Posts filed under “Crony Capitalists”
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)
This book is next up in my queue. It looks to be a primer on why big, highly leveraged banks are bad for the economy.
More than four years after the financial meltdown devastated the economy, our banking system remains resistant to reform and riddled with risk. The Bankers’ New Clothes challenges us to question the status quo and to think anew about the transformative changes in banking that are needed to serve the public interest. This work should spur a long-overdue debate on real banking reform.”
-Phil Angelides, chairman of the Financial Crisis Inquiry Commission
The Bankers’ New Clothes underscores that there is perhaps no reform more important and central to a stable financial system than capping the ability of financial institutions to take excessive risks using other people’s money.
-Sheila C. Bair, former chair of FDIC and author of Bull by the Horns
The Bankers’ New Clothes accomplishes the near impossible by translating the arcane world of banking regulation into plain English. In doing so, it exposes as false the self-serving arguments against meaningful financial reform advanced by Wall Street executives and the captured politicians who serve their interests. This revelatory must-read shreds bankers’ scare tactics while offering commonsense reforms that would protect the general public from unending cycles of boom, bust, and bailout.
-Neil Barofsky, author of Bailout
Bankers have sold us a story that their risky practices are the necessary cost of a dynamic system. Admati and Hellwig expose this as a misguided and dangerous lie, and show how banks can be made more stable–if less profitable for the bankers themselves–without sacrificing economic growth. This brilliant book demystifies banking for everyone and explains what is really going on. Investors, policymakers, and all citizens owe it to themselves to listen.
-Simon Johnson, coauthor of 13 Bankers
A clearheaded antidote to the ill-advised snap reactions to the financial crisis, The Bankers’ New Clothes carefully counteracts arguments that the banking system is now more secure. With direct and rigorous analysis, Admati and Hellwig lay bare the ongoing misinformation about modern banks, and show what remains wrong with banking. This book is the voice shouting that the bankers are still not wearing any clothes. We should listen.
-Frank Partnoy, author of Infectious Greed
I like this book. The Bankers’ New Clothes explains in plain language why banking reform is still incomplete, contrary to what lobbyists, politicians, and even some regulators tell us.
-Paul Volcker, former chairman of the U.S. Federal Reserve and the U.S. Economic Recovery Advisory Board
Full chapter after the jump . . .
The Times’s Louise Story talks to Thomas Hoenig, the vice chairman of the Federal Deposit Insurance Corporation, who says he is not alone in calling for a breakup of banks too large to regulate. The five that need to be shrunk JPM, Wells Fargo, Goldman Sachs, Citigroup, Morgan Stanley (Bank of America was not mentioned int his interview buy was discussed previously):
Is there a single doubt left in your mind? Are you still a believer in Rufus T. Firefly Jamie Dimon as the world’s smartest banker? Is there a scintilla of wonder left in your mind that the giant banks are legitimate? Have you come around to understanding — finally — what some of us have…Read More
The very belated Federal civil suit against Standard & Poors is based on one very specific deal, with an extremely egregious email trail. Looking at the entirety of the crisis, the Credit Rating Agencies (the properly blamed CRA) were major players. Standard & Poor’s and Moody’s as well as the much smaller Fitch ratings agencies…Read More