Courtesy of Washington’s Blog an impressive list of bankers, economists, and financial experts who’ve called for breaking up the big banks. They represent a broad range of the political spectrum, too.
It’s an idea whose time has come. Maybe ten years ago.
I would like to see someone explain “how” one would go about doing this. I don’t think you can waive a pen and make them smaller.
Bill Black, who participated as a regulator during the savings and loan debacle, has written about this from time to time. Essentially, it’s the same way as you eat an elephant: one bite at a time.
Lots of strategies have been proposed. For example, lots of people have proposed splitting the commercial banks from the investment banks.
We’ve broken up big companies before.
My general “how to” thought is, the government doesn’t bail out AIG and wathces things collapse, or bails out AIG and doesn’t use it to pump other banks. But then I wonder if the outcome would be a few big banks failing and the remaining big banks getting even larger.
We’ve used antitrust law to break up monopolies before, but the courts have decided the policy in terms of identifying a legitimate government purpose (protecting competition) and those economic theories that it finds to credibly serve that purpose. Its not clear that breaking up the banks would fall within their accepted range of policies, and this is an area where the SCOTUS makes the policy.
Black is probably thinking along the correct lines of small steps.
http://www.cnbc.com/id/48321443
Note the comment about loss of price competition. Just like in health care, you eliminate pricing, you are effed.
My general “how to†thought is, the government doesn’t bail out AIG and [watches] things collapse, or bails out AIG and doesn’t use it to pump other banks. …
The AIG “bailout” was to funnel money to the big investment banks. It is called laundering money when done by other criminals. but other criminals cannot have their activities legalized.
There was a run on the mutual funds, and TARP was created to stop this. I think the mutual funds were about 12 hrs from collapse, and their was a cascading effect occurring. The big investment banks among others had Credit Default Swaps (CDS) for the trash the mutual funds were holding, and they were on the “right” side. AIG was on the “wrong” side, but they did not actually have the funds to cover the bets. There would be a corresponding cascade at AIG.
Using the 1933 banking crisis as a template, the federal government could have backstopped the mutual funds, and purchased the MBS trash for a small percentage (>50%). In addition, the government could have forced the trash to be “marked-to-market”. This could have taken of mutual funds (pensions, 401k, etc.) and mortgages. They could have gotten Sheila Bair (FDIC chairman) to arrange the buyout.
Not sure what you suggest was politically feasible Tasty. They did a lot of that anyway, just spread out a bit more. To be fair, it is easier for us to see what could have been done after the fact. In real time, this stuff is a lot harder, especially when a lot of banks did not know their true exposure.
At any rate, now that things are settled, break em up.
Steve
I favored this at the time. I strongly suspect that mark-to-market would have revealed that the banks were insolvent which was exactly what Paulson and Co. wanted to prevent.
Just like in health care, you eliminate pricing, you are effed.
That’s just crazy make-believe economics talk. They don’t know anything more than the voodoo witchdoctors. It’s all a crock.
/ Michael Reynolds impersonation
It is called laundering money when done by other criminals. but other criminals cannot have their activities legalized.
Well that’s the fault of other criminals for not buying enough Congressmen and Presidents, right?
@steve
… To be fair, it is easier for us to see what could have been done after the fact. In real time, this stuff is a lot harder, especially when a lot of banks did not know their true exposure.
It was known long before the crisis hit. I became aware of it in 2006, and in 2008, more of the exposure was being exposed. I had no knowledge of how the mortgage, CDS, MBS, CDO, etc. worked before 2006, but I was following people who did. The only question was when was it going to collapse.
There were some people who made a lot of money shorting the various entities. The problem was timing, and without a lot of money, you would have risked losing a lot. At the time, it was out of my league.
Initially I was for TARP, but once I learned the details, I knew it was a scam. The FDIC insured banks were in better shape to weather the crisis. Sheila Bair had spent the preceding trying to strengthen the bank’s balance sheets, and she should have been called to work out this mess.
@Dave Schuler
I favored this at the time. I strongly suspect that mark-to-market would have revealed that the banks were insolvent which was exactly what Paulson and Co. wanted to prevent.
The FDIC insured banks were in much better shape because of Sheila. The trash is still on the books, and until it is worked off, the US will be dragging along the bottom.
Hank’s buddies had their asses hanging out, and he was protecting them. I will give him the benefit of the doubt and assume he was also acting to protect everybody. In his (and others) view of the banking/financial system is that it must work the way it does. Allowing the investment banks to collapse would be “the end of the world as we know it”. Similarily, President Obama makes the same argument for not allowing GM to go bankrupt.
There were some people who made a lot of money shorting the various entities.
I seem to recall Andy Beal tripled his fortune from about one billion dollars to three billion dollars because of plays like that. I’m sure he has tried to up the stakes more in his running heads-up battle with the Vegas poker pros!
And there was some crazy guy that did similarly well that tried to buy a Senate seat here in Florida a couple of years ago. He was crazy enough that he didn’t win despite the big money dump, but he might have pulled it off if he had an (R) after his name instead of a (D). (Strong (R) headwinds that year, and this state is almost solid red except during Presidential election years.) Hey, Scott bought the governorship down here respite being an obvious Richard. That MF Global guy bought a Senate seat and a Governorship in NJ. So clearly offices can be bought by the super-rich.
@Icepick
Well that’s the fault of other criminals for not buying enough Congressmen and Presidents, right?
Before I understood how many of these schemes worked, I was being factitious about the financial people being crooks, but after begining to understand how they worked, it dawned on me that this was the same thing that organized crime, scam artists, and street hustlers do. Most of it is not very complicated to understand if you look at from the hustler mindset.
“Do the Hustle”
Similarily, President Obama makes the same argument for not allowing GM to go bankrupt.
Actually he made that argument not to keep GM from going bankrupt, but to make certain he got to screw certain people (those in mutual funds for their retirements; dealerships that contributed money to Republicans) and reward certain other people (union leadership) when GM did go bankrupt.
“Do the Hustle”
Dude, you should at least provide a link…. WARNING: Link not safe for ANYBODY.
@Icepick
Actually, I probably should provide more context for my cultural references. You may have picked up on my Charles Lutwidge Dodgson quotes.
To anybody who cares:
I reference The Hunting of the Snark because it is nonsense, but it is well thought out nonsense in contrast with most nonsense. Alice’s Adventures in Wonderland and Through the Looking Glass (And What Alice Found There) contain logic taken to nonsense conclusions. Juxtapose Lewis Carroll with Charles Lutwidge Dodgson to complete the picture.
/ Michael Reynolds impersonation
I have not seen anything from him in a while. Is he OK?
TastyBits
He is alive and well, hanging out with the like-minded @ OTB.
@Tasty- I think a lot of people knew we were in bubble. Not many knew how bad it would be because most of us didnt know about the mountains of debt piled on top of the mortgages. That aside, the banks themselves did not know what they owned and how much it was worth when the crisis hit. No one knew. That is one of the reasons the credit markets froze. (Read el-Arian on this.)
Steve
@steve
I started hearing about the coming problem in housing in 2006. In 2007, I learned about MBS’s, CDO’s, and CDS’s from people who know a lot more than I do. This is where I learned about leveraging, off-books, on-books, SIV’s, and more. It was a house of cards, and once you knew how it worked, it was easy to see the coming crisis.
The problem was that people who refused to allow the possibility of housing declining. If housing never declines, there would never be a problem. This was the rational for the CDS market. They were protected by the CDS’s, and they were as long as the other party could meet their requirements.
The same folks who said the housing collapse could never happen are saying that Europe cannot collapse, and the same people who predicted the housing crisis are predicting the European crisis.
El-Arian is a bond trader, and my guess is that he never thought it could happen. What does he think will happen in Europe? (see Jon Corzine and MF Global)
@jan
He is alive and well, hanging out with the like-minded @ OTB.
Too bad. I like to hear different arguments. This allows me to strengthen my argument or modify it as needed. Occasionally, I have had to throw out one of my favorites, but it is better to be philosophically sound.
I keep up on the OTB RSS feed, but I do not find much that grabs me. @Dave Schuler has a wide variety of topics, and he and the commenters have interesting arguments.
The WH warned Congress about Fannie Mae/Freddie Mac in 2008 17 times alone
The above has a timeline from 2001 onward….there were red flags that went unheeded.
TastyBits
I doubt he is gone..why should he leave. It’s just that there are more kudos over at OTB thrown his way, which probably makes posting more pleasurable for him during his writing breaks.
I agree with you about OTB. Although their threads are interesting to read, IMO, their comment section is predictable.
@jan
If I remember correctly, Fannie & Freddie had off-book Structured Investment Vehicles (SIV), and these were fairly large. Mostly, Fannie & Freddie (and others) distort the mortgage market. This helped to inflate housing prices, but the housing problem was managable.
Fannie & Freddie were problems, but the cause for the financial collapse was the derivatives built using the mortgage trash packaged in the MBS’s & CDO’s. They were levered at 20 to 1 (some 30 to 1), and when the 1 collapsed it took out 20. Each of the 20 was levered 20 times, and the original 1 that collapsed took out these as well.
This was known among the insiders, and they would discuss it on some of the financial blogs. I followed them, and that is how I knew. (My wife knows more about the housing mess than the experts, but she had to put up with my rants.) The sub-prime mortgages were never a problem. It was the ARM and Alt-A that were the problem, and everything leveraged using this trash was going to be in trouble.
This is the same thing that is going on in Europe, and it is going to end the same way.
Bill Black has noted many times that the FBI warned Congress that no-doc loans (liars loans, the dominant form of subprime that has been a problem) had a history of fraud and was leading to massive fraud. A number of state AGs tried to stop them, but the OTC overruled. The exploding ARMs, IIRC, had a higher percentage of failures but were smaller in number (been a while since I read the details and memory fuzzy this AM as no caffeine yet.)
Steve
Steve
TastyBits and Steve
You’re both right, about the effects of derivatives (which I really don’t know much about) and so-called liar’s loans. Basically, the housing market was so distorted and in denial about buyer’s qualifications, real housing prices and so on.
Speaking of risky loans — this can be applicable to any industry, creating it’s own bubble with the potential of similar consequences as to what happened to the housing market:
GM risky subprime auto loans fuel sales
Will this be deja vu, except this time for GM?
@steve
The no-doc were probably the worst. The ARM’s were a problem because the rate adjustments would be due in 2007 and 2008 for the 2004 and 2005 vintage loans. The jump was predicted to be substantial (~25% of the existing payment or more), and many of the people with these loans were struggling.
There was also a recession coming in late 2007 which combined with the ARM reset was going to be a problem, and the coming recession was being denied also for a long time (especially by President Bush and Hank Paulson).
Alt-A loans are far worse than sub-prime. The Alt-A has a good credit history but does not have the ability to repay the loan. The sub-prime has bad or no credit history but has the ability to repay. Some of the Alt-A loans had the variable payment plans – interest only or even less, many of these people intended to flip the house. (I knew a few of these, and they refused to believe there was a problem.)
At the beginning of 2006, I did not know much about house financing. By the end of 2006, I was not an expert, but I knew far more than the talking heads on CNBC, Fox, CNN, MSNBC and government officials. At the beginning of 2007, I did not know much about financing schemes. By the end of 2007, see previous. It took some work to learn about housing and finance, but it was doable. The only way the experts (including government officials) did not see it was by deliberately refusing to look.
I do not remember most of the sources, but Mike “Mish” Shedlock was one. Another one had a female contributor who was an insider, but has since passed away.
@steve, I do not mean to disrespect you, but I spent a lot of time digging into this mess. When I say they were using the same methods as organized criminals, scammers, con men, and hustlers, it is not a throw away remark. The only reason they are not behind bars is because their crimes are legal – “legal criminals”.
@jan
Will this be deja vu, except this time for GM?
I would not doubt it.
Until 2008, the US auto makers made a substantial amount of money with their financing divisions. With the exception of fleet sales, my opinion is that they were the cars were a loss-leader for the auto loan, but I am not knowledgeable enough to make anything more than an uneducated guess.
@jan
You’re both right, about the effects of derivatives (which I really don’t know much about) and so-called liar’s loans. Basically, the housing market was so distorted and in denial about buyer’s qualifications, real housing prices and so on.
Unless you want to piss off your spouse, do not dig into how this crap works. Apparently, normal/sane people do not scream at the TV.
Fannie and Freddie were adding fuel to the fire, but the derivatives were the oxygen. Fannie and Freddie did have SIV’s with derivatives, but this was a separate and larger problem. As far as I know, the SIV’s were never brought up as an issue.
Derivatives were/are the reason housing could not be allowed to collapse. The housing problem was manageable. I have seen estimates of $800 billion (write-down) to $2 trillion (write-off) to make the problem go away. The derivatives levered by the write-down/off would collapse causing a cascade. This would hurt big money people, but it would hurt little money people as well. Pensions and 401k investments are tied to the derivatives. This is why I sound like a broken record about mutual funds.
TastyBits
I don’t doubt what you say. The housing bubble was just that, build on fantasy and futures filled with star dust. My husband is a RE broker, who lost deals because of the enormous caution he would pencil into proposals. His clients, though, would often want to make outlandish offers on property, saying that future equity would take care of any overage they were willing to pay for a property — something that the comparables just couldn’t support.
My husband, stubborn, honest man that he is, wouldn’t represent people who wanted to go for such deals. Consequently no client of his went under-water from the so-called housing bubble — although he did make a lot less money than some of his contemporaries, who don’t have the same stellar record that he has, nor the clear conscience.
@jan
Good for your husband. I know there a lot of good people out there, but it is easy to forget about them. Some of the people working in the mortgage factories faced the same dilemma.
This is another thing that sets me off. Trying to do the right thing, working hard, and playing by the rules are for suckers. For the illegal criminals, they have a downside to their actions, but the legal criminals have only an upside. I realize some of the people were trapped in the system, and it can be very hard to get out of it – a “Sophie’s Choice”. It is just another tar pit.
“Keep on a rockin’ me baby”
Another one had a female contributor who was an insider, but has since passed away.
That would be Calculated Risk run by Bill McBride. His female contributor was Tanta. (“Hoocoodanode?” was one of her expressions and became the name of the comment board for the site.)
“@steve, I do not mean to disrespect you, but I spent a lot of time digging into this mess. When I say they were using the same methods as organized criminals, scammers, con men, and hustlers, it is not a throw away remark. The only reason they are not behind bars is because their crimes are legal – “legal criminalsâ€.”
I am in agreement, so I dont feel dissed. Do you read Bill Black? He has consistently made some of the best arguments about what happened as being criminal in nature. Of note, he feels pretty strongly about the GSEs being very guilty of criminal conduct also. To this day, I do not understand why people giving out no-doc loans, and then buying the loans, were not prosecuted for fraud.
I would also agree with the alt-A comments. I was concentrating on subprimes, but in volume, the alt-As are worse. But then, once the bubble popped and housing values dropped, even good loans were in trouble.
Steve