Quelle Surprise! Former JP Morgan Chairman Offers Dubious Defenses of Big Banks

Ordinarily, it might not seem worth the bother to debunk yet another piece of bank propaganda. However Thursday’s op ed by former JP Morgan Chase chairman William Harrison, “Don’t Break Up the Big Banks,” recites a classic set of time-worn canards. As regulatory compliance expert Michael Crimmins said via e-mail, “It’s sounding desperate that they’re dragging Harrison out of retirement to spout this drivel.”Thus shredding this piece makes for one-stop shopping on this topic.

In classic Ministry of Truth style, Harrison depicts the critics of big banks as logically challenged:

The first fallacy is that the emergence of large, universal banks — combining commercial banking with investment banking — was an artificial or unnatural development. In 1990, there were 15,000 banks in the United States; this fragmented market meant that banks could not achieve economies of scale or easily serve clients on a national or global level.

Guess what, sport fans? Bigger banks exhibit DISECONOMIES of scale. Every study of banking ever done show that banks have a slightly positive cost curve once a certain size threshold is passed. That means that costs rise as banks get bigger. One study found the break point to be $100 million in assets, most find it to be between $1 and $5 billion in assets; I’ve seen ones that put it at $10 billion. The sort of bank Harrison is defending is vastly above that size level; JP Morgan at year end 2011 had $2.3 trillion in assets.

But what about those cost cuts you see when banks merge? Refer back to the diseconomies of scale: the acquirer and target each could have achieved those savings and even a smidge more without a merger. The transaction served as a excuse for expense reduction that each bank could have done separately.

As for “serving clients on a global scale,” big companies have long had numerous banking relationships, and take a “horses for courses” approach. The idea, say, that size would give JP Morgan an advantage in doing a merger in France is nuts. Major corporations typically make sure to have relationships with local banks in major countries in which they do business. While the major UK and US banks might snag some top local graduates, the native institutions are going to have a much bigger network of local contacts and expertise.

The real issue, which Harrison does not deal with honestly, is that the US banks used the European “universal banking” model as an excuse to push for regulatory waivers in the US. But universal banking has not served Europeans well. Any bank analyst will tell you that the large European banks went into the crisis more levered than their American counterparts, and they’ve made less progress in rebuilding their balance sheets. In addition, their big banks are even larger relative to their domestic GDP than the behemoth Americans. And some central banks have decided that level of risk is unacceptable. Contra Harrison, the Swiss National Bank now requires its banks to have 20% equity to force them to do a combination of shrinking and raising more equity. And after screaming bloody murder, UBS and Credit Suisse have decided that’s actually an advantage for them.

Back to Harrison:

Even now, the American financial services industry is far less consolidated than its peers across most of the developed world.

This is a virtue, not a defect.

Andrew Haldane, the Bank of England’s director of financial stability, has written that more diversity among financial players, which is the opposite of the model Harrison advocates, is pro-stability. Similarly, Australia has a very concentrated banking sector, and the IMF has issued warnings about its stability. And Canada, which is widely seen as having a financial system that weathered the crisis particularly well, is recognized for having done so precisely because its regulators were cautious about the universal banking model and curbed the major Canadian banks’ activities. Back to Harrison:

None of the first institutions to fail during the crisis — Countrywide, Bear Stearns, IndyMac, Fannie Mae and Freddie Mac, Merrill Lynch, Lehman Brothers, the American International Group — were universal banks.

Let me turn the mike over to Crimmins:

Indeed. Yet the failure of these non universal banks and non-banks threatened to bring down the US banks and the European universal banks in one fell swoop. As counterparties to the TBTF banks these counterparties were de-facto universal banks. Their failures, especially AIG, were also those of big banks in substance, if not in form. Shame on any fool who insults our intelligence by making this argument with a straight face.

As as Crimmins implies, the big banks needed to be rescued as well, and the scope of the assistance, as most NC readers know full well, go well beyond the TARP. Savers and retirees are still being taxed to help the monster banks in the form of super low interest rates.

Harrison tries to blow off how these companies have become too complex to manage:

A company of any size needs robust management and controls to manage complexity. Remember that smaller financial institutions — look at MF Global, Bear Stearns, Knight Capital — have had their share of risk-management failures too.

In fact, large global institutions have often proved more resilient than others because their diversified business model ensures that losses in one part of the enterprise can be cushioned by revenues in other parts. In some cases, complexity can be an antidote to risk, rather than a cause of it.

This is pure and simple dishonest argumentation. The fact that small firms “had their share of risk management failures” in no way exonerates the colossal risk management screw ups at the biggest players that led to a global financial crisis (or did you somehow forget that part?). And JP Morgan wasn’t a paragon, it was simply less visibly bad. Post-crisis, it was revealed to have taken what Lehman called “goat poo” as collateral for months; the realization that it was holding some empty bags appears to have been the proximate cause for the seizing of cash and collateral that was the fatal blow.

And let us not forget that JP Morgan, praised as the most well managed and best risk controlled, has been exposed as a rogue institution, as far as its risk controls are concerned (confirmed by their external auditors). As Crimmins wrote in July:

The first stunner, that JP Morgan was restating the first quarter financials, should have caused a deafening ringing of alarm bells. For a company of JP Morgan’s stature to be compelled to restate prior period financials is a very clear signal of bigger problems with their overall financial reporting.

As for the “resilience” that has nothing to do with complexity. Complexity is a function of inter-relatedness. Harrison is talking about diversification. If JP Morgan bought a big pharmaceutical company, it would be even more resilient. The party line is that even if banks are in a lot of businesses, they won’t necessarily all go down together. But that didn’t happen in the crisis. Indeed, as banks become more and more trading driven and markets become even more interconnected, the traders’ saying applies: In a crisis, all correlations move to one.

Harrison resorts to the Big Lie:

Commentators point to the inordinate influence large banks have on the political process. They fear that regulators are cowed by a large bank’s position and power. These critics seem to believe that regulators are incapable of making independent judgments. In the real world, this is just false.

Go read Neil Barofsky’s book Bailout or Frank Partnoy’s extremely well documented Infectious Greed for counterevidence. And you see proof every day. Just look at the brouhaha over Benjamin Lawsky’s order against Standard Chartered. The federal banking regulators still haven’t gotten over being shown up, and are continuing a campaign in the press against Lawsky, arguing that banks won’t cooperate with investigations. Huh? That’s an admission that regulators are so captured that they don’t know how to investigate any more.

This part is another flat out lie:

Another criticism I often hear is that large banks receive huge, implicit subsidies from the government and can borrow more cheaply because they are seen as “too big to fail.” But the facts don’t bear this out. An AA-rated bank deemed too big to fail by pundits cannot borrow any more cheaply than an AA-rated industrial company. One can see it every day in their bond spreads.

The industrial company/financial ratings comparison is deliberately misleading. Financial firms are vastly more levered that industrial companies of similar ratings and have thus always faced higher borrowing costs.

The rating agencies actually make a ratings distinction based on the TBTF status. As Andrew Haldane wrote (emphasis mine):

One such measure is provided by the (often implicit) fiscal subsidy provided to banks by the state to safeguard stability. Those implicit subsidies are easier to describe than measure. But one particularly simple proxy is provided by the rating agencies, a number of whom provide both “support” and “standalone” credit ratings for the banks. The difference in these ratings encompasses the agencies’ judgement of the expected government support to banks.

Table 2 looks at this average ratings difference for a sample of banks and building societies in the UK, and among a sample of global banks, between 2007 and 2009. Two features are striking. First, standalone ratings are materially below support ratings, by between 1.5 and 4 notches over the sample for UK and global banks. In other words, rating agencies explicitly factor in material government support to banks.

Second, this ratings difference has increased over the sample, averaging over one notch in 2007 but over three notches by 2009. In other words, actions by government during the crisis have increased the value of government support to the banks. This should come as no surprise, given the scale of intervention. Indeed, there is evidence of an up-only escalator of state support to banks dating back over the past century.5

Table 3 takes the same data and divides the sample of UK banks and building societies into “large” and “small” institutions. Unsurprisingly, the average rating difference is consistently higher for large than for small banks. The average ratings difference for large banks is up to 5 notches, for small banks up to 3 notches. This is pretty tangible evidence of a second recurring phenomenon in the financial system – the “too big to fail” problem.

It is possible to go one step further and translate these average ratings differences into a monetary measure of the implied fiscal subsidy to banks. This is done by mapping from ratings to the yields paid on banks’ bonds;6 and by then scaling the yield difference by the value of each banks’ ratings-sensitive liabilities.7 The resulting money amount is an estimate of the reduction in banks’ funding costs which arises from the perceived government subsidy.

Table 4 shows the estimated value of that subsidy for the same sample of UK and global banks, again between 2007 and 2009. <strong>For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

Table 4 also splits UK banks and building societies into “Big 5”, “medium” and “small” buckets. As might be expected, the large banks account for over 90% of the total implied subsidy.

Remember, Harrison just tried to con you into believing this enormous subsidy didn’t exist.

The last bit is disingenuous:

Finally, some critics have called for a revival of the Glass-Steagall Act (which separated commercial and investment banking) and a tougher version of the Volcker Rule (which would bar banks from using their money to make bets in their own trading account), without, it seems, having read either. The Glass-Steagall Act (repealed in 1999) prohibited commercial banks from underwriting debt and equity issues, a very safe activity; it did not prohibit banks from trading, engaging in derivatives, leveraging themselves or making bad loans.

If you took what he said literally, he’s just argued for ALSO restricting bank activity in trading, derivatives, leverage, and lending generally, which is something I’d favor. Glass Steagall might be a place to start, but it is insufficient. We’ve argued that banks are so heavily subsidized that they can’t properly be considered private enterprises and should be regulated like utilities.

But let’s go back to Glass Steagall. The restriction on underwriting had the effect of being in the secondary market business (trading and sales, for bonds, brokerage, for listed stocks) much less attractive. And those business, as integrated businesses (which they became in the 1970s and 1980s) were risky. For instance, bulge bracket firm First Boston nearly failed in the late 1970s, and did fail in the 1980s (it was rescued by Credit Suisse).

As for derivatives, had Greenspan not been the Fed chairman, it’s very likely banks would not have been allowed to build up businesses of the scale that they did. Volcker has made it clear that he disapproves of a lot of the risks banks take with deposits. And Greenspan’s hands off attitude to derivatives was stunning. I had some experience in the field by virtue of having worked with one of the leading players in that space. I recall gasping out loud when I read in Institutional Investor that Greenspan was going to take a “let a thousand flowers bloom” posture towards over the counter derivatives and merely look over the banks’ shoulders as far as their risk models were concerned, as opposed to implementing regulatory standards. I knew it would end in tears; it took longer and was a bigger blowup than I could possibly have imagined.

On to the next bit of banking PR:

Scale allows them to deliver, like big-box stores, more innovation, greater convenience and consistent, reliable service.

As Crimmins said via e-mail:

Big box stores rely on a labor arbitrage business model to deliver lower prices to US consumers to their own customer’s employment detriment. (Wal-Mart , Apple, etc keep prices low due to low labor costs at their non US suppliers). Banks rely on regulatory arbitrage to deliver superior returns to their investors and employees. These benefits are fully funded by their most vulnerable retail customers.

The big banks scale pits their retail customers against their larger institutional customers. On a net basis their retail customers pay for the benefits their institutional customers enjoy.

Harrison closes by waving the flag:

One of America’s great strengths is that we are home to the broadest, deepest and most efficient capital markets in the world. It’s a competitive advantage that we can’t afford to lose.

And the reason we obtained and still have that position? It was by virtue of having good regulations that protected investors. Investors prefer dealing in markets where front running is prohibited, disclosures are clear and complete, and insiders can’t take unfair advantage of their privileged information. Harrison clearly thinks he is addressing an audience that never ventures into the business pages. After the raping of customers in Lehman’s UK brokerage, the Libor scandal, and now Standard Chartered, London’s light touch regulation is coming to be recognized as a hazard to investors’ health. As indicated above, Credit Suisse and UBS have found their safe haven status enhanced by taking their regulatory medicine. But Harrison would never admit that the sort of remedies that other regulators have imposed on universal banks might actually be good for the American behemoths as well.

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  1. bmeisen

    Very loud cough and gag in response to Harrison’s use of Big Boxes in an argument for TBTF. Innovation, convenience, service!?! As Crimmins notes, the couple hundred that the devoted Walmart shopper saves per year do not compensate for the income, security, and social integration shit that happens when Big Boxes take over. Does Harrison genuinely believe this crap or is he fiddling while Rome burns?

    1. Carla

      Dollars to donuts Harrison has never stepped inside a Wal-Mart or any other Big Box store. Bet the closest he’s ever gotten is Nordstrom’s. He’s probably just spouting retail industry propaganda.

    2. NotTimothyGeithner

      I suspect the actual thought process is similar to people who say, “it was god’s will,” after a tornado, but we can’t leave out the importance of the author of the piece when it comes to the defense of the banks.

      The JPMorgan guy made a ton of money for some reason. For a person to have so much money while others starve of go hungry, they have to justify that somehow to make it through the day. Whether he is special or did so much good at the same, he has a justification. If the system which made him a fortune is a problem, maybe he doesn’t warrant his money? This is the real thought process, and more importantly, if the system is at fault for incorrectly picking winners and losers, he might not be a “special/job creator/part of the divine plan” or people might question why he needs so much money.

      This is the reality he needs to avoid, and there is no honest way to avoid that reality. The result is something insane or stupid. He might be stupid, but if he thinks he is special, he probably is stupid.

      1. bhikshuni

        And to top off all that, they have failed in performance in managing their bank (lest the lost billions of recent months be attributed to talent and skill).

  2. Conscience of a Conservative

    About this diversified business model. It’s false. What we saw in JP Morgan is that they took their low risk commecial business money and funded high risk investing/speculation. The combination allowed more risk, not less. We’re not talking shimano here who manufacturers snow and bike equipment, we’re talking about businesses that are correlated except that that the non-comercial activities are far risker.

  3. avg John

    I would take exception to the very notion of the benefit to society of “economies of scale”. It seems to me, striving for economies of scale at a time there is a glut of workers in the global workforce is madness.

    Four companies, each with a 1 President, 1 safety manager, 1 materials manager, 10 assemblymen, 1 mechanic and 3 truck drivers total 68 workers. Consolidated these companies into 1 large company (economy of scale) and output the same product with, say 20 workers. That leaves you with an industry with diminished competition, as well as an industry that employs less than a third of it’s prior workforce.

    That translates to higher unemployment, fewer customers with the ability to buy, and decreased payroll tax receipts to run the country. Break up the big banks and all of the big global corporations or charge them a tax for the damages society incurs from economies of scale. Surely, 20 companies competing for your business, as opposed to 2 or 3, will lead to greater innovation and more competitive pricing. By eliminating the benefits of so called “economies of scale” to a few shareholders, society gains full employment, a healthy competitive marketplace, and hopefully a healthier economy. We don’t need no stink’in huge multi-national corporations, we need locally owned and operated businesses.


    The major flaw in William Harrison, “Don’t Break Up the Big Banks,” is that the reader must assume that Executive Management’s decisions are for the benefit of the Bank. Not so.

    In the case of size, the Chairman is motivated to grow to infinity, thus increasing his annual compensation. Once merged, the Chairman is incented to reduce size (read staff), as specific targets are established for “performance” rewards.

    The size of the bank is determined by the Chairman’s comp.

    Shorter article.

  5. Gibby the Fifth

    I visited Shimano in Japan in 1989 or 1990 when the Japanese economy was at its peak, and as with all other companies on that visit I asked about their problems over labour shortages. The Shimano spokesman replied that they weren’t short of labour, they were short of robots! I burst into laughter in surprise, but the spokesman despite his accounting background explained his position with a wealth of engineering detail, ranging from their use of car industry cold pressing techniques to their design of 2 basic robot bodies to which they attached a variety of different hands. Given their status as the largest of 3 producers of components selling to a myriad of assemblers (the exact opposite of the car industry) their financial success should not surprise.

  6. jake chase

    Nice job. The only real efficiency produced by mega banks is efficiency in looting and corrupting the political process. Even classical economics understands that monopoly defeats useful social outcomes attributed to capitalism. What can the banks do but keep bribing legislatures and maintaining a drumbeat of mendacious propaganda? It works with advertising and gives every impression of continuing to work with politics. A population with no time or inclination to understand reality is tailor made for this bilge and bluster.

    1. Sufferin' Succotash

      Yes indeedy, it does depend very much on how you define “efficiency”. In the early days of the Russian Revolution Lenin decided that factories that were actually worker-run were “inefficient”. What he meant was that they weren’t controlled by the Communist Party.

  7. Warren Celli

    When you argue the merits or not; of the economies of scale, management efficacy, relative government subsidies, etc., of rape, it is like arguing relative penis size, and you only serve to legitimize and validate the rape.

    Yes, you in effect promote the gang rape of the people!

    You need to take the rape out of banking by eliminating usurious interest controlled by the Xtrevilist few and giving control of the money supply to the people.

    That won’t happen until you regain control of the hijacked — by the same Xtrevilist few — government.

    Are we ready for the election boycotts yet?

    Deception is the strongest political force on the planet.

      1. Chris Rogers

        Whilst I disapprove of boycotting elections, a cast vote for either of the legacy parties is not only a wasted vote, but actually validates the present system.

        So, we have two options, make sure representatives are on the ticket who actually care about the vast majority of the population and are immune to special interest capture, or, as others suggest, don’t endorse the present system by not voting – if enough persons stayed away from the voting booths of their own volition, rather than being prevented from even registering to vote as is currently happening in several US states, the World, and indeed Washington would finally get the message.

        Obviously, being a Brit, the above applies to my own nation, but given the lack of choice – Obama/Romney being no choice, the alternative is vote Jill Stein or stay away – which do you endorse?

        1. Warren Celli

          The third party ruse is an overflow energy and anger dissipation scam. Ross Perot got 12% of the popular vote and got zip when all was said and done — as in NO residual. Jill Stein, and the leadership of the Greens, should know better. The system is broken! The fart has left the rectum. You won’t put it back! At this point you are either drunk on the Kool Aid or selling it!

          I advocate proactive election boycotts — a letter to your local supervisor of elections demanding that your letter be counted and publicly posted as a “Vote of No Confidence” in this present government — done in tandem with a Constitutional rewrite calling for direct democracy with hand counted paper ballots. Duplicate boycott letters and the Constitutional rewrite should be promoted and displayed in whatever commons remain.

          By building a system outside of the system, organizing and uniting all of those disenfranchised by the system, you will create a system that has a residual power that you can build on. You can even elect your own officials as focal points of the process. OWS should have moved in this direction long ago — but they too, many of them, are smitten with the Vanilla Greed for Profit fantasy that includes the hopey dopey belief that change from within is viable. Good luck to that crap! You will also be able to claim those who do not vote as being opposed to the system rather than just being “apathetic” as they are constantly painted now by the corporate sell out shills. This would give you an immediate claim to over fifty per cent of the public as that many are so fed up they do not even show up for elections. It is not apathy! It is a conscious decision to not waste time validating and legitimizing those who gang rape and murder us — and NO — gang rape and murder are not too harsh terms. In my just completed local primary here in NE Florida we had a piss poor 19% turn out. Duh! That means 81% — by context, again, we are in very tough times — do not view the electoral process as even worth the effort for remedial change.

          Deception is the strongest political force on the planet.

          1. Chris Rogers

            I cannot concur with your analysis completely, but will add this, whilst I accept abstaining represents a vote of no confidence in the present corrupt system, it still plays into the hands of TPTB.

            Far better to demand that all ballot papers have a box to clearly state ‘none of the above.’

            Please also respect the fact that I have indicated a ballot paper, that is a tangible piece of paper that can be counted by a person/persons and verified by election overseers/ officers as in the UK.

            Either that, or just walk away from the sorry mess, perhaps move to Vermont that has always been quite an exceptionist State, perhaps even elect to join with Canada.

            One things for sure, change is required and the Federal/State governance system has been corrupted from the top down – at the end of the day, a focus on greed and power results in a highly dysfunctional form of governance – however, and as I was correctly taught, the US Constitutional settlement of 1789 was certainly not a democratic document, so a rewrite would obviously be a start, as would legislating laws that protect the interests of the majority and not a 0.25% minority – still, the Constitution was always about protecting the minority from the tyranny of the majority, regrettably its emphasis on liberty failed to mention that effectively you were establishing another type of aristocracy, only this time one based on monied interests rather than land.

          2. Tim

            I don’t know. Things are quite a bit different now than they were when Ross Perot ran.

            If there was an identifiable trend of increasing support for a third party, there would emerge a supply to meet that demand, and also woulr do their best to represent what those third parties want, which is quite simply everything the two current parties refuse to give them.

            PS. In case you didn’t notice your xtrevilism word is not catching on. It’s borderline unpronouncible, impossible to spell, and most people don’t understand what it means so stop using it.

          3. Warren Celli

            Jesus God the thought police are out in droves today…

            Tim says; “PS. In case you didn’t notice your xtrevilism word is not catching on. It’s borderline unpronouncible, impossible to spell, and most people don’t understand what it means so stop using it.”

            Tim, ideas are wedges but it is persistence that drives them home. Why don’t you go help Lambert with the definition of rape.

            Deception is the strongest political force on the planet.

          4. Warren Celli

            Chris Rogers says “Far better to demand that all ballot papers have a box to clearly state ‘none of the above.’”

            Maybe, but you won’t get that within the system either.
            I agree on paper ballots.

            Moving to Vermont is like the escapist going back to the land, you will still be at the mercy of the wealthy Xtrevilist sociopathic frackers, nuke plant builders, etc. There is no longer any place to run and hide, this is a moral battle for control of it all. A direct approach is required. Foot dragging avoidance behaviors are no longer viable either.

            Deception is the strongest political force on the planet.

          5. Nowhere Man

            Your signature line is almost accurate. In fact, self-deception is the strongest political force on the planet. Without self-deception, people are far less susceptible to external deception.

            For your proposal to work, you need to go through these steps:

            1) Convince a large majority of the voters to work with you.

            2) Ensure that after 1) happens, this leads to an overthrow of the current political system.

            3) Ensure that after 2) happens, the right people step forward to create a new system.

            4) Ensure that the people described in step 3) are supported by the public.

            It should go without saying that each of these steps will be difficult to achieve, with many barriers placed in your way.

            All of the energy and money that might be spent on that plan would be far better spent on finding and supporting unbelievably good candidates to run in Democratic primaries. Of course, you will have arguments against this. But getting unbelievably good Democrats elected is an essentially identical problem to steps 3) and 4) above, minus all the difficulties and impossibilities of steps 1) and 2). Therefore, all of your arguments against using the Democratic primaries can and will be used against your own proposal.

            The only downside for you of taking the primary route is that the possibility of failure leaves you with fewer excuses, and more quotidian ones at that. It’s your call.

          6. Warren Celli

            Nowhere Man — self-deception is a misnomer, it is in reality misperception — misperception that leads to being ruled by stronger deceptions.

            We’ll have to agree to disagree on proactive boycotts for change, vs working within the system for change. Yes, both approaches are formidable but I think step one, the most formidable of all, is making people realize that they are deceptively shaped and formed from womb to tomb into believing that Xtrevilism and Evilism are normal.

            Deception is the strongest political force on the planet.

    1. Lambert Strether

      I think that people who have actually been raped do not take kindly to the use of rape metaphors for financial transactions. I think they are right.

      I think also think that rape is not, as a trope, sufficiently isomorphic to the system it purports to represent, which is another reason to avoid using it. It’s all very well to stir up rage, but people with big budgets have entire corporate divisions devoted to strategic hate management (as the current election makes clear). Stirring up thought, however, is within our purview, and outside their scope. So, words matter, and metaphors matter.

      No, I don’t know what the appropriate metaphor is, but it’s probably more along the lines of trafficking.

  8. damian

    when i saw this yesterday in NYT i was taken by how shallow his arguments in favor of the big banks were. Harrison has been around a long time at chemical and chase bank and capable of getting the best talent to write or support his screed with positions that could be deemed credible – every one of his statements were easily rebutted. same thing happened with piece by Hubbard/ Duffy on capital markets

    must mean that the banks are out of ammo and that sandy weil and people like asher adelman who both spoke on CNBC on different dates with substantive positions with facts are getting traction for bank breakup after the election


      When William Harrison is alone, he knows That Size Doesn’t Matter, it’s how you use it. In this case it only matters in regards to his comp. He’ll be Big for more dough, he’ll be small if that’s where the dough is (see my earlier Comment for All You Need To Know About Bank Size and Compensation)

      The NYT piece is a loveletter for his Board and stupid shareholders, to let them know what a good job their current (and past) chairman are doing (did).

      Now, did all my verbs agree?

  9. Richard


    First, nice job debunking Mr. Harrison’s column.

    Second, I hope that your readers focus on your statement about why the US had the broadest, deepest, most efficient capital markets. The policies adopted since the beginning of the financial crisis have systematically undermined your statement.

    “It was by virtue of having good regulations that protected investors. Investors prefer dealing in markets where front running is prohibited, disclosures are clear and complete, and insiders can’t take unfair advantage of their privileged information.”

    1. Chris Rogers

      Hate to break it to you, but the good regulations Yves refers too were basically all revoked or ignored by Clinton and his neoliberal cohorts in the late 90’s and more or less vanquished by George W – obviously, Team Obama has continued the crusade.

      My God, even Dodd Franks has been further whittled down since its final passage in August/September 2010 by amendments and clauses added in other Acts by your master on Capital Hill.

      As it stands, particularly with the lacklustre UK Vickers Report , and complete hash of Basel III, we’ll have another financial crisis before even this ramshackle regulatory environment is finally implemented in the early 2020’s.

      Still, one thing is for sure, the 0.1% ruling elite will be laughing all the way to their offshore bank accounts and gated cities.

      All I can say is: “say it ain’t so!”

    2. Warren Celli

      The dysfunctional children complain that a few of their siblings are carrying things to excess and ruining the game.

      Evilism bitches about Xtrevilism.

      Vanilla Greed for profit laments the success of Pernicious Greed for Destruction.

      Meanwhile the herd thinning continues unabated…

      Deception is the strongest political force on the planet.

    3. Yves Smith Post author

      Look at equity trading volumes. They suck. Investors, even hedgies, don’t trust the market. I have one man hedge shops that get all sorts of attention from their prime broker that they never got in the past, and it’s because the bigger fish aren’t trading in meaningful volumes. And it was the once well policed equity markets that were the gold standard.

  10. Mark

    Thanks for this. Since I was positive it existed, I’ve been patiently waiting for it since the moment I finished reading Harrison’s transparent line of drivel.

  11. Lambert Strether

    Question on diseconomies of scale:

    Bigger banks exhibit DISECONOMIES of scale. Every study of banking ever done show that banks have a slightly positive cost curve once a certain size threshold is passed. That means that costs rise as banks get bigger.

    Is this true for that portion of banking operations devoted to accounting control fraud?

    How about criminal enterprises generally?

    I’m not enough of a banking wonk to answer, but maybe not. See this totally unvetted link on Internet-based organized crime, and recall the software component in the MERS mess (here and here).

    If in fact accounting control fraud does scale, suddenly the choices of (criminal) big bank executives look rational, and not ignorant or ideologically driven.


      The diseconomies of scale arise from the creation of opportunities to intentionally misunderstand each other (ie, “I don’t work on anything that doesn’t specifically benefit me.”

      This benefits those running accounting control fraud, as no one knows what you are doing, because they don’t want to contribute any effort to anything that they are not in on.

      This I know from 30 years on Wall Street.

      1. Lambert Strether

        So you’re saying that the diseconomies of scale in the legitimate* enterprise are economies of scale for the criminal enterprise embedded within** the legitimate enterprise?

        * For some definition of “legitimate,” of course.

        ** Or driving, rather like T. gondii…

  12. F. Beard

    Another criticism I often hear is that large banks receive huge, implicit subsidies from the government William Harrison

    They sure do; ALL banks do. One of the biggest ones is government deposit insurance and the lack of a risk-free fiat storage and transaction service alternative to the banks.

    Why is that? As the monopoly supplier of its own currency why doesn’t the Federal Government itself provide a risk-free storage and transaction service for that currency and abolish government deposit insurance? Cui bono that it doesn’t?

      1. F. Beard

        Yep. The Federal Government should provide a free (up to normal household limits) payment system for its money.

  13. headadoor

    Canadian Banks appear successful because then Finance Minister, Paul Martin, did NOT allow them to consider amalgamating early this dark ages (to come) century.

  14. F. Beard

    If the idea is that many small banks are better than a few large banks then why not give every US citizen a free (up to normal household limits) account at the Fed or US Treasury alongside the banks? People could still lend to the banks but without deposit insurance.

  15. Vincent Vecchione

    Great and comprehensive post, but can you please not compare massive and destructive fraud to rape? Both crimes are awful enough on their own and comparing them to each other only diminishes both.

    1. Warren Celli

      Yes, the thought police are coming out of the wood work…

      Let’s not liken fraud to GANG RAPE or MURDER, let’s keep it ‘civil and respectful’, even though the results of each crime are very similar and the victims all feel; shame, self blame, make excuses for their actions, are demonized, cut themselves off from others, feel anger, and engage in acts of aggression, seek revenge, commit suicide, feel guilt, etc., and in the case of their children, are scarred for life.


      No, of course not, lets just call that “massive and destructive fraud” — that sanitary white collar crime that is masked and far removed from its effects in sell out shill created voodoo economic apologist victimless gobbley gook — and not at all like the real GANG RAPE or MURDERS created by the “massive and destructive fraud”, or the GANG RAPE or MURDERS created by the dispossessed and oppressed who are created by the “massive and destructive fraud” in the first place.

      Yes, of course, now that they have control of everything but the kitchen sink let’s show the GANG RAPISTS and MURDERERS some civility and respect and not liken their crimes to any reality.

      Comparing these crimes does not “diminish both”, rather it accentuates and reveals the gross willfully created bias in the reporting of their effects.

      No balls! No brains! No Freedom!

      Deception is the strongest political force on the planet.

      1. skippy

        Actually I find the word and the usage of RAPE to benign.

        Skippy… more like a Savage Financial Skull F@#&^ and after ejaculations joy[!] the newly created cavity is used for defecation. Much Chest Thumping, Sky Punching, Lording over, The Victim… as a celebratory dopamine hit high cheery on TOP…. !!!

  16. Hugh

    A Jamie Dimon sockpuppet defends JPM. I never saw that one coming. I particularly like his bemoaning the previous “fragmentation” of the banking market. You know this used to be called competition. With the creation and expansion of the TBTF, thank goodness we don’t have to worry about that anymore.

  17. RichF

    Yves, Simon Johnson wrote a strong takedown of Harrison defense at http://baselinescenario.com/ using Jeff Connaughton’s book, The Payoff to point out flaws in Harrison’s argument. Interested in getting a copy? I am working with Jeff, so tweet if so @richfahle

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