Recent Items

Yet Another Barmy Obama Administration Excuse for Preserving the Banking Status Quo

Posted on by

The Administration, meaning the Treasury Department, is never wanting for a defense of the big financial services incumbents. From an article in the Wall Street Journal, “Bank Breakups: Not So Fast“:

Few members of the Obama administration have shown interest in restoring Glass-Steagall, the Depression-era law separating investment and commercial banking that was struck down in 1999 following the deal that created Citigroup Inc.

They note that the big banks that got into serious trouble during the financial crisis were less diversified than today’s giant players. Bear Stearns Cos., for example, was a Wall Street firm that nearly failed before getting swallowed by J.P. Morgan Chase JPM -2.24% & Co. Troubled Wachovia Corp., bought by Wells Fargo, was a big mortgage lender without large trading or investment-banking operations.

This is through -the-looking-glass logic. The big diversified players aren’t allowed to fail, remember? In particular, the 16 to 20 firms pre-crisis that were at the core of the global debt markets (which are over the counter and hence highly interconnected) were never never gonna be permitted to fail. Treasury is conveniently omitting all the post crisis subsidies to major banks, in particular the transfer from savers to banks known as ZIRP, and the asset-goosing, balance-sheet-flattering QEs.

And it’s simply untrue that diversified big banks weren’t on the verge of collapse in this crisis. Start with Citi, which is a serial recidivist in the “should have died but is allowed to lumber on” category. It nearly went under in the early 1990s (and frankly was in a lot of trouble in the Latin American sovereign debt crisis of the early 1980s). Shiela Bair wanted CEO Virkram Pandit thrown out and the bank broken up, but she was overruled by Treasury, and had to satisfy herself by forcing a considerable downsizing of the banks instead. UBS required a bailout from the Swiss government. The Swiss made UBS investigate, document, and publish what it had done to get itself in that fix. The Swiss are also imposing 20% equity requirements, is forcing UBS and its Swiss colleague Credit Suisse to considerably downsize their investment banking businesses. And guess what? After saying initially that these requirements would ruin their businesses, they’ve decided they are actually to their advantage.

And let us not forget the case discussed at some length in the very same Wall Street Journal article, Bank of America. Ken Lewis was delighted to buy Merrill during the crisis. But when he discovered it had more warts than he realized, he threatened to abort the acquisition, meaning (among other things) he saw the financial supermarket fantasy as less attractive than when he’d stumped up to pay an over-the-market price for Merrill. Readers no doubt recall that Lewis was browbeaten into sticking with the deal in return for getting $20 billion of additional TARP funds and $118 billion in loan guarantees (one might quibble as to whether Lewis was serious about wanting to exit, in that his prime objective was almost certainly to get more subsidies for the deal, but the flip side was he did seem serious about terminating the deal if he didn’t get his way).

So yes, bigger banks are safer because the officials won’t allow them to get into the state of becoming irrecoverably unsafe. It’s not unlike the way in Lake Woebegon that all children are above average.

Print Friendly
Twitter40DiggReddit0StumbleUpon1Facebook14LinkedIn0Google+1bufferEmail

35 comments

  1. greg

    It isn’t the size of the banks, (Well, yes, it’s the size of the banks.) it’s the size of the industry, so called, that is the problem. The real purpose of finance is to see to the allocatiion of resources in the real economy, but it has become corrupt and has instead allocated reousrces to itself. and fattened itself at the real economy’s, and everybody else’s, expense.

    Because it is so big and fat, it can only survive by corrupt practices: Legitimate and socially useful investments simply will not generate enough profits to satisfy its needs. See:http://anamecon.blogspot.com/2010/06/that-bloated-financial-sector.html.

    Government collusion has become necessary to the financial sector’s survival, and effective regulation will. destabilize it. Meanwhile, the financial sector is sucking resources out of the real economy, and is one of the reasons the real economy is doing so badly. The money they take is ours, and our government is in on it.

    It is thievery, plain and simple, and our politicians conspire with thieves and are on the payroll of thieves. They take the money earned by thievery, to aid and abet thieves. That makes them thieves, too.

  2. Capo Regime

    After seeing Yves chronicle over the last few years of the administrations actions (behaviors) on the economic front one has to wonder if it is some sort of cunning calumny, sheer stupidity or some other motivations. Its beyond outrage, its sheer confusion when one reads about yet another affront to basic intelligence. What is it that makes em tick? Are they truly that venal or inept?

    1. nonclassical

      …capo-read your history=”Wall $treet-A History”, by Geisst-always were corrupt, unless held under tight regulation…look at 1890′s speculation-traders trading futures back and forth to one another to drive up prices, just as “investment banks” did under bushit, with oil futures…

  3. Goin' South

    I’m going to buck the trend here and argue that this election does represent a significant choice.

    Obama and the Dems are true blue defenders of Capitalism. All of their behavior, including that decried in Yves’ post, is explained by a real desire to preserve the status quo, even if it means incrementally sacrificing all the core Capitalist concepts: rule of law; private property; competition. While they are deluded about the viability of Capitalism, they are at least connected enough to reality to drag out the process of “The Free Market’s” demise for another decade or so.

    A great future: constant and slow decline for all but the 1%; rapidly building environmental disaster; growing Right Wing reaction since the “Leftists” are in control.

    As another blog wit observed, the Dems represent the Sane Rich.

    The Republicans are in the pocket of the Insane Rich. They are well represented by the CEO of Exxon, whose recent speech to the Council on Foreign Relations admitted human-caused global warming, but counseled that it was no problem. Yes, crop growing regions would “shift,” but humanity had already proved its adaptability. The tens or even hundreds of millions who would die in this “adaptation” process were not mentioned in the speech, nor were those hundreds of millions or even billions who would be reduced to even greater poverty. It was all collateral damage to Exxon’s CEO that was acceptable as long as Exxon’s profits continued.

    (Possible journalist project if there were real journalists: how many of the 1% are paying climate scientists to predict how those “shifts” will take place.)

    If you spend ten minutes listening to Fox, Rush or CNBC, you’ll learn that the economy is like a thoroughbred confined behind the starting gate of all our socialist regulations and taxes. Merely elect Republicans, and the gate will be opened, and the economy will be galloping around the track at breakneck speed shitting jobs instead of horse manure.

    Some of these idiots might actually believe it.
    After all, they never saw Lehman coming. Most are presumably paid to claim fervently that the earth is flat while they personally know better.

    If the Republicans end up in power, it will not take 24 months before we are in a depression that makes 1932 look like the Halcyon Days. A Capitalist meltdown that Marx could not have imagined will be upon us.

    So there is a choice, of sorts.

    1. Capo Regime

      Now this post is fairly imaginative. Defenders of status qou translates to defenders of capitalism? Sane rich? Lots of assertions….none based on facts. Yves does not dercy–she provides factual analysis which is more than others do–much more….

    2. Capo Regime

      Your post rests on the premise that the parties actually differ substantively and the fact is the contributors to both parties are the same people. Odd that no? Yes, Obama and Chcuk Schumer take money from the wall street sane rich huh?

      1. Goin' South

        You seem to be missing the point.

        What is “differ substantively?”

        Both parties are Capitalist supported and supporting. I don’t deny that.

        Lambert has linked some very enlightening posts from the Archdruid comparing our current situation to pre-revolutionary France. The ruling class had divisions then. It has divisions now. Is the ruling class united on the proposition that they are entitled to exploit the rest of us? Of course. But there were divisions then and now about the details.

        As for political contributions, I learned when I was 19 that rich Republicans contribute to Democrats and rich Democrats contribute to Republicans. Why not bet on red and black when the payoff is so great that you win either way?

        What is important for those of us who don’t buy into this farce is to understand how the divisions among the power elite play out to our advantage and disadvantage so that we can prepare.

        1. Capo Regime

          Differ substantively–should be self evident.

          Yes, I do miss your point. What is your point?

        2. Strangely Enough

          ‘What is “differ substantively?”’

          Republicans insist on going 50 mph in a school zone while Democrats say that 35-40 is more pragmatic.

          1. JCC

            A better metaphor would be that Republicans insist on doing 90mph through a school zone while the Democrats think 55mph is quite a bit more reasonable.

            They both are insane, a little more than somewhat.

    3. Jim

      Question for critics of President Obama’s policies regarding banking and their impact on the status quo.

      Are you equally critical of Draghi, Merkel and the Eurocrats in Brussels who are attempting to (a) save the Eurozone by imposing a United States of Europe on voters who have no desire for such a construct, (b) to save the Eurozone to preserve the banking status quo in Europe?

      Or perhaps I’m wrong. Perhaps the critics of President Obama’s banking policies are demonstrating intellectual honesty by supporting the political parties in France, Germany and Greece who would like to pull the plug on the ill-fated Eurozone, thereby ensuring higher GDP growth for their respective countries.

      1. reprobate

        What planet are you from? Geithner was just in Europe browbeating Germany’s Finance minister Schaeuble to fall in line with the technocrats. And amazingly, the Europeans have coddled their banks even more than the Americans have (due in large measure to the weak but not complletely toothless Dodd Frank).

      2. reprobate

        Hit the “submit” button too soon. Merkel is not on the same page as Draghi and Eurocrats. And the German pols have been completely dishonest in their characterization of the rescues. They aren’t rescuing Greece and Spain, they are really rescuing French and German banks.

        If you are going to troll for the Dems, at least get your facts remotely right.

      3. Goin' South

        The Sane Rich/Insane Rich paradigm is not limited to the U. S.

        Ain’t global neoliberalism great?

      4. Carla

        Gee, I don’t live in Europe — or vote there. It’s more than I can do to keep up with the rot and corruption right here in the US of A. Without Yves, of course, it would be impossible.

    4. Greg T

      That sums it up nicely. The GOP is the movement/aggressive faction of the Rich Party and the Democrats are the stasis version of said Party. If you want to die slowly, vote D. If you want to get it over with, vote R. Working class voters ( roughly all of us ) are only represented insofar as we get to choose how we die. We don’t vote for representation, we vote for a euthanist.

      1. Goin' South

        I’m not as pessimistic as you.

        Yes, it will get ugly.

        But strangely, I’m of the same opinion as that Exxon CEO. Some of us will survive. And those of us who do will make sure there are no more CEOs of Exxon.

        For those who would accuse me of being no better than that 1%-er, my response is that I have no choice in the matter. I must try to survive and help those in my family and neighborhood to survive as well.

        I do not have the choices of the powerful Exxon CEO who is so uncaring toward his fellow human beings.

    5. curlydan

      Going South: I think you’re being to nice to the Dems. You say they are “true blue” Capitalists and want to defend the status quo, but you also mention they will “drag out the process of “The Free Market’s” demise” over the next decade.

      If they’re capitalism’s defenders, why are they watching and abetting the decline of the system? If the want to defend the status quo, why would they allow a “constant and slow decline for all but the 1%” unless you’re saying the status quo is a decline which is kind of a stretch, but OK.

      I think a better analogy may be found in an interview with Greg Palast that I heard on my local community radio station last week. He said the election is a contest between the big banks like Dimon (represented by the Dems) and the non-bank rich by the Kochs and Adelson (Repubs). I think this is close to what you’ve proposed, but Dimon is not sane and neither are Corzine and Blankfein and crew.

      1. Goin' South

        Curly Dan,

        I think Capitalism is bent on its own destruction. Profit-fixated = greed obsessed = self-destructive. The Dems are idiots trying to preserve what can’t survive.

        Do you deny that the status quo is a slow decline at best?

        1. Capo Regime

          WE have not had capitalism in quite some time if ever. We have a system of corporatism with state enabling and favoritism.

          Its not capitalism. One wonders what ever happened to dictionaries.

          1. Goin' South

            It amazes me how far the defenders of Capitalism will twist themselves and fundamental definitions to claim that we are not under Capitalism.

            Do we not have private ownership of the means of production?

            Is not profit the one and only driver of business decision-making?

            Who invented the corporation? Would Capitalism even be possible without the corporate form? How would accumulated capital survive generationally without the corporate form? Who would ever invest in a a business enterprise that they did not manage if they were not rendered immune from liability for the business’s acts by virtue of corporate investor immunity?

            Do you live in a dream world where “Capitalism” consists of tiny petit bourgeoisie businesses? LOL. It’s in the nature of Capitalism for the big fish to eat the smaller until only a few big fish remain. The Law of Manu prevails when it comes to a Capitalist society.

            If it’s profit that you’re after, then monopoly is the goal, combined, of course, with some fine Edward Bernays manipulation of customers.

            What we’re experiencing is Capitalism Max. It’s the nature of the beast.

          2. darms

            ‘Capitalism’ ain’t ‘privatize the profits, socialize the losses’. Or is that the modern definition?

    6. nonclassical

      “In the wake of the financial crisis, the banking and finance community has warned about the dangers of over regulating the sector. “We mustn’t impede the free flow of capital”, it is claimed, “otherwise efficiency and productivity will be lost and the real economy will not recover.” The other camp claims that the finance sector must be reined in, re-regulated, otherwise crises will continue to happen. The dichotomy is entirely false. Finance is rules. You cannot increase or decrease the amount of rules in rules. You can only change their character. And you can decide who will set them.

      And that is what this argument is really about; who has the power to set the rules of finance. For a quarter of a century, governments have given up power to set the rules; given it over to private players, who, made up their own rules: forwards, futures, options, swaps, CFDs, CDSs, CDOs, securitisation, volatility derivatives…which can be translated as “WE MAKE THE MESS, THEN WE MAKE MONEY FROM THE MESS” (Shock Doctrine economics).

      The false dichotomy about regulation inevitably led to another false dichotomy. That the only choice facing us is between bad government and good markets. You can see how it works in the Economist article on LIBOR (the London Interbank Offered Rate that sets the interest rate for the world). Never let a chance to blame government go past, even when the traders have been caught cold rorting the system:
      BOOSTERS of financial regulation note widening scandal over allegations that LIBOR, a key interest rate, was rigged repeatedly for at least five years since 2005.

      Bashing of government (oversight) can be seen in Karen Horn’s article for Standpoint, one of many examples of the rear guard action being mounted against criticisms of the ideology of the market state. Horn announces that the “anti-capitalists are coming out of the closet”, eliding, as ever, democracy and markets. Underlying her critique is the neat use of dichotomies, bad government, good markets. Markets have pricing. Governments don’t:

      This circular bashing of the state is typical of the quasi logic of (IP-LIKE) pro-market apologists. The market is defined as inherently better because it prices supply and demand, whereas the state is defined as inherently inefficient because it doesn’t.

      But the choice is between good government and bad government. In the final analysis, as we are graphically seeing, governments have to set the rules. Traders rely on the basic legal structures that underpin transactions. If they are allowed to set their own rules, markets collapse; who has to pick up the pieces? Governments.”

  4. Susan the other

    Michael Hudson, today’s links, “War deflected western civilization… taxes on land, natural resources and the financial sector have been unwound… labor is taxed… in 1913 income tax fell only on the wealthy, not wage earners… rent exploitation has been democratized… pension funds are lent out to indebt the industrial economy instead of (sharing ownership)…”

    How could the big banks ever adjust to real market forces? They have been irrational so long it looks rational to them. And worse, there has been no new direction for the economy because we have gone to a war economy. Is congress going to refine the rules while we are busy appropriating the rest of the world? I’m sure the military needs funding that relies on the old rules. What they get in the budget couldn’t begin to pay for all of their exploits. If the investment banks split away from their commercial branches, how would they justify getting money from the Fed and funneling it to their favorite causes? What on earth is Sandy Weill thinking about? Africa?

    1. ajax

      There is so much “messaging” in news articles and blogs
      maquerading as authentic journalism (the kind they praise in the Columbia Journalism Review).

      The lenses here at NC are among the best. In any case,
      it seems it’s a “long journey” to gather a decent amount of
      top-notch commentators on the issues that matter in US elections, policy and “current events” .

  5. briansays

    obama is giving the banksters the opportunity to double down and say by mid october if mitt hasn’t just closed on the popular vote but continues to trail in electoral college to buy their way back into the fold since the later contributions won’t be disclosed until post election

  6. Max424

    “What we’re experiencing is Capitalism Max.”

    Good thread Goin’ South, but I have to mildly disagree with you here. This is not Capitalism Max.

    Capitalism got the shit kicked out of it throughout much of the 20th century. You know, think Red China, the Soviet Bloc, the communist “movement” in general, the semi-ascendency of the mid-left here in the US, from the time of FDR to maybe Nixon, and especially, what I consider the most logical –if not the most direct– rebuttal/threat to Capitalism we’ve seen so far, the rise of the genuinely committed liberal-socialist democracies of post-war Western Europe.

    It’s taken Capitalism a while to recover. Don’t get me wrong, Capitalism is back on its feet and it’s the one doing ALL the shit kicking now. But it still has a long way to go.

    World wide slavery is Capitalism Max. And it’s coming. What exact form it will take, who can say, but at the very least, it means slavery will be an integral part of the economies of every major country* on the planet.

    How long? I think world wide slavery will be in full bloom by the end of the century, no later. In other words, in relative time, in the wink of an eye.

    *If we still have what could be considered countries, in the coming Age of the Neo-liberal Slave Traders.

  7. Doug

    I hate to disagree with Yves here. But, clearly the Obama reasoning is entirely accurate. Unlike the failed Bear Stearns and Wachovia, the other banks WERE more diversified because of their extensive holdings of SHITBONDS: Super High Indentured Taxpayer Bonds Of Nonperforming Derivatives.

  8. OpenThePodBayDoorHAL

    The Left is just so reluctant to place the blame squarely where it belongs: with our present Basketballer-in-Chief.
    Zero bank fraud prosecutions: in the S&L Crisis in the 1980′s, which only cost taxpayers $200 billion to clean up, there were more than 1000 felony convictions. This time? Zero. They won’t even go after Corzine, let alone Jamie Dimon who should be up as we speak for Sarbanes-Oxley violations of the most obvious sort based on his actions at Q1.
    No, we can’t assuage the guilt by claiming Obomba is for Sane Rich people, or any other formula. Obomba is squarely FOR the running roughshod over our nation of laws, whether they be for bank fraud, war declarations, civil liberties…the list is getting huge. The more the Left rolls over and plays dead, listening to his mellifluous lies, the worse off the country will be. What happened, people? We stopped this kind of sh*t with Nixon…why not today?

Comments are closed.