Is the modern version of “Beware of Greeks bearing gifts” “Beware of ‘reform’ proposals that bankers favor”?
The fact that banksters seem to be bowing to the inevitable, that they will have to submit to some changes in how they do business, should be a step in the right direction. But their inability to accept their central role in creating the worst economic disaster in modern times is stunning. The implosion almost certainly would have brought about a depression absent massively liquidity injections, and still appears like to leave us with years, if not a decade, of halting growth and dislocations for those whose savings were given a nasty haircut. And the lack of real reform means the odds of creating bigger bubbles with an even worse aftermath remains high.
And why should we be a little wary of this new found religion among our financial overlords? Consider this report from the Financial Times:
Support has been growing among regulators and politicians for an insurance levy as the best way to ensure that the burden of big bank collapses would not fall on taxpayers. But until now bankers have resisted the idea. They say the impetus for considering a global levy came from President Barack Obama’s $90bn balance sheet levy, which will tax banks in the US to recover the cost of an earlier bail-out programme.
Yves here. So why are the bankers rallying behind an Obama-type fee? Because the charge is too low, natch! The banks no doubt noticed what James Kwak figured out when the fee was announced (to howls, remember, even mutterings of Constitutional challenges?):
The best thing about the tax is that it helps level the playing field between large and small banks. From Q4 2008 through Q2 2009, large banks had a funding cost that was 78 basis points lower than that of small banks, up 49 basis points from 2000-2007. Closing that gap could lead some of those customers, faced with lower interest payments on deposits or higher fees, to take their money elsewhere. (Of course, they are already getting lower interest and paying higher fees, so there may not be much of an effect.)
But the tax isn’t nearly big enough! It’s being calculated as 15 basis points of uninsured liabilities, calculated as assets minus Tier 1 capital minus insured deposits. 15 basis points is a lot less than 78 basis points. And if the FDIC cost of funds data are based on all liabilities (not just uninsured liabilities),* then charging 15 basis points on uninsured liabilities only increases the overall cost of funds by about 7 basis points (at least in the administration’s example). This doesn’t come close to compensating for the TBTF subsidy.
Yves here. It gets even better:
Josef Ackermann, chief executive of Deutsche Bank, told the Financial Times on Friday : “To help solve the too-big-to-fail problem I’m advocating a European rescue and resolution fund for banks. Of course, the capital for this fund would have to come from banks to a large degree.”
Yves again. Ahem, to a large degree? How about in toto? Oh, because it might mess up precious bank economics. FDIC insurance is too cheap too; the FDIC did not have sufficient resources to handle the savings and loan crisis. Congress had to allot additional funds to create the Resolution Trust Corporation, which acquired the assets of dud thrifts.
And Team Obama is now considering exempting repos, one of the Street’s favored sources of cheap funding, so this won’t do much to solve the leverage problem either (yes, you can make a case for excluding Treasuries, but don’t expect any carve-outs to stop there).
So all this change of posture means is that some bank leaders have ascertained that some gestures that have modest costs attached to them would make for good PR. So expect theatrics and public declarations to make these measures sound more effective than they really are.
Update: The Wall Street Journal reports that top bankers got such a cold shoulder at Davos that it might finally be dawning on them that they not only screwed up big time, but also overplayed their hand in the year after the crisis. But I would not expect a wee bit of reality penetrating their well-developed defenses to lead to a change of heart, merely a change of tactics. And some organizations still appear to be beyond redemption:
….a senior London-based investment banker offered this wager: Lloyd Blankfein, CEO of Goldman Sachs, would be out within two years, he said, and he was prepared to back up his bet with millions of pounds…
Asked about the wager over Mr. Blankfein, Goldman spokesman Lucas van Praag said: “It is preposterous that The Wall Street Journal would even consider publishing such effluent.”