There has been much commentary (see this as a smart example) on the scathing Senate hearings on JPM and the London Whale last week.

I wanted to take a moment to throw out a few ideas that relate to JPM’s embarrassing moment int he spotlight (again).

The TBTF giant banks want to eat their cakes and have it, too. These publicly traded companies want to maximize the returns on their invested, leveraged mostly off balance sheet dollars. They still are incentivized for maximum transfer of wealth form shareholders to insiders. They want FDIC insurance so the depositors are comfortable. They do not want to suffer their own losses, preferring to lay them off on third parties (GSEs, taxpayers, etc.) where ever possible. They want low cost FOMC monies to do this with, and full tax payer support for when they inevitably crash and burn.

It is the worst of 3 worlds: Socialism for the banks, crony capitalism for the insiders, with taxpayers on the hook for the downside.

The Volcker rule was aimed at separating the gambling with other people’s money (OPM) from the guaranteed deposits side of banking. Originally oart of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the banks have managed to thwart its full implementation via lobbying and political influence.

We all understand why: The large investment banks are no longer partnerships, so their incentives remain maximizing returns, embracing enormous risk to do so. The upside is huge, while the downside risks — some reputational damage, but no financial risk or jail time — are de minimis.

Hence, why Volcker and others want to separate the low risk depository institutions from the much more speculative and risky iBanks. But until the Volcker Rule is capable of protecting taxpayers, there are alternatives. To remove the taxpayer from being the ultimate guarantor of all banker speculation, I suggest the FDIC step in.

The FDIC should add conditional elements to its depository insurance. The price increases for the the cost of deposit guarantees could be tied to various conditions. As these increase head the wrong way, increasing risk, the costs t the banks should scale up:

- Bank size
- Specific percentage of off balance sheet transactions (for many large banks, this is now over 50%!)
- Leverage ratios
- Capital reserves

None of this works if the accounting firms facilitate banks misrepresenting their balance sheets. We must make it clear that helping bankers make criminality appear legitimate is an irresponsibility that won’t be tolerated. Thus, the FDIC should maintain a list of accounting firms that meet its standards, with the penalty for accountants that violate the standards above being they get tossed off the list. You don’t need to Arthur Anderson them, just remove a huge source of their revenues for being complicit in fraud in order to get some cooperation from them.

One last thing: Any bank that ever gets bailed out again should be subject to a mandatory 10 year tax. I figure 3% of gross revenues or 15% of profits, which ever is higher, as a mandatory cost of bailouts will be a disincentive for the banks to engage in further recklessness.

As Josh Rosner detailed in these pages before the hearings, JPM’s controls and risk management are laughable. Their fortress balance sheet is illusory. Despite his reputation as the smartest banker of his generation, Jamie Dimon is one banana peel away from being Dick Fuld.



FDIC Rule Change Ends Too Big to Fail (May 24th, 2012)

Category: Bailouts, Corporate Management, Credit, Crony Capitalists, Regulation

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6 Responses to “Implementing the Volcker Rule via the FDIC”

  1. AHodge says:

    totally agree with your clearTBTF state of affars
    not bad for FDIC better than nothing.
    but i think better for FDIC and everyone else who can give not liquidate/resolve support
    fed with discount window etc etc
    to give it only to real banking. meaning make loans. run the payments system
    like the Dalllas fed– or generally Volcker on steroids
    the concession id the guearnatted part could still be in a holding company
    also— these guys might pay more
    then dump a real load on you
    there were many examples of them doing things like
    take first most toxic tranche to get a deal done
    they might be willing to pay 5% if the bonussing was big enough
    it would leave the FDIC better funded

  2. “…We must make it clear that helping bankers make criminality appear legitimate is an irresponsibility that won’t be tolerated…”

    “…irresponsibility…” ??

    is Is a Tort.

    and, with that, they, too, should be scooped up, with the ‘Bankers’, in the ‘Net’–called RICO.

    though, good thing, for them, that US AG “Bag” Holder is, still, ‘on the Job’..

    or, better, that Congress is, still, “The Parliament of Whores”
    “…RICO was used frequently in its civil form against notorious 1980s figures like Michael Milken and Charles Keating, but in 1995 Congress disallowed the use of RICO in civil cases of securities fraud, essentially ending that era. Some creative thinkers, however, believe there are opportunities to apply RICO to cases where securities are involved but the claim is also much broader and involves a pattern of defrauding the rightful owners of their assets…”
    Investment Dealers’ Digest
    September 30, 2002

    but, really, maybe We should note the *fuller Context..

    QUOTE: “Authority has always attracted the lowest elements in the human race. All through history mankind has been bullied by scum. Those who lord it over their fellows and toss commands in every direction and would boss the grass in the meadow about which way to bend in the wind are the most depraved kind of prostitutes. They will submit to any indignity, perform any vile act, do anything to achieve power. The worst off-sloughings of the planet are the ingredients of sovereignty. Every government is a parliament of whores. The trouble is, in a democracy the whores are us.”

    –O’Rourke, P. J.

    Was a ‘Good Idea’, then, It ‘s a Good Idea, still..

  3. rd says:

    The markets are shocked, shocked to discover that Europe now believes that uninsured depositors may actually be uninsured. Applying the invisible hand of free markets to banks receiving deposits from large, “sophisticated” is apparently not a desirable state. These days, free markets are only acceptable when they come with government guarantees against loss.

    It would be interesting to see what would happen if a similar announcement to the Cyprus bailout were announced in the US, namely that insured deposits would really only be limited to $100,000 and that depositors bigger than that may be converted to shareholders if trouble arose. They kind of made that announcement a while back but nobody really believes them and nobody pulled much money from TBTFs. It will be interesting to see if Cyprus changes that. Given that bank deposit interest rates are close to zero, that would be a pretty big risk to take. I can’t imagine that too many wealthy or corporate treasurers would want to put lots of money into TBTF banks that are no longer TBTF and could have shaky balance sheets.

  4. flakester says:

    “Thus, the FDIC should maintain a list of accounting firms that meet its standards, with the penalty for accountants that violate the standards above being they get tossed off the list.”

    And jail time or equivalent for those individuals that violated the standards, and their bosses.

  5. dbrodess says:

    I like the idea you previously proposed here on TBP that the cost of FDIC deposit insurance should be tied to banks decisions to conduct or ignore certain business activities. Banks that conduct prop trading would pay more for the insurance – a lot more.

  6. Onemoretime says:

    Thanks Barry for your excellent suggestions and for keeping banking reform an issue.