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.”
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With Uncle Ben paying the Big Boys interest on their reserves at the Fed (and other perks of megawealth), the Fed will, in essence, subsidize any such insurance ‘fees.’ This, to me, is why the banksters are getting on board: they’ve been assured that the public agencies will actually pay the fees FOR them on pass-throughs of this kind. Look for reserve-interest to become a permanent feature of the soak-the-public Too Greedy to Control system.
Really, for the survivors at the top of the financial system the crisis was the best thing that’s happened to them since Reagan. The banks have _completely_ taken control of sovereign financial policy. What we really have here are guys like Summers and Bernanke and Emanuel (behind Bo Prez) telling the banksters how to improve their visuals on the hurry-up while the new ‘game the system’ system is made ‘enduring.’
I’m wondering: “What will it take to reign in those bastards in DC and Wall Street?”
After reading about the financial world for, what, 2 decades, I am more pessimistic than ever about the possibility of significant reform. The damage is too great, the political institutions of this country are, but a shadow of their previous selves, the establishment media is patently useless as a healthy organ of a real democracy. To top it all, we have a significant minority of Americans, that, when it comes to politics and social issues, cling to destructive belief systems that prevent any reasonable consensus for the future.
I sure hope we don’t need physical mayhem to enact change that would be believable.
Since Big Corp is watching, I’m not gonna spell it out, m’friend. But it’s fer damn sure that punching a chad in alternate years iddn’t gonna cut it.
What did it take in ’32. Don’t see much of that kinda stuff in the American body politic this century.
You don’t have to reign them in. Those parasites are destroying the host so quickly that both will die off within a decade at most–and probably well before then.
Sometimes people get too big for their britches and begin to be an embarrassment. You can get away with that when the rule of law obtains, like in the olden days of before we had disappearances, privatized black ops, and assassination by executive decree. If Blankfein is still being a dick when Addison et al get back in power in 2012, it will be some fun. Patarkatsishvili thought he was a big wheel too.
OK, Br’er Rabbit, no briar patch, we put you in the wood chipper.
“Quite frankly, they own the place!”
— Senator Dick Durbin
I believe we are in a depression. It’s just not the Great One. All the liquidity did was allow extend/pretend. So now it looks like another decade of post-bubble stagnation a la Japan rather than Sweden.
Note the Heritage Foundation just came out with rankings of global econ freedom. The US suffered a huge drop of 2.7 points, dropped to 8th (below Canada), and is for the first time rated “mostly free” rather than free.
All this is part of the problem. A piddling bank fee will change nothing in the larger picture.
Taleb/Volcker have it right. Banks need to be plain vanilla utility-like institutions, heavily regulated if not govt-owned. All they can do is standard banking. All the other stuff can sit in “gambling houses”, llightly regulated but forbidden from tying into the real economy in a way that would destroy the banking system.
Oh-and credit default swaps should either be banned or become regulated insurance products backed by reserves, and in any case shouldn’t be traded.
And the same goes for interest-rate swaps. All these “swaps” are little more than highly profitable line extensions for Big Finance.
Blankfein’s bye-bye will be much sooner: as soon as the riddle of AIG pay-outs and the CDO and CDS muddle is solved. And you are all working on that. Great.
Sometimes the best way to win is to surrender. And so we have it here.
I want to know, what the proper characterization of the following is: The enterprise enters into a very large number of contingent event contracts that it knows that it cannot honor. It tells each of the counterparties that the contract is money good. The counterparties place great reliance on the representation that the contract is money good, even so a number of the counterparties buy additonal insurance to ensure that the contract in any event or sequence will be money good.
While I find it extremely distastetful that there was this pass-thru bailout, I can partialy understand the motivation and the action. What I cannot fathom, nor abide, is the fact that this monstrous tort, if not fraud, has gone unreferred and unprosecuted. The worry about a Fed cover-up is misdirecting. The worry about bonuses is also a misdirection.
The appropriate societal vengence is inquiry and prosecution. Given what transpired and accepting that this is a crises of liquidity, admitedly a very questionable, if not stupid assumption, why not demand that monies expended on bonuses be matched by increments to retained earnings. Or, simply dictate that there will be no bonuses and that the earmarks for bonuses will instead be allocated to retained earnings.
When the hell is there going to be an inquiry and referral to the Justice department?
Now helicopter Ben has been confirmed for a second term by a modest majority. This great experiment in borrowing our way to prosperity is set to continue. It is my view that it will succeed when pigs fly.
Let us hope that in the effort to levitate the pigs that they never leave the ground and that when they fall the drop is not very fat. What is worrisome is that the drop will be into an abys of undefined depth.
YS:
I love this. Who is the tar baby? I could kiss you. Smack!
Couldn’t be that the banksters realize how universally reviled they are, could it? Even the WSJ is reporting how low they’ve fallen in elite opinon :
At Davos, Bankers on the Run
http://online.wsj.com/article/SB10001424052748704343104575033373335750804.html?mod=WSJ_hps_LEFTWhatsNews
I guess everyone but David Brooks gets it.
Of course the banks are in favor of paying a bank tax as opposed to having their proprietary activities and investments curtailed.
The banks can pass that fee directly on to the consumer as a cost of doing banking. No extra cost to the bank, no extra pain.
I was expecting the Goldman representative to accept the wager, repackage it into a financial product, and market it to customers.