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What is Simon Johnson Smoking?

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Simon Johnson deserves tons of kudos for pointing out that the US is in the hands of financial oligarchs, via his celebrated Atlantic article, “The Quiet Coup.” But having recognized a clear and present danger, he seems peculiarly willing to confuse non-solutions with meaningful measures. In an article at Project Syndicate, he incorrectly celebrates a toothless provision in the Dodd-Frank bill as being tantamount to an anti-trust act for too big to fail banks:

Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

This is not a theoretical possibility – such risks manifested themselves quite clearly in late 2008 and into early 2009. It remains uncertain, of course, whether the regulators would actually take such steps. But, as Representative Paul Kanjorski, the main force behind the provision, recently put it, “The key lesson of the last decade is that financial regulators must use their powers, rather than coddle industry interests.”

And Kanjorski probably is right that not much would be required. “If just one regulator uses these extraordinary powers [to break up too-big-to-fail banks] just once,” he says, “it will send a powerful message,” one that would “significantly reform how all financial services firms behave forever more.”

Yves here. Citbank, JP Morgan, Bank of America, Wells, Goldman, and Morgan Stanley NOW constitute “a grave risk to financial stability.” You could extend the list further into the stress test banks (19 in the US), but let’s stick with these. If we believed this bill was meaningful, action be taken against these banks immediately upon signing. Odds of that happening? Zero.

And there is good reason why. Breaking up banks is not a way to solve the TBTF problem. The Kanjorski amendment is a lame-brained remedy.

The problem is it not merely the size of these firms, but the fact that they control infrastructure that is deemed critical to modern commerce. I’ll get into specifics in short order, but in some cases the firm owns critical plumbing outright; in other cases, it is so tightly networked to other firms that mucking with it very much runs the risk of taking down the rest of the grid. As Richard Bookstaber pointed out in his book Demon of our Own Design, in a tightly coupled system, efforts to mitigate risk typically make matters worse. You need to reduce the degree of integration first, then more direct efforts to lower risk are less likely to produce unexpected perturbations.

It is also critical to understand that making firms smaller does not necessarily make them less “TBTF”. So if an alternative universe variant of the Obama Administration were to decide it was going to bolster its poll ratings by roughing up financiers, one course of action would be to break up a large bank. But the businesses that are easiest to hive off – asset management and retail banking – pose no systemic risk. If the bank were BofA, the next step would be to split Merrill back out. But Merrill on its own represented a systemic threat, remember?

Let us look at Citibank. Why has it been allowed to lurch from crisis to crisis? One big reason is it has simply oodles of uninsured foreign deposits, roughly $500 billion during the crisis. Mess with Citi, and you have the prospects of bank runs all over the world. Moreover, these very large foreign deposits in large measure result from the fact that Citi runs a big corporate cash management/reporting system called GTS.

Now I don’t buy that GTS could not be separated from Citi, although operational it would be a huge pain. But Citi will howl like a stuck pig because this is a bread and butter business, almost certainly low margin, but keeps its foot very firmly in the client’s door and gives it an excellent overview of its businesses. The intelligence it derives from that wide perspective no doubt gives Citi an advantage in selling more complex products (note the big value added is likely in the information, not the access it gives, since the day to day contact for this is likely the assistant Treasurer, generally not an influential player).

But the authorities already buy Citi’s claim, replayed in the Wall Street Journal, that GTS is too important and too integrated into the bank for it to be tampered with:

Executives told officials with the Treasury Department and the Fed that GTS’s technology and presence in more than 100 countries made it too dangerous for the U.S. to let Citigroup collapse. The Treasury gave the bank a second big helping of $20 billion just six weeks after an initial $25 billion infusion from the Troubled Asset Relief Program, partly in recognition of GTS’s importance to the financial system, according to government and company officials….

While Citigroup is primarily known for its retail banking and credit-card businesses, the GTS unit is increasingly integral to the parent company’s functioning. Clients that move funds through GTS leave a lot of cash on deposit at the unit, which funnels the money to other parts of Citigroup for lending or other uses. GTS’s deposit-gathering muscle has grown more important since the financial crisis began, now providing about 40% of Citigroup’s $800 billion of deposits.

Yves here. Or look at JP Morgan. Chris Whalen has described it as a $1.3 trillion bank attached to a $76 trillion clearing operation. Guess where the big risk sits? And the reform bill is only going to nudge some derivatives over to central clearing (the latest estimate I recall seeing is 20%). And no one is going to dare tamper with JP Morgan’s clearing business.

And what about global capital markets? The major dealers, which are the firms listed earlier, plus players like Barclays, HSBC, Paribas, Credit Suisse, Deutsche Bank, all have large counterparty exposures to each other through a whole range of businesses, from OTC derivatives to repo to more mundane credit operations. There have been initiatives to reduce the connectedness of the major players, but they seem unlikely to have much impact. As we noted, for instance, the Fed already has doubts about repo market proposals, noting that they could increase the odds of a run. Lovely.

The problem is that it would take a radical restructuring of the very biggest banks, the critically placed dealer firms, and the most important payment and clearing operations to make a real dent in systemic risk. The officialdom the political lacked the will to do so at the peak of the crisis, and there is no basis for fantasizing that it will suddenly develop more nerve now.

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47 comments

  1. attempter

    Well, Simon and other break-up-the-banks advocates never said it was sufficient, only necessary.

    But I agree the Kanjorski amendment is insufficient to accomplish anything but provide the pretext for astroturfing articles like this one.

    These examples highlight well the fraudulent basis of the finance sector’s claim to prerogative and a right to exist.

    Now I don’t buy that GTS could not be separated from Citi, although operational it would be a huge pain. But Citi will howl like a stuck pig because this is a bread and butter business, almost certainly low margin, but keeps its foot very firmly in the client’s door and gives it an excellent overview of its businesses. The intelligence it derives from that wide perspective no doubt gives Citi an advantage in selling more complex products (note the big value added is likely in the information, not the access it gives, since the day to day contact for this is likely the assistant Treasurer, generally not an influential player).

    Even by the standards of their flacks, even if they could try to argue that GTS is a real service in itself, they could never argue that the secondary rents it affords Citi, which are the real purpose for Citi owning it in the first place, serve any legitimate, “capitalist” purpose at all. On the contrary, it’s existentially anti-free-market.

    JPM and Goldman are similar structural scams, a phony “bank” facade on a speculative shooting gallery which has no legitimate purpose, no right to legally exist in the first place, and on top of that a proven record of massive robbery and vandalism.

    Those are the gangster rackets who bought the politicians who wrote this legislation (to the extent the lobbyists didn’t write it themselves) and rigged the regulatory and judicial system within which this legislation would function.

    Who could possibly expect any part of it to be effective in practice, no matter what it says?

    From here I’ll reporduce the comment I already wrote at Baseline:

    After all of Simon’s good talk about breaking up the banks being one of the necessary components, in the end he was going to magically discover a way to declare the fraudulent bill to be victory anyway?

    On its face it’s ridiculous to think the Kanjorski amendment slipped through by stealth. These are the same bankster lobbyists who were so satisfied they had gutted everything which could possibly be of substance that they even found energy to go after the sham “Volcker rule”.

    The Kanjorski amendment, like any other version of sham “resolution authority” or discretionary pre-emptive authority, will simply never be used even if it really does theoretically bestow worthwhile authority.

    We already have the PCA Law. We know what happened with it: Nothing. What rational person could really think “This time it’ll be different!”

    And according to this:

    http://www.creditwritedowns.com/2009/11/the-kanjorski-amendment-trojan-horse-and-prompt-corrective-action.html

    the real nature of the Kanjorski amendment is to actually obstruct already existing FDIC powers, by letting banks targeted for receivership take the FDIC to court. If that’s accurate, then the point is clearly to force even more bailouts in a crisis, since how could there be time to hash everything out in the often corrupt courts?

    The whole bill is a fraud and must be rejected by all real anti-gangsterists and anti-corporatists. The urge to discover (i.e. invent) some pearl in the mud which miraculously redeems the whole thing is the path of delusion, or of astroturfing.

    1. craazyman

      Every day I wake up in a state of complete dispair at what the morons who run things are doing to us all, and to the world.

      There are so many of them, everywhere, and I can’t even turn on the TV because there they all are — talking and talking and talking and talking.

      They don’t infuriate me, or nauseate me or even make me angry — they simply suck my spirit out of my body and pack the resulting vacuum with a despondency that clogs my every mind-hole like shit clogs an uncleaned outhouse.

      I remember as a kid once — at a cheap suburban barbeque thrown for some event — that nobody cleaned the Porta-Potty and that the shit when I lifted the toilet seat to pee was smooth as cement nearly to the top of the bowl. It astonished me. Where was there to pee? There was nowhere. It would have just floated on top, like peeing onto the top of a cake.

      That’s how I feel every morning when I read the news, to the extent that I do, which I try not to.

      But you, Attempter, and others. You make me smile a little. That delightful roar of your rebellion. Yours and many others here. It lifts up my lid, it cleans my pores a bit, and it makes it a little easier to breath.

      1. i on the ball patriot

        Hey craazyman,

        I like your Porta-Potty story, I often feel the same way. The solution is to tip the Too Big To Pee In Porta-Potty over. It is messy, but you will then have a place and time to; pee, figure out how to clean up the mess, and prevent it from happening again in the future. And maybe the dub that was supposed to see that it got serviced might even give back some of his fees.

        See if this puts a smile on your face, its a Porta Potty brain tumor of deception …

        So … the arteries have been hijacked by a cancerous tumor of deception in the brain and the brain now sends blood supply only to favored locations in the body, locations that the cancerous tumor of deception deems necessary for it to survive and to reconfigure the body to its liking. The cancerous tumor of deception, guided by elite thinking that is twisted and clouded by the core cancer within it, perceives the body as overweight, running out of nutrients, and so robust that it threatens the survival of the cancer of deception itself.

        The body, now with its blood supply so sporadic, and its cells in various locations dying off, reacts by sending the same old remedial signals to the brain, not realizing of course that the brain has been overtaken by a very malignant cancer of deception.

        The solution is twofold;

        1. The body must realize that the cancerous tumor of deception is correct about its perception of the body over consuming beyond its nutrient supply and so must go on its own crash diet.

        2. The body must also realize that the cancerous tumor of deception in the brain, in spite of its correct perceptions about over consumption in the body and attempting to correct that over consumption, is going about it in a malignant and devious way and so the tumor must be excised immediately. A cancerous tumor of deception in the brain can never be Too Big To Excise, as ultimately IT WILL DESTROY the entire body. The body must cease sending the same old time wasting remedial signals to the brain and instead go into ‘perceptive shock’ that will manufacture proteins of perception that will travel to the brain and attach themselves to, and destroy, the cancerous tumor of deception. This is one of Mother Nature’s very common remedies.

        ‘Perceptive shock’ will include election boycotts that will send a very strong message to the cancerous tumor of deception in the brain that the perceptive proteins are being manufactured and on the way and unless they cease their deceptively fascist ways they may end up in the same boat as Mussolini …

        http://4.bp.blogspot.com/_YYMeAu4i7gA/SssFZe4Z0_I/AAAAAAAAFxs/Fz_d31AEETM/s1600-h/mussolini-dead-mistress-milan-may-1945.jpg

        Deception is the strongest political force on the planet.

  2. Jeremy Roth

    Yves, while I agree with the holes you poke in Johnson’s analysis, isn’t this the case for TARP, that we have to keep these bloated banks afloat somehow? If these banks are so deeply imbedded in the infrastructure that breaking them up would wreak havoc, then holding them accountable for their toxic assets (meaning bankruptcy or at least massive losses) would have the same effect. When advocating for effective regulations is a waste of time, considering how deeply imbedded the industry is in our government. What’s left? Do we just throw in the towel?

    1. Yves Smith Post author

      Obama had a window of opportunity when he came into office. He blew it. Aside from his distaste for confrontation, he wasn’t interested in economics, and delegated it to the sort of people he liked, Clintonites (really Rubin cronies) with glittering resumes. So the outcome was not inevitable by any stretch of the imagination.

      I offer recommendations in ECONNED. You can’t attack TBTF directly, this will never work. At a minimum, you need to address the tight coupling. I’d love to get rid of credit default swaps, but there are reasons you can’t, at least quickly. Next best is to make the product unattractively costly via very intrusive regulation (like insurance) to discourage its use and shrink the market.

      Another measure I recommend is making a clear definition of what critical banking functions are, like payment and clearing systems, depositaries, etc (some thought would need to go to where to draw the line) and regulate them like utilities. They are supposed to be very safe and deliver not very high but steady returns. And firms engaged in the core functions are VERY restricted in the kind of lending they can do (much like narrow banking as proposed by Irving Fisher).

      1. alex

        “Clintonites (really Rubin cronies) with glittering resumes”

        I never fail to get a bitter laugh out of such descriptions.

        This is not a criticism of Yves’ use of the term, as I understand how she means it, and she’s been more than vocal in discussing their “shortcomings”. Nevertheless it’s amazing how people like Summers, Geithner and Bernanke are widely considered to be anything other than abject failures (or utterly corrupt).

        Imagine an honestly written resume for Summers: “As Deputy Secretary of the Treasury, opposed regulation of derivatives. This action helped cause world economic meltdown.”

        Or Bernanke: “As Chairman of the Federal Reserve failed to take action or even publicly acknowledge an $8T housing bubble.”

        I’ll leave further excoriation to the likes of Dean Baker, as he’s ever so fond of pointing out that a janitor that screwed up half as badly as these clowns would get fired in a heartbeat, and have no hope of being hired by anyone who checked his references. But it’s different when you’re one of the “elite”. No matter how badly and consistently you screw up, Serious People will solemnly discuss the magnitude of your accomplishments.

        1. DavidS

          Absolutely right. When you’re in the club, there are so many people who owe you–whose careers you’ve helped, whose fortunes you’ve helped create–that they will step out of the woodwork to defend you regardless of circumstances.

      2. gordon

        “…it would take a radical restructuring of the very biggest banks, the critically placed dealer firms, and the most important payment and clearing operations to make a real dent in systemic risk”.

        Well, there is nationalisation, which of course everybody was talking about in early 2009. This seems still to be in Alex’s mind, though now he calls it a “wild fantasy”. And there is the creation of a new Govt. bank to undertake the basic banking functions (which may be the same as your “critical banking functions”).

        People may claim these options are unrealistic. But are they any more unrealistic than making credit default swaps “unattractively costly via very intrusive regulation”, or restricting the lending of firms engaged in the core functions?

        May as well be hung for a sheep as a lamb. May as well advocate something substantial and impossible as something more moderate but equally impossible. Hey, if Tim Duy can become a protectionist, anything can happen!

        1. alex

          ‘This seems still to be in Alex’s mind, though now he calls it a “wild fantasy”.’

          Correct, although the proper term is receivership, not nationalization. Receivership is what it was called during the S&L crisis of the Reagan administration, but nationalization, which inaccurately suggests a permanent government takeover, and has scary connotations of “socialism”, if not outright expropriation, is the incorrect term nowadays used even by many proponents. Score an Orwellian propaganda point for the “free market” crowd.

          ‘People may claim these options are unrealistic. But are they any more unrealistic than making credit default swaps “unattractively costly via very intrusive regulation”’

          Yes. It might be possible to kill CDS as long as you let the banksters profit from another scam.

          ‘May as well be hung for a sheep as a lamb. May as well advocate something substantial and impossible as something more moderate but equally impossible.’

          I agree, but there is still value in discussing what’s more “politically realistic”, if for no other reason than to point out just how full of shit the people who call for “compromise” are.

          “Hey, if Tim Duy can become a protectionist, anything can happen!”

          Duy is a protectionist only in the Orwellian sense:

          War is Peace
          Freedom is Slavery
          Ignorance is Strength
          Currency Manipulation is Free Trade

      3. Tom Crowl

        Two quick points:

        1. It’s gratifying to have your detailed knowledge and experience. Many of these financial machinations are really almost incomprehensible (as you’ve pointed out… largely because they were designed to be that way) and the “Devil” really IS in the details regarding both the problems and possible solutions.

        So if it was up to me, I’d give you the honorific title “The Detail Angel” having both a strong grasp on the Big picture
        as well as the intricacies that have served to obscure the nature of this cancerous financial black box.

        2. Regarding Obama…

        It’s truly difficult to comprehend why a politician who campaigned on “Change We Can Believe In”…

        and in the middle of a massive financial and economic earthquake…

        Would bring in the SAME TEAM OF IDIOTS!!!!!

        I can’t think of any reasons that don’t involve either stupidity, ignorance or corruption. And if it was either stupidity or ignorance, I’d think he’d have gotten a clue by now. And even if he thought their financial models of the world were sound… why would he use the same guys? You’d think from a political standpoint he would’ve gone with lesser known fools at least. Sometimes I wonder if this clique’s grip on power which extends across BOTH parties… has more to do with knowing where all the bodies are buried (so to speak)…

      4. jdmckay

        Obama had a window of opportunity when he came into office. He blew it.

        That “window” was wide open and the opportuntiy was to explain to a largely ignorant public precisely how they’d been fleeced by BushCo and financial sector.

        BO continuted the coverup, and refie’d the crooks.

        He didn’t just blow it, he closed the window and sealed it.

        Aside from his distaste for confrontation, he wasn’t interested in economics,

        After election but prior to inauguration, he had plenty of top notch after advisers recommending a structural cleanup. AFAIC, BO made a choice: he was most certainly informed.

        and delegated it to the sort of people he liked, Clintonites (really Rubin cronies) with glittering resumes.

        I wish you’d be more explicit in describing things like this. These guys’ core attributes are not explained by “Clintonite”, and US economy/infrastructure had plenty of all the stuff needed to go forward productively when Clinton left office.

        Under Clinton, the malfeasance was in pockets (some large, yes), with plenty of legitimate resources foundational. Ensuing 8 yrs, malfeasance was made saturating and institutional.

        But then, at this point, I guess maybe it’s all just an anecdotal postscript as there’s precious little on the horizon from anywhere suggesting meaningful fundamental “change” in the right direction.

        WSJ is entirely unrepentant… considers (OpED last week) last week’s SCOTUS ruling requiring reconsidering Jeffrey Skilling (Enron: “What’s the difference between the Titanic and California?”) and his crew’s convictions a victory against the forces who would like to “criminalize business”. In their view, these guys were engaged in legitimate enterprise.

        We see similar language from wave of tea party/repub candidates leading in polling across the country advocating more big biz wet dreams, while leaving the same corroding core miscreants pulling the levers of financial flow into their own bank accounts at expense of meaningful and needed investment. EG. we’re headed for another lateral move back to BushCo.

        Majority of US public in for a very, very rude awakening in coming yrs. decades, and they are very unprepared. The US political spectacle makes Monty Python look scholarly.

      5. tyaresun

        Yves,

        Agree with all your recommendations. I stopped reading Simon Johnson a while back. I feel he is desperately trying to get a White House job.

      6. readerOfTeaLeaves

        I first read about ‘tight coupling’ in Demons of Our Own Design.
        It’s harder to explain than TBTF, and I assume that too few in DC grasp its significance.

        “Design” is the operative word in addressing the issue.
        The ‘tight coupling’ is diabolical, and so your point that solving TBTF without first addressing ‘tight coupling’ (math, computerese-speak) makes a lot of sense.

  3. Sechel

    This is the dilemma. The top four/five banks represent huge systemic risk, but more importantly represent an oligopoly an unfair competition, however the Government is worried about the fragile economy and the lack of lending. Aggressive action with regard to our biggest banks in the short term will not help lending or create stability. In the eyes of Larry Summers the four big banks represent stability and hundreds of small ones do not. It is also easier to get four guys in a room and get an agreement as opposed to a few hundred. Summers, Geithner and Rubin would also argue that if the United States acted unilaterally then the American Banking system would be at a disadvantage to Europe and Asia’s biggest banks.

    I have no doubt we need to act boldly and do what we did with Standard Oil, but I don’t see anyone on Capital Hill supporting this for the reasons cited above.

    I have no doubt that

    1. alex

      “Aggressive action with regard to our biggest banks in the short term will not help lending or create stability.”

      Unfortunately that’s very true, which is why the only possibility of something being done is when the manure hits the fan again. I’m not saying that’s likely, but it’s the only chance at this point.

      In my wildest fantasies I imagine of group of people from Treasury and the Fed who meet twice a week to discuss detailed plans for taking TBTF banks into receivership and keeping the essential parts of the banking system functioning. My second wildest fantasies involve being alone on an island with an insatiable Salma Hayek. I think the latter is more realistic.

      “Summers, Geithner and Rubin would also argue that if the United States acted unilaterally then the American Banking system would be at a disadvantage to Europe and Asia’s biggest banks.”

      I’m sure you’re write. Considering what our banking system has done for us though, being at a “disadvantage” doesn’t sound so bad. Seriously. The Summers/Geithner/Rubin view is that finance _is_ the economy, and everything else is ancillary.

    1. Richard Kline

      Political irradiation so that any lefthanded-leaning inclinations are sterilized and rendered incapable of activity or reproduction.

    2. sgt_doom

      You said it, anon!

      Nobody takes Simon Johnson seriously because:
      (1) he’s at MIT (which has never had a non-bank/oil cartel type there as an econ prof;
      (2) he’s a senior fellow at the most senior of propaganda operations, the Peterson Institute;
      (3) on even days he rails against the credit default swap, on odd days he promotes it; and,
      (4) he has yet to repudiate his former employer, the IMF.

      Johnson is a fraud, clear and simple.

  4. Richard Kline

    To me, the worries of those in Government regarding the maintenance of the US behemoth banks, not to say their regulation, are not primarily focused on ‘stability,’ or ‘optimal system design,’ even less fairness. These institutions are seen as enormous projections of American state and economic power. This view is not entirely wrong. Our power as a national economy was, and to a degree still is, in our industrial production. The degree to which US T. rex banks chokehold the global financial system is a real pressure-point for American interest at this time. So the banks aren’t simply a financial problem; they aren’t primarily an economic problem; they are a political problem.

    To me, this is why the pipsquek powers-that-wannabe in US government refuse to govern the banks: they cannot see or get around the political reality of these banks as financial aircraft carriers threatening Those Other People to approach, conceptually or practically, the economic and systemic gross imbalances which these banks represent. I’m less sanguine than I have ever been that we will se ‘reform’ of the US financial system worth the name of such: the system will fail, and the ‘reform’ to follow will look more like some attempt to rebuild what we have only with a few sharp edges filed off. Unless, y’know, the people take over the government, which these here American type sheeple appear to have no such inclination to undertake for themselves. The ‘reform’ of this system will be nature’s way: it’ll gorge and correlate itself to dissolution. Got a Victory Garden? Y’all may need one when nature wins as ever in the end.

    1. alex

      “The degree to which US T. rex banks chokehold the global financial system is a real pressure-point for American interest at this time.”

      What American interests do the US T. Rex banks protect or promote other than themselves?

    2. Bates

      RK…

      “The ‘reform’ of this system will be nature’s way: it’ll gorge and correlate itself to dissolution. Got a Victory Garden? Y’all may need one when nature wins as ever in the end.”

      What you term ‘nature’ I call ‘Mr Market’… and, you are correct. Mr Market always wins. We had/have an opportunity to unwind these banking monstrosities so that what remains can benefit Main St America and continue to function well in international markets. Lehman Bros was unwound and the remainder can be slowly unwound. Since we have no representation except for banks there will be no slow unwind…but a sudden stop.

      The rubber will hit the road later this year when the G countries meet to discuss a new world reserve currency or a modification of the current system.

      Meanwhile the unwind of the Social Security system is proceeding apace…What was formerly the untouchable third rail for politicians has become the low hanging fruit. Says a lot about where we are vs where we were, eh? “Both parties mull raising retirement age
      House leaders get frank about Social Security cost” link… http://www.washingtontimes.com/news/2010/jul/13/both-parties-mull-raising-retirement-age/

    3. jdmckay

      The ‘reform’ of this system will be nature’s way: it’ll gorge and correlate itself to dissolution.

      I think you’ve got that about right, Richard.

      1. DavidS

        Ordinarily that would be a very logical conclusion, but few people in insular official Washington understand the precariousness of the country’s international standing, even now.

        Further, you’re suggesting that a series of calculated, rational decisions were made. I don’t believe that anyone in a position of power, public sector or otherwise, has ever had such a capacity.

    4. Anonymous Jones

      I completely agree and have said so here before, though I did not use as clever a phrase as “financial aircraft carriers.” I think what many people on this site neglect to focus on is that while the financial machinery does in fact subjugate US citizens, that seems to be incidental in the minds of our government. The reasons that the US government tolerates the activity of the finance behemoths is most likely, IMO, perpetuation of power of the US internationally. To not understand the widespread economic benefits of colonization (and banana republics) to the colonizer is to not understand the economic history of the past two millennia.

    5. NOTaREALmerican

      Re: These institutions are seen as enormous projections of American state and economic power.

      Really good point. I think this sentence is also how the peasants view things. Americans talk-the-talk about “competition” but don’t (internally) walk-the-walk. The entire culture is now conditioned to accept socialist / fascist bigness.

      And, as all those of us on here that work for monster corporations know: speaking the optimistic management-line is the only path to success. Unquestioning optimism has killed American society.

  5. global-ease

    “… the GTS unit is increasingly integral to the parent company’s functioning. Clients that move funds through GTS leave a lot of cash on deposit at the unit, which funnels the money to other parts of Citigroup for lending or other uses. GTS’s deposit-gathering muscle has grown more important since the financial crisis began…”
    AND
    “The major dealers, which are the firms listed earlier, plus players like Barclays, HSBC, Paribas, Credit Suisse, Deutsche Bank, all have large counterparty exposures to each other through a whole range of businesses”

    I am combining these two broad thoughts to present another aspect of the interconnection of the TBTF syndrome.

    Please do not ignore the fact that the major dealers also use Citi’s GTS network and infrastructure to promote their own business in countries in which they do not have said infrastructure. Every banker who covers clients around the globe knows you need good relationships with the local Citi branch if you want to do business in a country in which your firm does not have real infrastructure. Why? Simple – b/c the local currency accounts, cash reserves and collateral instruments are usually held at Citi, across the globe. If you want acccess to or a lien or a pledge on those accounts (which you always do) you need Citi.

    So, GTS could be construed as TBTF and what are your solutions? Sell it to another TBTF competitor? Or, watch JPM try to unseat Citi as the global go-to guy for such mundane and critical inter-dependent global banking services infrastructure needs. Hey, someone’s got to do it.

    I am taking the easy way out today in simply presenting another fact/problem, as opposed to solving any. But the point is, as we dig deeper into how to break up the joint and decrease interdependencies, we just keep getting sucker-punched by the reality of the true global interdependencies that was inevitable and in fact, was a goal when we started.

  6. liberal

    I’ve long thought based on reading this blog and the intelligent commenters here that the problem isn’t TBTF per se, but rather too (1) complex and (2) interconnected to fail.

    I guess with her “owns the crucial plumbing outright” Yves is adding a nasty complication to (2), essentially.

  7. Siggy

    Recognizing the interconnectedness of the banking cartel is a first step toward dismantling it. Citi is a prime target. It is an institution that doesn’t need to exist save for its GTS system.

    Now here’s a thought, expropriate the GTS system, make it a ward of the Fed. Then dissolve the connection between the Fed and the Treasury. The Fed can then assume the role of being the nexus of the evil empire of money grubbing.

    As to Europe, let it go its way. As to our global economic hegemoney, surrender to the market. It’s the quickest and easiest way to win. We win by going back to autarky save for our thirst for oil. Who loses, well just about everybody and that would really be quite fair. But then the world and life are not fair. So we continue to deny the reality before us that the global fiat monetary system has failed.

    As to CDS, just say that from a date certain and forward, all CDS and CDS type contracts are deemed to be insurance and therefor require substantial reserves upon their execution all of which must be reported to the High Commissioner of Speculation and Odds and Probability determination, both Gaussian and Bayesian.

    The banking system is gangerous and the cure is amputation. Do the amputations now or suffer the consequences. Pretend and extend just makes it a problem for the next generation.

    1. Cynthia

      What Robe Johnson said on The Real News Network gets at the heart of what’s causing the American economy to remain stagnant:

      “I think the best analogy [to describe what is happening the Americans right now is what happened to the British between 1926 and 1932-33.] They were stagnant. All their elites at the time—Britain was like the United States today, the kind of world financial leader, and they were stagnant. Their politics couldn’t come to agreement to re-stimulate the economy. The stagnancy continued. In many respects the hollowing out of the British economy continued from 1930 right into the 1960s or 70s. And the United States is facing that challenge right now. We have a financial sector that was 46 percent of corporate profits in 2007. I think last year it approached 40 percent again in the recovery. It’s only 3 percent of the workforce. We have a system of politics that’s very dominated by finance. Financial services beg the question: what are you—if you’re taking that much of the profit, if you’re taking that much of the income, if you’re taking an $800 billion bailout, what are you doing for society? What’s the basic function? And once finance becomes so overgrown [that] instead of taking 5 or 6 or 7 percent of profits it’s taking 30 to 40 percent, we have to ask ourselves: are we not as a society paying an enormous tax to a system that is designed to be a—. You know, finance is supposed to be a servant to commerce. Commerce and economy and markets are a service to social goals. Well, the servant’s servant has become the master’s master, and it’s time to re-invert that. I think the political process we see underway and the hostility and the anger and the pressure on legislators is an early—what you might call an early stage of that rebalancing. But it will be a hard and tough road. And it was in Great Britain. And they didn’t really get out from the clutches of the control of finance for quite a long time.”

      http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=5320

      [So until we drive a wooden stake through the heart of the vampire squids on Wall Street by slapping them with enormous sin taxes on all of their casino activities, from credit default swapping to high-frequency trading, the American economy will remain stagnant, both in terms of jobs growth and consumer spending.]

  8. steelhead23

    I offer a very simple amendment to the bill: Any institution holding deposits insured by the FDIC must qualify under IRS rules as a not-for-profit business. That is, socialize the banks and the insane behaviors and the risks they impose would go away – or at least shrink like mad as the government would have no reason to bail out the separated investment firms the TBTF banks would be forced to spin off. As Yves said, the basic banking function is a utility function, not a productive function, and turning those into NFP businesses would wall them off and reduce systemic risk. Of course, this is not going to happen.

  9. Blurtman

    Being regarded as TBTF certainly gives one tremendous leverage. A TBTF can pretty much do whatever it wants. Mess with the TBTF’s and the money market funds break the buck, the market tanks, 401k’s go bye-bye.

    Why wouldn’t a TBTF bank embark on policies that continue to maximize its revenue at any cost, at any risk? Who is going to stop them?

    Obama has blown many opportunities. I would urge that as we are threatened with a syndicate of ruthless gangsters, a new law enforcement organization be created, like the FBI, but with enough understanding of the financial markets and products to break up these crime gangs.

  10. Jackrabbit

    Until there is accountability, no government/regulatory scheme is worth the paper its written on.

    TBTF is the new GSE: Government Sanctioned Enterprises.

    Obama blew it alright. Who would’ve thought that the administration of the first President of color, who campaigned on the message “change we can believe in,” would be so friendly to big business? I think he has squandered the Kennedy legacy.

    I keep thinking that Obama is not stupid and will WAKE UP to the fact that everything changed in 2008. Still hasn’t happened, though. It is a testament to our mercenary and insular culture that this “community organizer” can’t see (or choses not to see) how the nation is being undermined by a mercenary and insular culture. Changing/softening that culture could’ve been his greatest achievement.

    1. sgt_doom

      “I keep thinking that Obama is not stupid and will WAKE UP…”

      Dood, he spent 12 years at the University of Chicago, the school that John D. Rockefeller financed.

      That school that produced countless looney tunes, and the winner of that title, Milton Friedman.

      Nobody comes out of the jackhole of academia, the U. Of Chi, without being a part of that “system.”

    2. liberal

      “Who would’ve thought that the administration of the first President of color, who campaigned on the message “change we can believe in,” would be so friendly to big business?”

      Speaking as someone who voted for Obama in the primaries and general as perhaps the least bad of the alternatives, it was clear that “Change we can believe in” and other such speak was just meaningless campaign propaganda.

      As for what kind of politician Obama was, his Americans for Democratic Action score showed that he was comparable to Hillary. Not particular conservative for a Democratic senator, but not very liberal either.

      As for Obama and the banks, there’s that business that he had huge donations from GS.

    3. Cynthia

      Jeff Cohen, the founder of the media watchdog FAIR, explains how Obama rose to become our nation’s leading corporatist Democrat. He did this by being a high-priced whore for Corporate America:

      http://www.youtube.com/watch?v=yfLJIfRUBkU

      Cohen also mentions that Obama describes himself as a “free-market” guy. Cohen then goes on to mention that Obama is too smart not to know that by 2008 there is no free market. A few companies have taken over basically every industry. So when Obama says he’s a “free-market” guy, it’s just a softer way of saying he’s a “corporate” guy. But Obama is smart enough not to say that.

      So this should leave no trace of doubt in your mind that Obama never WAS, ISN’T, nor ever WILL be a change-we-can-believe-in type of political leader. He is no different from Clinton in that he sees and will always see the office of the presidency as nothing more than a kleptocratic place to make himself rich by helping make the rich even richer.

      1. Doug Terpstra

        Interesting link on the corporatization of the Dems through the DLC and the Brookings Institution, etc. Obama as Great Deceiver, is a brilliant choice to seal the DLC coup, “clean-cut and articulate” in Biden’s words, and a wily glad-hander (slicker than “Slick Willie”). And they say there’s no conspiracy!

        In related news (buried in the Billings [Montana] Gazette, while the MSM media snores), yet another fox is appoined to the henhouse: “Obama Hires Former Wellpoint Exec to Implement Health Care Law” by David Sirota. Former Wellpoint Exec Liz Fowler is thus rewarded for deep-sixing the public option.

        http://www.commondreams.org/headline/2010/07/14-7

        It’s all very exasperating, but I like i-on-the-ball’s metaphor of cancer in the body politic, much like Marx’s conclusion that capitalism, like all organisms, is embedded with its own relentless and inexorable terminal gene. We are witnessing the raging mestastasis of an unchecked autoimmune disorder that is now devouring itself. It will be traumatic with a lot of “collateral” damage, but ultimately (I hope) give birth to something new and better.

  11. RueTheDay

    “Yves here. Citbank, JP Morgan, Bank of America, Wells, Goldman, and Morgan Stanley NOW constitute “a grave risk to financial stability.” You could extend the list further into the stress test banks (19 in the US), but let’s stick with these. If we believed this bill was meaningful, action be taken against these banks immediately upon signing. Odds of that happening? Zero.”

    I’d take it even one step further.

    Assuming the legislation passes, and a few years down the road there is another crisis involving one of the banks you mentioned, the policy choice of the regulators STILL will NOT be to break up that bank, but to come up with some sort of rescue. Break up would ONLY be a last resort, after all other attempts at finding a buyer, injecting capital, backstopping assets, etc. had been exhausted.

  12. jevannet

    A few comments:
    1) With regard to separating GTS from Citi, the current trend is to diversify where possible using other banks (which admittedly also tend to fall in the TBTF category), but also to increase reliance on SWIFT (a multibank-owned coop’s global network) to mitigate operational reliance on Citi’s GTS, or any other bank’s proprietary network.

    2) Integration is not the problem. I would also counter your argument that integration is a problem. How can you have a global financial system if banks and market participants cannot be interconnected? The problem lies more in the kind of integration: proprietary integration premised on closed-systems as opposed to open systems with global standards that make switching easier.

    3) Citi getting a view to transaction business of a global firm is not necessarily bad. GTS may indeed create synergies for other business, but a common complaint from assistant treasurers with banks is that they too often pitch products that are not what they need and show little understanding for their business. More than a few would welcome a case where Citi learned something from the GTS information and offered them something that added real value.

    4) Assistant treasurers are not rubes, nor inconsequential. While not CFOs, ATs often have more technical finance knowledge than those higher up the chain to see through bank efforts to sell them complex products their firms don’t need. Further, ATs often hold significant sway over share of wallet allocated to their bank group, so pleasing an AT with its GTS service does give Citi access to win further business.

  13. i on the ball patriot

    What will it take for YOU to consider the dark forces …

    The DECEPTOFATZIS …

    There is a lot of undy bunching and trying to figure out why the scamerican government — and other governments around the world — are unable to reverse the financial crisis. Literally hundreds of thousands of good remedial measures have been submitted, over and over again, that would, at the minimum, restore good old fashioned Vanilla Greed. None of these plans have been listened to or implemented. As each new gross corruption and hypocrisy is revealed it is simply ignored or deflected away. Legislation meant to remedy is hijacked away to favor the hijacking gangsters. The plague is spreading. Canada, now with Toronto firmly established as intimidating and oppressing dissent, is the latest to publicly proclaim its alignment with the gross deceptions going on.

    At some point, those well meaning SUCKERS, who continue with the remedial plans to deaf ears, will have to consider that maybe there is more than meets the eye at work here. Maybe there are some really dark forces orchestrating the global propaganda. Dark forces that have no intention of remedying anything, but rather to use the divisive self wound inflicting chaos to their advantage. Maybe Simon Johnson is not smoking so much as he is sucking — sucking the dick of collaboration that writes his paycheck …

    Maybe the essence of corporate fascism is alive and well. Maybe the Darwin, survival of the fittest, dog eat dog world, espoused by Mussolini and Hitler, and a recurrent theme throughout history, has simply morphed and gone underground. Maybe it really has embraced the concept of the noble lie as promoted by University Of Chicago’s, Leo Straus (what is there about Chicago ‘education’ anyway?) and maybe that is what is now running rough shod over the planet. Maybe the Full Spectrum Dominance plan does include domestic populations as targets for subjugation and exploitation. Maybe that is what is really hiding under the deflective moniker of ‘neocon’ and ‘neoliberalism’, and maybe it should be labeled more appropriately.

    Maybe it should be called deceptofascism.

    The deceptofatzis are after all a combination of; deception, fat cat elite wealth, and nazi fascism with its new world order supremacy, its racism now expanded to demonize ALL for the purpose of dividing and creating perpetual conflict in the masses, and its promotion of corporatism. Add them all up and it seems that calling them decepto – fat – zis is far more appropriate and indicative of what they do.

    Some times if it intimidates and oppresses like a fascist, and yet poses as a lover of democracy, and quacks like a lover of democracy, maybe it is a deceptofatzi.

    Maybe it is deceptofascism.

    Maybe it is now time to start calling it what it is and react accordingly.

    Deception is the strongest political force on the planet.

    1. NOTaREALmerican

      Re: deceptofascism.

      I’m sick of all the new words, they just confuse the peasants; especially neo this & that.

      How about the smart amoral scumbag (sociopaths) rule the world. Nothing new under the sun, for the last 10000+ years.

      1. i on the ball patriot

        “How about the smart amoral scumbag (sociopaths) rule the world. Nothing new under the sun, for the last 10000+ years.”

        Your right Sean Hannity, nothing new under the sun, its always been this way, boo hoo, let’s just all roll over, give up and die, we are already defeated.

        If it is so futile why are you constantly selling negativity and defeatism so hard? Why don’t you just give up Sean?

        Deception is the strongest political force on the planet.

  14. tpinlb

    The only solution is to reinstate Glass Steagal. Separate out FDIC protected deposits and community bank loan making from the casino gambling, speculation and malfeasance of the investment bankers. This is the only way we can save the essential deposit accepting and loan making functions of the banking system that are essential for economic growth.

    1. sgt_doom

      “The only solution is to reinstate Glass Steagal (sic)”

      (Should be Glass-Steagall, BTW.)

      Dood, it’s gone waaaay beyond that. And it ain’t about casino gambling, although it’s always easier to repeat something you’ve heard then to actively engage your mind, your reading ability, etc.

      If it’s rigged, it’s not gambling, dood!

      The system has self-destructed, with infinite runaway greed and exponential super-leveraging.

      All those debt-financed trillionaires and debt-financed billionaires came from somewhere.

      Now how do you suppose they originated, huh?????

  15. monday1929

    Let’s not forget Citi’s crucial role in laundering drug money and disributing cash to its benefactors.
    While much elegant verbiage is expended here on esoteric explorations of power relationships, much of what occurs comes down to people being handed large envelopes loaded with CASH.

  16. Tom Hickey

    Professor Johnson is a good guy and lead a good fight. But in the final analysis, he is a “suit.”

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