Steagle back in the last days of the Clinton administration, and my view of Bill Clinton for signing it. Irregular readers, I suppose, should be made aware that my feelings about that action are far more uncomfortable than their constipation.

The British, at least, seem to see the problem in allowing retail banks and investment banks to be one in the same. Governments that provide deposit insurance, when banks are on the brink of failure, find themselves facing the necessity to bail out the whole institution — thereby making whole investors, speculators, and just plain gamblers as well as depositors.

What Sir John Vickers and his colleagues have come up with, for the UK, is a plan to "ringfence" the segments of the banking industry that serve ordinary consumers and businesses, while letting the "players" eat their losses. It sounds like a good idea to me, albeit a bit odd. The too-big-to-fail institutions, under the Vickers plan, could be allowed to fail — while their retail subsidiaries would be saved. Go figure.

Well, if that's all that's politically possible, I say, "Go for it." The British, according to all the talking heads I've heard, are likely, indeed, to "go for it." Here in the USofA, of course, anything similar wouldn't be at all likely. The banks still own both our political parties, and they're still working (with nauseatingly predictable success) to eviscerate Dodd-Frank, which wasn't a particularly strong bill in the first place.

What we really need, of course, is a return to Glass-Steagle — which would require the megabanks to split their investment and retail segments into separate companies, and might encourage a bit more healthy fragmentation along the way.

2008 should have taught us that too big to fail is to big to exist.

Regarding the Bank Tax

I wish I could figure out what the Obama administration has in mind regarding that idea for a tax on the big banks. Whose idea was it? Did it come from Summers and Geithner? (Maybe, but I don't think so.) How about Rahm and the political team? (A lot more likely.) Somebody else? (I hope so!)

You see, it's actually a pretty good idea — provided it's done right. There is that little problem that it would have to be enacted by Congress, which means that getting it done right is very unlikely. Nevertheless, unable to rid myself of a residual twinge of optimism left over from my youth, I can't help thinking of how it might be done right.

Here's how it might happen: noticing how unhappy most of America is with the giant banks, their bailout by government, their vast, government subsidized profits for the past year, and the huge bonuses they are paying to their inept executives, members of Congress who are not total prostitutes to Wall Street will decide it might be a good idea to go a bit populist. They will go along with the Obama administration's efforts to assuage teabaggers and fellow travelers who think a balanced budget will restrain their taxes.

Community banks certainly cannot afford additional taxes — enough of them already are failing because they financed all those half-empty strip malls. Community banks will be excluded from the new taxes. The targets will be the big banks — the ones that are too big to fail.

If you slap a big tax on the biggest banks, it's a dead cinch that those big banks will break themselves into manageable pieces — pieces that are small enough to fail (and not pay those taxes.) Congress won't do it, but an appropriate tax will encourage the banks to do it to themselves.

Will it happen?

I'm not too optimistic, but, what the fuck, there's a chance.

Still, I'm not holding my breath.