VoxEU: If banks should act as utilities, why not treat them as such?

Richard here: Yves talked about this last week.

By Charles Goodhart, Professor of Banking and Finance at the London School of Economics. Cross-posted from VoxEU.

The calls for better bank regulation are many. This column argues that regulators have the concepts right, but the mechanisms are in need of repair.

Nobody thinks that utility-operating companies – whether in transport, such as railways, in energy, such as electricity, or telephone or water – are too big to fail. If they lose enough money and go bust, then, if another company cannot be found to take over the franchise, the government steps in to take over the operations. They keep the capital and (most of) the workers to continue running the utility. No one would think that it would make any sense to rip up the railway lines, electricity pylons, or water pipes, to sell them for scrap, and to push the skilled workers into unemployment. Nor is there any worry about utilities being too-big-to-fail.

Why is banking different?
The key reason is that its capital is fungible and can be quickly redeployed, unlike the water pipes, power stations, etc., of the utilities. The real danger with banking is the bankers’ ability to “gamble for resurrection”. With limited downsides from failure but enjoying the spoils from success, it is in the interest of both bankers and their shareholders to take on more risk than is socially desirable, especially when their stake in the business has already been eroded by losses. By the time that the bank has clearly become technically insolvent, it may well have run up far greater losses than any ordinary utility could aspire to emulate.

One answer, of course, is regulation. But regulation, whether by risk-weighted ratio control or by structural ring-fencing, has severe limitations; Anglo-Irish and Northern Rock were both, in effect, ring-fenced retail banks. If regulation is taken sufficiently far to ensure safety, creating narrow banks, it not only destroys the key utility function of such banks, i.e. credit allocation, but also leads to a major shift of business to non-regulated intermediaries, which can worsen both the fragility and the pro-cyclicality.

Prompt corrective action is needed
What needs to be done is bring intervention by the authorities forward in time: prompt corrective action, well before the bank’s managers can really drive it into the ground. A problem is that the available signals for doing so are quite faulty. The accounting value of equity capital is only available after a lag that can be far too long for comfort in fast-moving markets, and can be subject to all kinds of accounting tricks. On the other hand, the market value of equity can be subject to (temporary) manipulation, or to market over-reactions or flash crashes.

An answer to this is a requirement for both of these signals to be flashing red before intervention is contemplated, and having the accounting signal at a much higher value, say 5%, than the market signal, say 2.5%. If that is still thought too draconian, one could make such signals the trigger for a “comply-or-explain” exercise, whereby the authorities either comply by intervening, or explain in public why there is no need to do so.

But is this not a transgression of the rights of private property?
Maybe so, but is not all regulation (and taxation) also such a transgression? If banking is special, it is because it is a utility with special risks, and special risks justify special responses. Moreover, the shareholder could be protected in a variety of ways, notably by having a claim to the value of any (subsequent) sale of the business (beyond the appropriate cost to the government of the intervention, and residual to other senior creditors).

In general, no systemically important financial intermediary should ever be liquidated, for exactly the same reason that no other systemically important utility is liquidated and broken up. But bankers, and their shareholders, should be allowed to fail, just as other utility companies fail. The difference between banks and other utilities is that, because of the fungibility of their assets, banking “failure” and associated intervention by the authorities should come much earlier in the process, well before bank equity capital has been reduced to near-zero.

The best response to bank fragility remains prompt corrective action. It was tried in the US in 2008, but it failed – partly because it relied on a faulty trigger mechanism. The concept was right, but the mechanisms need repair.

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  1. Hilary Barnes

    Take a leaf from the very effective Norwegians in 1992 – two of biggest banks declared insolvent, nationalised overnight with previous shareholders’ capital written off, opened for business next day, later re-privatised and taxpayers (I believe) came out ahead.

  2. It's Not Bad When We Do it

    “The best response to bank fragility remains prompt corrective action”

    Everything else can go to hell!
    That my friends, is just about what happened.

    “But regulation, whether by risk-weighted ratio control or by structural ring-fencing, has severe limitations”

    Here, the delightful sprite suggests ‘regulation bad’, pulls out cryptic, magical hand spells to enunciate the heated air.

    “It was tried in the US in 2008, but it failed – partly because it relied on a faulty trigger mechanism.”

    Ah, it just wasn’t done the right way. We thank you!

    1. Borewors Mae

      “But bankers, and their shareholders, should be allowed to fail, just as “, Enron failed and faced searing indictments, prosecution and widespread wrath from the public they exploited.
      Public utilities have delivered reliable, safe service for decades. This includes Democratic systems that allow direct access to management, this includes collective bargaining among the skilled workforce to deliver electricity. TBTF, on the other hand, is rapid tumor growth within the host, an insidious parasite that uses hidden code to consume.

    2. No Know

      I believe and have written previously that the repeal of Glass Steagall made it impossible from a practical legal standpoint to take prompt corrective action. That is the dirty little secret that the gang of thieves running the show will not acknowledge. With the purposeful, and in some cases needless, complexity that the large banks operate under they have been incomprehensible and unmanageable considering the various international jurisdictions whose laws govern their actions. What will happen when the next crises hits is we will again be faced with the complete breakdown of our payments system while the mother of all legal battles breaks out.

  3. hello

    to sound like a grumpy old man, the American polity has become ignorant and stupid. (or alternatively, the polity is equally stupid now as ever, but the complexity of the world’s issues have trebled.)

    I’d bet that the vast majority of people have zero clue of the historical/economic context of the bank run scene in “It’s a Wonderful Life.”

    In a climate of sheer ignorance like that, it’s easy for lobbyists to set the agenda and astro-turf popular opinion.

    1. Anonymous Jones

      Well, let me suggest one other alternative.

      The polity is still extremely stupid (though not as stupid as it once was), and the complexity of the world’s issues is just the same (i.e., so great that the minimal decrease in stupidity looks like trying to raise the level of the ocean by pissing in it).

      In 1900, 41% of the US workforce was in agriculture; so let me just doubt for a second that the farmhands had a great grasp on the gold standard.

  4. Slump Gut

    Helen Brown wrote: “North Dakota’s Economic ‘Miracle’—It’s Not Oil “, from ‘Yes Magazine’, from ‘Common Dreams’, with permission, Creative Commons License:

    ” California deposits its many billions in tax revenues in large private banks which often lend the funds out-of-state, invest them in speculative trading strategies (including derivative bets against the state’s own bonds), and do not remit any of their earnings back to the state treasury. Meanwhile, California suffers from constrained private credit conditions, high unemployment levels well above the national average, and the stagnation of state and local tax receipts. “

  5. flow5

    The deposit taking, money creating, financial institutions (DFIs) are completely different animals. I.e., virtually all (if not all), economists think DFIs loan out existing savings. That’s why REG Q CEILINGs were eliminated. This was the biggest error in Keynes’ “General Theory”.

    Instead of strengthening the regulations for 14,000 commercial banks, the FED gave the 38,000 non-banks the legal authority (see DIDMCA), to become commercial banks (& in the process deregulated their lending & investing activities). The S&L crisis was the direct result of this legislation. Further deregulation lead to the current Great Depression.

    This is all very simple. The axiom is that if private profit institutions are to be allowed the “sovereign right” to create money, they must be severely regulated in the management of both their assets & their liabilities.

    1. Nick

      or the fact that the federal reserve let the money supply decrease by about a third before INCREASING interest rates due to a lack of gold in the treasury, thereby making the depression even worse.

  6. Positroll

    There is of course another option re: utilities: have them owned by the public, not chasing yield but supporting the local economy.

    But the European Commission during the naughties forced the German Landesbanken to switch from their old model (doing boring lending in their home state at low rates while being backstopped by the public) and to act like “normal” banks. Result: they had to chase yield and started investing German money in the PIGS and (now worthless) US papers.

    So while the EU Commission defended “free competition” (yeah, right, because nobody would never bail out private banks, now, would they … ?) it reduced German growth while artificially inflating the PIGS and making the Landesbanken very vulnerable. Thanks a bunch.

    (recently the IMF has been continuing this B.S. by stating that the Sparkassen – though they were the one anchor of stability during the GFC – should be privatized, too, all in the name of liberalisation of markets. Don’t these guys ever use their brains ???)

    1. Leverage

      The area of operations of banks should be restricted to the one where there is both common Treasury and CB operating and there is a state who controls both monetary and fiscal policy.

      Personally I would go much further (reforming the whole financial-monetary system), but this is a no-brainer: Deglobalize the credit system, this means no Interbank operations between banks operating under different jurisdictions. Obviously this would screw the banking cartel so hard and mean returning power to sovereign governments that won’t happen.

      If you want to operate on foreign capital markets either you give up the ability to create money out of nothing (credit) and become an investment fund or you don’t and are kept to your national area of operations.

      Obviously this would mean stronger controls of shadow banking to stop hot money flows channelled through it, too.

  7. flow5

    “In general, no systemically important financial intermediary should ever be liquidated”

    In general agree. Example: The Fed rescued Continental Illinois in 1984 (7th largest bank), by advancing over $6 billion thru the discount window (the FDIC’s reserves were inadequate to meet a wholesale run on the bank & the bank held billions of foreign corporation’s deposits which threatened the dollar’s reserve currency status).

    The board of directors & senior management were replaced. Shareholder’s equity was destroyed, but bond values & deposits were fully protected.

    1. Cap'n Magic

      Continental Illinois laid the foundation for the “Too Big To Fail” doctrine. Which led to the LTCM crises. Then to Citi, B of A, et al.

  8. Linus Huber

    I can agree with the drift of your thoughts. There is one aspect that intrigues me, namely the fact that bankers are able to profit personally while the going is fine but do not face any downside risk (except maybe loosing the job) when things go bad. This aspect flighs in the face to the spirit of the rule of law. If an entrepreneur with his own money at risk, makes a killing, well I am all for it. But if in case of losses the guy responsible walks away with pockets full of ill-received benefits, something is really wrong. Therefore I do think that bankers need to be made personally responsible and it must be possible to take them to account with all the wealth they acquired during the frenzy.

    1. fajensen

      it must be possible to take them to account with all the wealth they acquired during the frenzy.

      I think they will just do like their street gang relatives: Press-gang some poor junkie to do the crime and serve the time!

      The real problem is that the government is colluding with the fraudsters – there are plenty of laws, RICO, f.ex. that could be activated, but all that is done is “settlements”; whatever goes down is OK as long as the government gets a cut of the action!!

  9. F. Beard

    Even conservatively run banks and credit unions are counterfeiters. Unless they are forbidden to create money, so-called “credit” they will continue to be so.

  10. Pokey

    Regulated public utilities (unlike Enron)should never fail. Increased expense goes into rate base. Banks might like that, but would not like the limitation on return and kinds of investments that are permissible.

    Sounds like an excellent idea. Treating banks like regulated utilities would be good for everyone (including investors) except the billion dollar bonus babies.

  11. steelhead23

    I have a simpler solution. Simply force commercial banks to be organized as non-profit organizations. This won’t wholly solve the problem of bank failures due to stupidity but it would end the tendency for banksters to take risks that the public is forced to backstop. It would also end a primary source of funding to the elite, who have chosen to attack us. While regulation would still be needed, the method for achieving this revolutionary goal would be to offer federal guarantees on deposits (FDIC insurance) and access to the Fed’s lending windows only to not-for-profit banks.

    I’ve been spouting this crazed idea for at least a year here on NC and haven’t gotten so much as a second, or even a nasty retort. I ask you all – why not?

    1. F. Beard

      Theft is theft whoever does it. So-called “credit” is merely a means by which the population steals purchasing from each other with the poor (since they are typically less credit-worthy) being the net losers.

      “Credit” is not a magic means by which we borrow from the future; it is a means by which we steal today.

    2. The Cock Foundation

      It’s a great idea. Keep in mind that some non-profits, under guise as such by the Foundations that have taken advantage of the arrangement, avoid certain, reasonable social obligations. Gosh, let me think of a few of them.

    3. mansoor h. khan


      Here is even a simpler way to look at it:

      Payment clearing and money creation (these two are closely tied, insperable) = Utility bank (no lending, 100% reserve).

      All new money is given directly to citizens (as a social dividend) or spent by the government into circulation.

      Therefore the national utility bank should be a public trust (like the military) and cannot go bankrupt. Such a national bank may also have to tax and destroy money to control inflation at times.

      Investment Bank (cannot create money) but does whatever it desire with money it “has”.

      Even with the above setup there will be entities which will maturity mis-match (and indirectly create money and inflate prices). But such entities can be allowed to fail (and eventually all such “ponzi” schemes fail). Any resulting deflation from their failure can be countered with “more money creation” by the government bank and the new money can simply be given to the general public or spent for other government purposes.


      1. steelhead23

        Mansoor, Thanks for the thoughtful response. I stopped short of the government bank idea because there is a very broad and strong disdain for government in the U.S., and the idea simply would not sell. As regards investment banks, I have limited concern with investment banks conducting fractional reserve lending if the government does not guarantee their deposits. Thus, if the community bank offers 2% on its federally guaranteed deposits and the investment bank offers 3% on its shares, those who are willing to exchange surety for profit could continue to play (under strict regulation). My only objection to eliminating fractional reserve lending by investment banks is that it would reduce the velocity of money, which would likely slow the economy. In my view, investment banks must be “free to fail” which might mean that among the regulatory reguirements would be to remain small enough that failure would not pose systemic risk.

        Your suggestion and mine both approach the problem structurally, which I believe is necessary. I am wholly convinced that regulation, even onerous regulation, is a stop-gap, it does not end the underlying problem which is profit seeking. Eliminate the potential for profit and the need for regulation would greatly diminish.

        Econned showed how individual players, seeking to maximize their personal compensation, would incur risks at odds with company policies and how individual companies could incur risks that placed not only the company at risk, but imposed a risk on the system. The motivation for this behavior is profit seeking. How does profit seeking by a utility benefit the public?

        1. mansoor h. khan

          Steelhead23 said:

          ” it would reduce the velocity of money, which would likely slow the economy. ”

          Reduced velocity of money (deflation) can simply be handled by giving more social credit to the public (let the public decide directly what to do with the “slack” productive capacity of the economy) or additional government spending (indirectly the public decides in this case).

          There is absolutely no need for private money creation to deal with deflation and low money velocity (which I agree are a big problem).


        2. F. Beard

          How does profit seeking by a utility benefit the public? steelhead23

          Profit is good. The problem is that theft is used to generate those profits. Ethical money creation would be truly profitable since it would not generate external costs to society.

          1. gerold k.b. weber

            “Profit is good. The problem is that theft is used to generate those profits.”

            An even more important problem arises when profits (and compensation for the managerial and banker class) are too high and don’t get recycled into the real economy via investments in factories and workers, or via capitalist consumption.

            Unrecycled money inflates credit/debt bubbles (‘financial instruments’) and the price of alternate stores of value, like commodities.

            This fundamental problem lies at the root of depressions after credit bubbles, as many – among them Marriner Eccles, Robert Reich, John Bellamy Foster and Fred Magdoff, as well as MMT economist Bill Mitchell – have acknowledged.

        3. Ransome

          If you can find a copy of Hints on Banking written by McVickar in 1827, the first requirement was that banks be non profit, no stockholders, no investors. This would keep the cost of borrowing low which always been recognized as desirable. If the cost of money rises, less money is invested in production and more is used for unearned income by rentiers. Having a profit motive encouraged risk taking and over-printing.

          Banks as utilities would eliminate much of the new innovations by the broker-dealers who frequently used money as a commodity to receive unearned income. Originally, broker-dealers had a special purpose, providing alternate financing mechanisms for business, stocks and bonds. A problem developed when commercial banks referred customers to the broker-dealers for investment advice. This is why the fire-wall was established.

          As a current example, until recently, bank could charge 3% for moving a quantity of money from a customer’s bank account to a merchant’s bank account, treating money like a commodity such as coal; moving more coal incurs more costs, fees increase, not so moving zeros on a spreadsheet. Or the bank can lend money for 4% a year, risking principal and receiving the 4% over the year. What do you think the banks want to do? As a utility, the banks would be forced to stop treating money like coal.

    4. Binky the Bear

      Because explicitly not for profit organizations are just as easily corrupted and looted as for profit organizations.

  12. Surface Tension

    Kate Berry. ‘Murican Banker:

    “Some of the largest mortgage servicers are still fabricating documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners.”

  13. John Merryman

    Underlaying the myriad problems with banking are misconceptions about the nature of money. We treat it as a commodity, the supply of which can be manufactured to whatever is limited by demand. Since demand is debt, the illusion of enormous wealth can be created by the expansion of debt. Then when there is more demand for wealth, it becomes imperative to allow loosen requirements on debt and create all sorts of structured products that are nothing more than gambling, but designed to resemble legitimate debt.
    Solving this problem will require far more than just regulating the banking industry.
    The fact is that money is a contract, not a commodity. It is a promise, not a store of value. There are limits on how many promises society can make, not only to those clever enough to accumulate large amounts of wealth, but to everyone else. There has to be methods of recycling notational value back into society in ways which are productive for the long term, not just satisfying current demands. This doesn’t mean some central authority that would quickly focus on its own needs and desires, but an ecosystem of local economies served by public banking systems, that would support regional, national and global enterprise to the extent it is viable, rather than being coerced by private control of monetary systems.
    If people understand that the money itself is a form of public utility, not just the banking system, then they would be far more careful what personal value they convert into currency. This might possibly lead to stronger communities and healthier environments, as wealth becomes more of an organic function and not just dominated by currencies.

    1. gerold k.b. weber

      Inspiring considerations, thx!

      “If people understand that money itself is a form of public utility …”

      An important option is the introduction of money with guaranteed circulation (‘umlaufgesichertes Geld’ or ‘Freigeld’), based on negative interest rates (continuous depreciation), along the theory of Silvio Gesell.

      In the Tyrolean town of Wörgl there was even a 14 month lasting implementation of that concept at the height of the Great Depression in 1932/33, which slashed unemployment from 21% to 15%. During that period unemployment further increased for the rest of Austria.

      We should be aware that proposals of Buiter, Krugman, Mankiw, and Rogoff to ‘go negative’ or to somehow create 4-5% inflation coupled with low interest rates point just to that direction.

      A significant drawback however is the sudden flight to stores of value such as commodities which induces poverty and increases inequality. Therefore we have also to think about other solutions for current ‘promises’ which will be broken, and for avoiding a crisis replay.

      This includes meaningful debt restructuring for defaulted and underwater loans (‘principal mods’ as demanded by Yves Smith and others), and redistribution of income and/or wealth by taxes or other means to sustain aggregate demand without credit bubbles.

      And of course, there has to be an end of TBTF for non-utility banks and the containment or even reduction of ‘casino capitalism’. Furthermore, decreasing trade surpluses should also be part of the solution.

      Full employment and growth probably would be restored quickly, and further Keynesian or MMT stimulus accompanied by increasing public-debt-to-GDP ratio not be necessary.

  14. Miss Prism

    If banks, as they claim, are too incompetent to see that loan packages are enterprises that must be subjected to strict top-down governmental rules to ensure the quality of each and every loan that goes into them, how do you expect the legislators or regulators to see this — much less to foresee and intervene prior to future collapses? The banks’ argument is, we do everything just as the government tells us. But the government is clueless. If cluelessness pours massive fees into the banks’ pockets, why should the banks complain? Regulators are 100% reliant on what the banks choose to tell them. Even cooked books and blinding corporate shell games with off balance sheet entities have lately been deemed A-OK, and if the regulators don’t have a problem with it because they don’t understand it, then under the current law it can’t be wrong, because current law assumes regulatory omniscience that doesn’t exist and wipes out fiduciary duty (owed by the banks to the nation and its regulators).

    For decades now, the regulators, with their sleepy, underfunded, understaffed bureaus, set up back in the 30s, have been hamstrung or out to lunch. They are easy to set chasing their tail around political haymaking d’jour and foresight is not exactly their middle name. Keep your head down is their middle name. The private sector runs circles around the regulators. To learn anything at all about their charges, the regulators have to cater to them. At this point, the lawyer lobbyist class actually believes it is acceptable to game, cheat, and con the regulator on behalf of a paying client’s wholly venal and selfish interests. Lawyers today do this without the slightest fear of God or prosecution, or even mild regulatory wrist slap. Every lawyer in Washington has a clubby old boy relationship with the banks. They care only about admission to the glam social circle of rich, the better to pick up new clientele for their firms. They have underlings do all their dirty work for them. Paid somewhat less to look the other way, most of these are too young and dumb themselves to understand that what they are doing is grossly corrupt. This is how the corporate veil works, has always worked, and will always work.

  15. Miss Prism

    The answer to things being too large and complex to manage from top down, including by government regulatory command and control and enforcement, which presupposes a brilliant foresight that does not exist, has always been, capitalism, and breakdown into small enterprise — in which everyone is at risk, no one has any government (taxpayer) guarantee, and no corporate entity will be deemed too big to fail. If a corporate entity wants to make money taking on tail risks, on high leverage, and then loses the roll of the dice, then they and all their shareholders and counterparties must pay the piper, and fail.

  16. Roger Thunders

    Some people think that it is ok to remove people from their houses so that they sit empty for months – to be stripped for copper and other building materials, damage other property values, reduce the quality of life of neighbors, push costs onto municipalities and reducing revenues to provide for basic services. A regulator (former) like John Dugan would arrogantly dismiss this violence as “contract law”. Perhaps former regulators like John Bowman have had success in life by doing and saying something incredibly stupid, and becoming successful by doing so.

    Indeed, this is why Banking is unlike the utilites where the author broadly states that “no one would think that it would make any sense to rip up the railway lines, electricity pylons, or water pipes, to sell them for scrap, and to push the skilled workers into unemployment.”

    That’s naive as hell. Banks have torn up housing, sometimes literally, coast to coast. The US continues to treat borrowers like dogs. Not like prisoners just yet, but like dogs. No due process, no regulation and occasional white tower indifference.

  17. kpmg killed jane




    Holy cow, can it be I just found the KPMG statement of facts as recited in an IRS press release. See below.

    Of course, I also found in a court filing the email directly below wherein Joseph Loonan (one of Jane’s lying thieving murders from KPMG) states in no uncertain terms the statement of facts are false.

    The email is dated 3/19/05 to Joseph Barloon of Skadden Arps, an email which Joseph Loonan the lying thieving murder from KPMG states “freedom is just another word for nothing left to lose” in reference to the KPMG statement of facts which Loonan the killer from KPMG asserts are absolutely false but necessary for KPMG to survive.
    Joseph Barloon of Skadden Arps is one of fat pig Bob Bennett’s lackeys (like Peter Morrison) who wrote a memorandum dated 3/05/05 wherein Barloon quotes fat pig Bob Bennett of Skadden Arps telling the DOJ that Skadden and KPMG would do everything possible to assist the DOJ in indicting KPMG partners who allegedly sold tax shelters to individuals if the DOJ would allow KPMG to keep all of its government audits (including the audit of the DOJ) worth 100s of millions of dollars and if the DOJ would cease and desist its investigation of KPMG’s massive corporate tax shelter practice which generated tens of billions in phony tax deductions/benefits for KPMG’s “best” clients.

    The deal between Skadden, KPMG and the DOJ was written in blood. Skadden (fat pig Bob Bennett) agreed to lie (and my mother f…king god did KPMG lie) such that the lives of many families were absolutely decimated and Jane killed herself in a violent disgusting manner befitting of no one not even Dennis Malloy, one of the biggest liars of all (except maybe the faux self promoting piece of garbage Michael Hamerlsey of Hamersley Partners and KPMG).

    KPMG Partners and Employees I would be extremely nervous especially given all of your questionable tax practices and offshore special purpose vehicles hiding accounting losses…..

    Just read the email below from KPMG’s chief counsel, KPMG will and say anything to make a buck and throw its own partners and employees overboard to be ass raped, beaten and tortured for life.

    Yes that is what happens in prison don’t delude yourseves, of course after you are ass raped and beaten for a few weeks the government will come to you and state that if you lie about others like the scum fat pig Bob Bennett, Dennis Malloy, Michael Hamersley and countless others from KPMG did, the government will promise to stop the ass raping and torture.

    Dennis Malloy I have KPMG communications with the Government wherein you ruin lives with your lies and deceit not only did you commit perjury but you are a lying worm, people are dead because of you, hope your happy. I will be making all of your lies and deceit public soon.

    Michael Hamersely you may be the single biggest A hole on the planet. I have many emails showing you to be a tax shelter purveying backdating scumbag for hire.

    It is bad enough you advised clients to backdate documents to take tens of millions in phony offshore tax deductions by selling the stock of a client’s subsidiary to the clients lawyer for a dollar but what is utterly disgusting about you is you have absolutely not one shred of decency or honor. Michael Hamersley of Hamersley Partners you lied about and turned your very own clients over to the Government for personal gain and directly caused others to die , who in the world would ever do business with you again. Your actions caused Jane to die, that I will never forget and you better pray to your god there is no afterlife.

    In any event I digress, I have thousands of emails like the one below, all of you dopey KPMG partners and employees should be fearful of your number one enemy, KPMG (just read the f…king email below).

    From: “Loonan, Joseph I”
    To: “‘Joseph Barloon”_ , “Russo, Gregory A”

    Date: 3/19/05 5:OIPM
    Subject: RE: Government Recitation: Confidential


    The recitation presented is not of “facts” but of conclusions based
    on some facts, distortions of facts and adverse inferences. This recitation,
    in large part, is itself false, misleading and unsupportable.

    The strategy in this case has never been to defend the facts of the
    investigation. I believe the time may have come, if it is not already too
    late, to actually mount a defense and to challenge some of the purported
    facts and the unreasonable inferences that Weddle is making from either
    benign facts or perfectly normal and legal business practices.

    It iS imperative that we push Weddle for every “fact” and the
    support for such a “fact.’ Gene telling Smith (or more correctly, repeating
    to Smith what Fred and Armando said to him) is not a “fact” establishing

    As the great philosopher Kris Kristopherson wrote: “Freedom’s just
    another word for nothing left to lose.” What time are you planning to come
    up to NY on Monday?


    KPMG to Pay $456 Million for Criminal Violations

    (Additional Link: Statement by IRS Commissioner Mark W. Everson)
    IR-2005-83, Aug. 29, 2005

    WASHINGTON — KPMG LLP (KPMG) has admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution and penalties as part of an agreement to defer prosecution of the firm, the Justice Department and the Internal Revenue Service announced today.
    In addition to the agreement, nine individuals—including six former KPMG partners and the former deputy chairman of the firm—are being criminally prosecuted in relation to the multi-billion dollar criminal tax fraud conspiracy. As alleged in a series of charging documents unsealed today, the fraud relates to the design, marketing, and implementation of fraudulent tax shelters.

    In the largest criminal tax case ever filed, KPMG has admitted that it engaged in a fraud that generated at least $11 billion dollars in phony tax losses which, according to court papers, cost the United States at least $2.5 billion dollars in evaded taxes. In addition to KPMG’s former deputy chairman, the individuals indicted today include two former heads of KPMG’s tax practice and a former tax partner in the New York, NY office of a prominent national law firm.

    “Corporate fraud has far-reaching consequences, both to the marketplace and those whose livelihoods depend on companies that maintain honest business practices,” said Attorney General Alberto R. Gonzales. “Today’s agreement requires KPMG to accept responsibility and make amends for its criminal conduct while protecting innocent workers and others from the consequences of a conviction. The stiff financial penalty announced today means that the firm is paying for its conduct, while the guarantees of cooperation, oversight, and meaningful reform will help to ensure that its future business is conducted with honesty and integrity.”

    The criminal information and indictment together allege that from 1996 through 2003, KPMG, the nine indicted defendants and others conspired to defraud the IRS by designing, marketing and implementing illegal tax shelters. The charging documents focus on four shelters that the conspirators called FLIP, OPIS, BLIPS and SOS.

    According to the charges, KPMG, the indicted individuals, and their co-conspirators concocted tax shelter transactions—together with false and fraudulent factual scenarios to support them—and targeted them to wealthy individuals who needed a minimum of $10 or $20 million in tax losses so that they would pay fees that were
    a percentage of the desired tax loss to KPMG, certain law firms, and others instead of paying billions of dollars in taxes owed to the government. To further the scheme, KPMG, the individual defendants, and their co-conspirators allegedly filed and caused to be filed false and fraudulent tax returns that claimed phony tax losses.

    KPMG also admitted that its personnel took specific deliberate steps to conceal the existence of the shelters from the IRS by, among other things, failing to register the shelters with the IRS as required by law; fraudulently concealing the shelter losses and income on tax returns; and attempting to hide the shelters using sham attorney–client privilege claims.

    The information and indictment allege that top leadership at KPMG made the decision to approve and participate in shelters and issue KPMG opinion letters despite significant warnings from KPMG tax experts and others throughout the development of the shelters and at critical junctures that the shelters were close to frivolous and would not withstand IRS scrutiny; that the representations required to made by the wealthy individuals were not credible; and the consequences of going forward with the shelters—as well as failing to register them—could include criminal investigation, among other things.

    The agreement provides that prosecution of the criminal charge against KPMG will be deferred until Dec. 31, 2006 if specified conditions—including payment of the $456 million in fines, restitution, and penalties—are met. The $456 million penalty includes: $100 million in civil fines for failure to register the tax shelters with the IRS; $128 million in criminal fines representing disgorgement of fees earned by KPMG on the four shelters; and $228 million in criminal restitution representing lost taxes to the IRS as a result of KPMG’s intransigence in turning over documents and information to the IRS that caused the statute of limitations to run. If KPMG has fully complied with all the terms of the deferred prosecution agreement at the end of the deferral period, the government will dismiss the criminal information.

    To date, the IRS has collected more than $3.7 billion from taxpayers who voluntarily participated in a parallel civil global settlement initiative called Son of Boss. The BLIPS and SOS shelters are part of the Son of Boss family of tax shelters.

    The agreement requires permanent restrictions on KPMG’s tax practice, including the termination of two practice areas, one of which provides tax advice to wealthy individuals; and permanent adherence to higher tax practice standards regarding the issuance of certain tax opinions and the preparation of tax returns. In addition, the agreement bans KPMG’s involvement with any pre-packaged tax products and restricts KPMG’s acceptance of fees not based on hourly rates. The agreement also requires KPMG to implement and maintain an effective compliance and ethics program; to install an independent, government-appointed monitor who will oversee KPMG’s compliance with the deferred prosecution agreement for a three-year period; and its full and truthful cooperation in the pending criminal investigation, including the voluntary provision of information and documents.

    Richard Breeden, former Securities and Exchange Commission Chairman, has been appointed to serve as the independent monitor. After his duties end, the IRS will monitor KPMG’s tax practice and adherence to elevated standards for two years.
    Should KPMG violate the agreement, it may be prosecuted for the charged conspiracy, or the government may extend the period of deferral and/or the monitorship.

    “Today’s actions demonstrate our resolve to hold accountable those who play fast and loose with the tax code,” said IRS Commissioner Mark Everson. “At some point such conduct passes from clever accounting and lawyering to theft from the people. We simply can’t tolerate flagrant abuse of the law and of professional obligations by tax practitioners, particularly those associated with so-called blue chip firms like KPMG, that by virtue of their prominence set the standard of conduct for others. Accountants and attorneys should be the pillars of our system of taxation, not the architects of its circumvention.”

    The nine individuals named in the indictment are:

    • Jeffrey Stein, former Deputy Chairman of KPMG, former Vice Chairman of KPMG in charge of Tax, and former KPMG tax partner;
    • John Lanning, former Vice Chairman of KPMG in charge of Tax, and former KPMG tax partner;
    • Richard Smith, former Vice Chairman of KPMG in charge of Tax, a former leader of KPMG’s Washington National Tax, and former KPMG tax partner;
    • Jeffrey Eischeid, former head of KPMG’s Innovative Strategies group and its Personal Financial Planning Group, and former KPMG tax partner;
    • Philip Wiesner, former Partner-In-Charge of KPMG’s Washington National Tax office and former KPMG tax partner;
    • John Larson, a former KPMG senior tax manager;
    • Robert Pfaff, a former KPMG tax partner;
    • Raymond J. Ruble, a former tax partner in the New York, NY office of a prominent national law firm; and
    • Mark Watson, a former KPMG tax partner in its Washington National Tax office.

    The indictment alleges that as part of the conspiracy to defraud the United States, KPMG, the nine defendants and their co-conspirators prepared false and fraudulent documents— including engagement letters, transactional documents, representation letters, and opinion letters—to deceive the IRS if it should learn of the transactions. KPMG, the indicted defendants and their co-conspirators are also charged with preparing false and fraudulent representations that clients were required to make in order to obtain opinion letters from KPMG and law firms—including Ruble’s law firm—that purported to justify using the phony tax shelter losses to offset income or gain.

    The conspirators allegedly concealed from the IRS the fact that the opinion letters provided by KPMG and the law firms were not independent and were instead prepared by entities involved in the design, marketing and implementation of the shelters. Had the IRS known this, the opinion letters would have been rendered worthless.

    KPMG admitted that the opinion letters issued for the FLIP, OPIS, BLIPS and SOS shelters were false and fraudulent in numerous respects, including false claims that transactions were legitimate investments instead of tax shelters; and also false claims that clients were entering into certain transactions making up the shelters for investment purposes or to diversify their portfolios, when these actually served to disguise the shelters.

    KPMG also admitted that the clients’ motivations were to get a tax loss, and with respect to BLIPS, the opinion letters also included false claims about the duration of the transaction and the clients’ motivation for terminating the transaction. According to the charges, BLIPS was also based on false claims about the existence and investment purpose of a loan, when these were in fact sham loans that had nothing to do with any investment, and at least one of the banks never even funded the purported loans.

    According to the charging documents, Smith, Eischeid, and others caused KPMG to provide false, misleading and incomplete documents and testimony in response to a Senate subpoena, which was delivered as part of an investigation into tax shelters being conducted by the Senate Governmental Affairs Committee’s Permanent Subcommittee on Investigations.

    Assistant U.S. Attorneys Justin S. Weddle and Stanley J. Okula, Jr.—together with Special Assistant U.S. Attorney and Tax Division Trial Attorney Kevin M. Downing—are in charge of the prosecution. The investigation and prosecution are being supervised by Shirah Neiman, Chief Counsel to the U.S. Attorney for the Southern District of New York.

    For the IRS, the case was investigated by a team of special agents and revenue agents from the agency’s criminal and civil divisions.

    The individual defendants are scheduled to be arraigned by Judge Lewis Kaplan.
    The charges contained in the indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.


    1. Andersons Aurturo

      Help me out here – should big accounting firms be regulated like power companies? Also, who is Jane?

  18. rf

    Deposit insurance is a big problem. Bankruptcy law for banks is a big problem (th liquidation thing). Risk weighted capital is a big problem (the let’s make many less risk loans because the risk weight is low; like home mortgages).

  19. jerry 101

    “No one would think that it would make any sense to rip up the railway lines, electricity pylons, or water pipes, to sell them for scrap, and to push the skilled workers into unemployment.”

    Haven’t been to the United States lately, huh? Because there are a whole lotta people around this country these days who would think that was a pretty swell idea. These are not intelligent people. But there are a lot of ’em out there.

    And, with regards to railways, yeah, we actually did do that (ripped up the railways, sold ’em for scrap, and pushed the skilled workers into unemployment – there’s only a handful of streetcars left, and only one interurban left in the entire country).

  20. tz

    Banks are of only marginal utility. We need high levees to prevent liquidity from getting out of control.

    And if the capital is fungible, how do I exchange Obama for Ron Paul?, or does it have something to do with funny mushrooms?

    1. Bagger Vance

      Ron Paul weirdness. Paul is hostile to just what people desperately need at this time, some kind of leverage at work.
      What we have now is a majority who are in a disposable workforce. In other words, Baggers hate democracy in the work place.

  21. flow5

    Investment Banks are the customers of the CBs. No need for deposit insurance.

    “Even with the above setup there will be entities which will maturity mis-match”

    Not true. In the first place, the CBs should not be allowed to pay interest on their customer’s deposits. I.e., the source of time/savings deposits to the SYSTEM as a whole is other bank deposits. The CBs are already paying for what they already own. This is thus more expensive & less profitable to the CBs.

    For the general economy it also decreases the supply of loan funds & increases their cost – raising the capitalization rate on company earnings, raising mortgage rates, etc…retarding the transaction velocity of money…

    In the second place there is no ambiguity in economic forecasts using MVt.

    Then the CBs should be restricted to the pre-1914 banking theory (the Real-Bills Doctrine). I.e., commercial banks should confine their lending to short-term, self-liquidating paper – paper originating out of the financing of “goods-in-process.” I.e., in the original Federal Reserve Act the CBs “were adjured to cto take only “short-term self-liquidating agricultural, industrial or commercial paper which was originally created for the purpose of providing funds for producing, purchasing, carrying, or makreting goods.”

    As a corollary to this it was assumed that the banks wer not to take paper whose proceeds were used to finance fixed investments or investments of a purely speculative nationure. This would rule out stock market credit, etc.

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