Tuesday, December 15, 2009

Bigger Than Too Big to Fail?

Anyone who reads here with any regularity already knows where I stand on this, but just in case you forgot…

citiTBTE Asserting that it “is among the strongest banks in the industry,” Citigroup announced on Monday that it would soon repay $20 billion of federal bailout money. This from a bank that has been in the red for most of the past two years, that is expected to limp through 2010 amid a torrent of loan losses, that saw its stock price close after the announcement at a measly $3.70 a share — and that, like other big banks, is still reluctant to lend.

Meanwhile, the Treasury Department, which seems to have no qualms about Citigroup’s self-proclaimed strength, plans to sell its $25 billion stake over the next six to 12 months.

Citigroup’s planned exit from the bailout — like Bank of America’s earlier this month — would be welcome if the banks were the picture of health. But their main motive is to get out from under the bailout’s pay caps and other restraints. The Treasury Department’s approval is a grim reminder of the political power of the banks, even as the economy they did so much to damage continues to struggle...

...Big bank profits, for instance, still come mostly courtesy of taxpayers. Their trading earnings are financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets are collateral. They benefit from immense federal loan guarantees, but they are not lending much. Lending to business, notably, is very tight.

What profits the banks make come mostly from trading. Many big banks are happy to depend on the lifeline from the Fed and hang onto their toxic assets hoping for a rebound in prices. And the whole system has grown more concentrated. Bank of America was considered too big to fail before the meltdown. Since then, it has acquired Merrill Lynch. Wells Fargo took over Wachovia. And JPMorgan Chase gobbled up Bear Stearns.

If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the nation is moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.

The White House’s proposal to overhaul financial regulation has ideas for banks that are too big to fail. The House passed a bill last week that would require big banks to have bigger capital cushions to absorb losses. It gives the government authority to seize and dismantle big financial firms at imminent risk of failure and mandates banks to pay for a $150 billion fund to cover the costs of any future mess. It grants regulators authority to limit the operations or even break up big banks deemed too risky, even if they appear healthy.

These provisions still seem vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities.

If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist. [emphasis added]

Inserted from <NY Times>

I have nothing to add, except that Obama’s attempt to shame the Banksters yesterday is an exercise in futility.  They have no shame.


rjs said...

"Obama’s attempt to shame the Banksters yesterday is an exercise in futility." NO kidding! The Bankers Summit and Some Significant No-Shows - from Jesse -
Some White House Banking summit. A one on one with Jamie Dimon and a few second tier, TARP-bound moneylenders. John Stumpf of Wells Fargo is running late but surely on his way. Tied up signing some last minute foreclosures. The opening topic must be how to spin 26% credit card interest rates as a consumer benefit. It appears that Goldman's Lloyd Blankfein, John Mack of Morgan Stanley, and Dick Parsons of Citgroup will not be able to make the meeting today with The One regarding executive pay and the failure to lend by the Wall Street Welfare Queens. The excuses are not the usual: end of year performance reviews, too busy with the office redecorators, trying to settle the tab at Scores, on hold with the Neiman Marcus trophy-wife and office-chippy department, making plans to fix the Superbowl. Ken Lewis of Bank of America is there. LOL. Trying to pick up an unemployment check and cop a plea.

(Jamie Dimon was there because he is lobbying to be new Treasury Sec, but the rest said that washington was "fogged in"..lol...)

TomCat said...

Thanks, RJ. I read that this morning. They don't care.