Lynn Parramore: How a Much-Heralded Bank Reform Proposal Could Actually Blow Up the American Economy

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Yves here. I had really wanted to write this piece, but Lynn Parramore beat me to the punch. There’s been almost universal enthusiasm for Brown-Vitter, legislation proposed by Sherrod Brown and David Vitter to get tough with the too-big-to-fail banks. The legislation is sufficiently stringently written that if it were enacted (big if), it would force the banks to make changes to maintain anything remotely resembling their previous profit margins. Goldman and Morgan Stanley would probably drop their banking licenses and the other US systemically dangerous banks would presumably downsize by hiving off major operations.

So what’s not to like? The problem is that the enthusiasts haven’t looked behind the curtain. This bill is being pushed, hard, by big insurers, who would be major winners.

By Lynn Parramore, senior editor at Alternet. Cross posted from Alternet

It sounds like a fabulous idea: a bipartisan bill to end big commercial bank bailouts. Though it probably won’t pass, there are certainly many good things in the freshly minted Terminating Bailouts for Taxpayer Fairness Act, co-sponsored by Sherrod Brown (OH-D) and David Vitter (LA-R).

Greater transparency? Like it. Juggernauts like JPMorgan Chase with over $500 billion in assets forced to hold more capital to protect against losses? This is a terrific proposal, the one big idea that would at a stroke make bank bailouts a lot less likely. No more taxpayer funds to bail them out? Three cheers, even if one doubts that federal authorities will ever dare to let another behemoth go down after their ghastly experience with Lehman.

But there’s more to this bailout bill than meets the eye – much more than many progressive cheerleaders realize. Some things in the bill could hurt us, and even increase overall risk in the financial system.

Loud criticisms of Brown-Vitter are coming from predictable sources like corporate law firm DavisPolk. But, as ProPublica’s Jesse Eisinger has pointed out, they aren’t too convincing. Warning that higher capital requirements could cause credit to dry up, Great Depression-style, as banks scramble to meet them, or the howl that the bill would make U.S. banks less competitive are so much hot air. That’s just the banking industry and its supporters crying wolf again.

So if the banking industry hates the bill, what’s not to love?

The real problem is not what the bailout bill does; it’s what it doesn’t do. Or, more specifically, who and what it leaves out.

If we recall the financial crisis of 2007-'08, the threat of large financial institutions collapsing and causing havoc across the economic system was real and very scary. The U.S. Financial Crisis Inquiry Commission reported in 2011 that risky and reckless activity, coupled with breakdown in governance, had compromised the global economy. Commercial megabanks like Citigroup, Bank of America and JPMorgan (though it doesn’t like to admit it) were over-extended and posed enormous risk.

But there were other financial institutions that were NOT commercial banks that were also extremely dangerous. Remember Lehman Brothers? It was an investment bank, rather than a commercial bank, and it would not be covered under Brown-Vitter. So was Bear Stearns. Does the name AIG ring a bell? Astonishingly, the bill asks nothing new of the giant insurer that we actually did bail out in 2008 to avoid complete meltdown. Giant hedge funds like Long Term Capital Management, which nearly went belly-up in the late 1990s and got a bailout, would also escape the requirements.

It hardly suffices to say, as the bill’s champions do, that the Financial Stability Oversight Council the Dodd-Frank bill established could still intervene if it wants to. That council has been notably slow to move. The plain fact is that holding more capital is desirable not just for big banks, but for all the financial institutions that potentially can bring down the system.

The right question to ask is, why would anyone seek to exclude the non-commercial banks from Brown-Vitter? Well, there’s something going on behind the scenes: Let’s call it Clash of the Financial Titans. Since the financial crisis, the commercial banks have gotten special treatment from the Federal Reserve and the regulators. They know they can be bailed out if they run into trouble. So does everyone else, which gives them a huge advantage over other kinds of financial institutions which do not have the same assurance. The big banks get money cheaper because people know they’ll be backstopped. The big boys also sometimes move risky parts of their business, like derivatives, in and out of the insured deposit sections of their firms, when dubious creditors worry they might go belly-up.

Brown-Vitter would rightly take away the privileges of the big banks and make too-big-to-fail status costly. In effect, it would level the playing field between the banks and the non-banks.

But the larger problem remains. In the realm of finance, big insurers, big commercial banks, and large investment houses extensively compete with each other and many of their activities overlap. The big banks now have the upper hand, and they should certainly face restrictions. But giant insurers like AIG should also have to put up more capital because they, too, put the rest of us at risk. If we focus all our attention on big banks and forget the risks posed by other types of firms, we could set ourselves up for a nasty shock when one of them collapses. University of Massachusetts Boston political economist Thomas Ferguson summarizes the threat:

“Making only the big banks hold more capital is a half-measure. We know what happens if you leave insurers and hedge funds free to play with derivatives or anything else they think they can turn a profit in. We’ve run that experiment. We know for sure it’s a threat to the whole system. With the Euro crisis still raging, it’s hardly a time for half measures.”

It may interest you to know that Sherrod Brown and David Vitter both have strong ties to the insurance industry and have received a high rate of donations from that sector (see Vitter’s donations here, and Brown’s here). Both lawmakers have received more money from the insurance industry than from commercial banks. In a recent article, “Senators tell Feds to back off bank-centric standards for insurers” you can see Brown and Vitter making arguments against tightening restrictions on insurers that are actually very much like those the big banks are making against their bailout bill. As always, if you want to know what’s going on in Washington, follow the money.

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  1. lakewoebegoner

    as much as the SEC regulating wall street is a joke, the state regulation of insurers is even more of a clown car.

    while you’re holding your breath for glass-steagall to be repealed and chuck schumer to represent ordinary people instead of midtown and lower manhattan, the next best course of action is “starving the beast” —-park your money in a local credit union, community bank, Vanguard ETF, etc.

  2. banger

    I guess I have a fairly rigid ideological position on these matters. Any bill coming out of Congress has to, by definition, either do very little other than re-arrange the proverbial deck chairs (to make some asshole look good) or make matters much worse. Why? Because, Washington is a city that is going in a hundred different directions at the same time and generates mainly noise and friction aided by the appalling state of the mainstream media whose main purpose is to misdirect us.

    Washington, over the past few decades has become a town run by hustlers for hustlers–and I speak as someone who has spent most of my life in and around that town (I moved away a couple of years ago). It’s hopeless folks–if you want change look elsewhere–I don’t say this easily and yes, I know there’s always been problems historically but not like this, not even close.

  3. Foppe

    But if this were passed, would it not incentivize the banks to lobby for the regulation to similarly affect insurers?

  4. Matthew Cunningham-Cook

    A similar dynamic seems to have played out with other Senators who are ostensibly anti-bank. Byron Dorgan was always held up as a hero by liberals because of his prescient speech against Gramm-Leach-Bliley. But his wife is/was the top lobbyist for the American Council of Life Insurers, and of course he never failed them while in Congress.

    1. Phil Perspective

      He was only held out as a hero in so much as his speech re: Graham-Billey and the fact he voted against(one of only 6 Senators) Glass-Steagall repeal.

  5. F. Beard

    Juggernauts like JPMorgan Chase with over $500 billion in assets forced to hold more capital to protect against losses? This is a terrific proposal, the one big idea that would at a stroke make bank bailouts a lot less likely. Yves Smith

    It would, but not because the capital would be used much but because the higher capital requirements would put a damper on the ability of the banks to counterfeit create deposits, which itself is the cause of the boom-bust cycle.

  6. Susan the other

    Those serene pools of capital. Like pools of pure denial of self-interest. Cenotes full of the sacrifice of innocents. Never shout FIRE in a crowd.

  7. Working Class Nero

    Clash of the Financial Titans indeed.

    Sure there may be risks when the two titans battle it out. But there could also be potential benefits are well. While I am totally unqualified to weigh these, I am able to point out a couple analogies from military history.

    So we have Big Banks and Big Insurance fighting it out. The question is: what position should the bottom 60% take? These are the people that have been on a thirty year losing streak during World Class War I. Can the bottom 60% really defeat the Big Banks and Big Insur at the same time? Sure we could have a long debate about which is side is more evil: just as one could still debate whether Hitler’s Nazi Germany or Stalin’s Soviet Union were worse. But from a strategic point of view the US during WW2 could never defeat the two at the same time so an alliance with one was required. The bottom 60% today find themselves in a similar position. The ideal situation would be for the bottom 60%, in any way possible, phone calls to congresspeople, etc; to support one of the two great Evil’s in their internecine warfare. Because after one side wins, then there only remains one left for the bottom 60% to destroy.

    And yes, after basically sitting back, sending a few supplies, and jumping in at the last moment to take the best half of Europe, the US then faced great risks and instability after assisting the Soviets in defeating the Nazis. But a Cold War ensued and eventually the US wore down the Soviets. Could the bottom 60% repeat this pattern by after helping Big Insur to defeat the Big Banks and then turning their guns turn on Big Insur to continue the struggle for economic justice? Only time will tell.

    The other strategic model is the Iran / Iraq war in the 80’s. Following this strategy the bottom 60% would aid Big Insur right up until just before the point of victory. Then at the last moment they would switch their allegiance and start sending arms and intelligence to the Big Banks. The goal here would be to continue the Clash of the Financial Titans for as long as possible, while not really caring which side ultimately wins. Again, once there is only one they would immediately turn on the victor. We see an example of this strategy in domestic US politics where the top 30% unleash endless abortion, gay marriage, and gun control debates in order to divide and rule the bottom 60%.

    On the other hand the strategy for the top 30% of course, who have been winning World Class War I for the past 30 years, is to stop all this infighting so that they can turn their guns back on the bottom 60% and take even more economic ground from them. To them the message to the Big Banks and Big Insur showdown is “can’t we all just get along”.

  8. Jesse

    Sounds like FUD: Fear Uncertainty and Doubt.

    I remember similar arguments being made about Glass Steagall and the Volcker Rule. Oh no we can’t do that, it’s doom!

    1. Yves Smith Post author

      1. I guarantee you aren’t old enough to remember the debates around Glass Steagall (1933). Plus Glass Stegall was all the securities firms + smaller banks v. JP Morgan. The Morgan bank was the only firm affected by Glass Steagall when it was made law.

      2. The Volcker Rule has not been challenged in any serious way as not reducing systemic risk. It’s been attacked on all sorts of other (largely supurious) bases, as being able to be circumvented, reducing “innovation”, leading to worse customer service, etc. And I will add that the way Volcker off the cuff spoke of how to define the Volcker Rule (customer trades v. prop trades) played into the hands of the industry (we’ve discussed that at length on the blog, this was a really bad way to parse it, since banks took on a prop positions all the time when facilitating customer trades in the days before there were prop desks. The idea, of not letting banks take much in the way of risk when they are using guaranteed deposits, could have been addressed by putting tight risk parameters on instead).

  9. Jackrabbit

    Holding more capital _would_ be desirable, but I doubt that’ll ever happen. Instead, Dodd-Frank makes TBTF customers a source of cheap contingent capital.

    Dodd Frank “reform” doubled down on TBTF. Bankers convinced government that unforeseen risks were the problem, not size or capital levels or executive compensation. Government should not mess with “the free market”, they insisted, but serve it by helping to identify risks.

    And thus the Financial Stability Oversight Council (FSOC) was born.

    FSOC determines who is TBTF (not just Banks), tries to identify system risks, and has the power to nullify/suspend Consumer Financial Protection Board (CFPB) regulations. What does THAT mean? Well, as near I can make out, it means that when Banks might get into trouble, their customers can be tapped as a source of capital.

    Welcome to the rabbit hole.

    1. Jackrabbit

      There is an implicit subsidy in FSOC’s ability to suspend consumer protection regulations. FSOC may protect the *taxpayer* but only by putting *customers* at risk. This subsidy may not even be considered in Brown-Vitter. Note: One way to compensate for this implicit subsidy AND cut back on HFT ‘scalping’ could be a transactions tax. But Wall Street has heretofore been dead-set against such a tax.

      Bank capital levels are very thin and they show no sign of increasing them. It seem that government willingness to allow for ‘bail-in’s’ (like FSOC seems to allow for) may be the reason. We’ve already seen a bail-in in Europe (Cyprus) and Europe seems to maneuvering to make that a “template”.

      TBTF Banks sit on a massive cash flow which they use for political gain. This represents a threat to democracy that is generally under appreciated. It’ll be interesting to see if the corrupting influence of TBTF is mentioned in the future discussions/debates about Brown-Vitter.


      The Good
      Brown-Vitter may be the best chance to break the grip of TBTF.
      Simon Johnson: Brown-vitter Rearranges Financial Reform Battlefield
      “Intellectually, the tide has turned. The dangers of reckless behavior by global megabanks are now understood much more broadly. And Brown-Vitter provides an appropriate road map for addressing some of the core problems and making the financial system significantly safer.”

      The Bad
      The Industry is putting out much Fear Uncertainty and Doubt (FUD) to counter Brown-Vitter.
      Cato: Brown-Vitter – More Hot Air
      Senators Brown and Vitter display some disturbing, though not uncommon, misconceptions about U.S. and global banking. And, as is always the case, poorly understood and inaccurate facts create bad policy suggestions.

      The Ugly
      The Republican Party may be gain an advantage (depending on how much weight they ultimately throw behind Brown-Vitter)
      AEI: Too Big To Fail Is Too Good To Resist
      The existence of TBTF financial institutions reflects government meddling and crony-capitalist collusion rather than market forces. And as far as pure politics goes, embracing pro-market financial reform would be a much smarter way to rebrand the GOP than any of the policy tweaks in the RNC’s recent autopsy… For a party desperately in need of both a messaging makeover and policy entrepreneurship, a push to end too-big-to-fail banks should be an idea too good to resist.

      1. Jackrabbit

        I meant to add a question mark to The Ugly?.

        Basically, as is so often the case, for many people the choice will be one of “pick your poison”.

    2. Jackrabbit

      Although many people recognize that utility banking (and single-payer health insurance, etc.) would be much more efficient for society, the fact is in the good ‘ol U S of A, little gets done with out a powerful constituency (with a financial interest) behind it.

      For many, that makes Brown-Vitter into a simple referendum on TBTF. There really is no other group of interests can effective go up against the TBTF Banks. And, if Brown-Vitter fails, it seems likely that TBTF Banks will do what they can to prevent such bills from being proposed in the future.

      1. Claudius

        The Brown-Vitter is nothing more than a political-FIRE ruse for US banks to circumvent/ignore, by mandate, Basel III implementation (presently – 2018). The net-net consequences of which would be far more onerous on the banks than B-V.

  10. kevinearick


    Economic Articulation

    Central control is capital control, what legacy “thinks” is the means of production, which it enforces socially through population control, Family Law, and many layers of peer pressure misdirection in between. Current misdirection is more complex, but the basic algorithm hasn’t changed in thousands of years.

    The status quo is preserved by the overwhelming breeding of small-minded monkeys, to make short-term, expedient decisions, all playing to survive the feast and famine policies that result, to grow their empires of gravity. That is why their laws increasingly normalize arbitrary, capricious and malicious decisions, and identify non-participants as outlaws, the enemy of better being best in a one-world government of best business practice.

    But all politics are local. No empire can withstand non-participation in the civil marriage contract, and associated “fountain” pump, for long, which the Eunuch of eunuchs designed, by getting rid of married priests and required marriage licensing by law. Here in Fort Bragg, CA, the multinationals have shut down the forest and ocean to small business enterprise, leaving small token monopolies at the gates, expunging the private sector. What remains is retirees, their services, tourism and government, none of which contribute to productivity.

    And the remaining crutch, so isolated, is pot, the means of local monetary expansion, but replication, adoption by other states in their quest for additional tax revenue, is dramatically reducing its yield, and conversion to gold by the proprietors doesn’t help. This town, like the vast majority in America, is already dead, with the dwindling remainder enjoying its prize, a hopelessly dysfunctional economy.

    I’m the bad guy, a homeless old white male, who earned six figures for growing organic revenue at many multiples, until the proprietors decided to “go for gold,” to cash out first, before the other herds recognized the significance of one-way global demographic collapse. If I replace the work of another in this contraction, at $10/hr, we both qualify for federal, state, county, and city welfare programs, because the Fed is pumping artificial real estate prices.

    And if I choose to be disabled, drunk, or in any other way dysfunctional, there is a plethora of non-profits, all supporting real estate inflation at their core, to help me do that as well, artificially expanded demand at artificially contracted supply. Wage and price controls always end badly.

    I have nothing else to do, so I help my wife with a homeless shelter in the back of a church for thirty people, ultimately including nightly accommodation, washing, all meals, and recreation, problem but no problem if you no what I mean, ruffled system feathers. But when we start rolling out an employment program, to build the necessary circuit, suddenly my wife and I are having sex in the church, blah, blah, blah, and, poof, it’s all gone, back to the corporations.

    Maintaining the status quo is a local imperative. The “thought leaders” up the chain of command simply run out in front of the parade. All politics is local, aggregated to the least common denominator, in a positive feedback loop.

    Bay Area has all the same problems as Fort Bragg, but has only recently experienced similar difficulties because it is a global metropolitan center, getting a leveraged cut of “free” trade accounting profit by implementing both physical automation and the associated banking processes. It enjoys trade among government embezzlers from across the globe accordingly.

    Which metropolitan center, with the most foreign investors, do you suppose gets the most free money through the mortgage deduction, currently under review by Congress?

    In the final stage of the empire cycle, it’s a closed system, and all the positive feedback eliminates any link with nature, beyond political posturing to lock the gate, and nature applies quantum reversion when the empire reaches the limit of ignoring its own stupidity. BRIC money, which now sees its own writing on the wall, can no longer afford San Francisco, and Fort Bragg is dependent upon dumber and dumber money coming from the Bay Area to keep its ponzi growing. Those beyond the system see the implosion accelerating and move out accordingly, while those participating continue to assume normal operation.

    The public corporation prints debt to guarantee revenue demand, leaving the private corporation to focus on cost as the means of maximizing accounting profit, and cost, from this perspective, is labor, as defined by the corporation to its own advantage. The non-profit corporation allows preferred proprietors to avoid taxation all together, while maintaining the appearance of charity. Free trade isolates groups into competition accordingly, to cut their own throats, the end to which fixed-cost automation is being employed.

    Small entrepreneurs seek to maximize profit, not revenue, by improving service and releasing the non-performing resources for other uses, by employing flexible, variable cost, intelligent HUMANS. See any around? The Fed continues to print real estate price inflation, and Congress sequesters to simulate labor deflation, netting monetary expansion and fiscal austerity, with the same exemptions for favorites, less a few on the bottom of the priority list, and pension losses, the fuse, which is now readily apparent in local budgets, accelerates into the implosion.

    Have fun with that. I’ll be last in the line of lines, watching the sh-show from a calibrated distance.

  11. washunate

    I’m a little confused by this title. Isn’t the present system what could blow up the American economy? (and more fundamentally, isn’t the economy already blown up?)

    So a piece of legislation only addresses part of the problem. I follow how that doesn’t solve the whole problem, but I’m not following how it makes things worse?

    1. Yves Smith Post author

      I’ve discussed this at much greater length in previous posts, so forgive me for being brief.

      The reason the current system blew up so spectacularly and is still disaster prone is actually NOT primarily due to the size of the current players (although their size does give them a lot of political power just due to their profit level). It is due to their interconnectedness.

      No one would have thought monolines were systemically important on their own, but they were due to their connections to the major financial firms.

      When you want to reduce risk in an overly connected system (the term of art is “tightly coupled” the ONLY way that works is to reduce the overconnectedness FIRST. Going about it ANY OTHER WAY MAKES MATTERS WORSE. In an tightly coupled system, measures that address superficial elements of risk (like TBTF) make matters worse. This is discussed long form in the book A Demon of Our Own Design, by Richard Bookstaber. He’s been in the risk management game since the 1980s. No one knowledgeable has disputed his analysis.

      So going after TBTF directly WILL make matters worse. It will lead to less well capitalized players taking risk and they’ll blow up somehow (mind you, it probably won’t be that soonwith ZIRP and QE on in a big way).

      In the runup to the crisis, I also listed examples of how measures taken to reduce risk made matters no better, they simply produced blowups in other places that were systemically important.

      The most important step to reduce connectedness would be to reduce the use of credit default swaps and other OTC derivatives. I discussed that (how to go about it) and other steps in ECONNED.

      1. kris

        For once, let me disagree with you, ma’am.
        Nothing’s going to happen, nothing bad.

        Nowadays credit can be made instantly available to the people.
        Bankers are losing. I think they wish gold standard back since they could own gold. Now, anybody can produce electrons on a computer.

      2. jake chase

        You have to both shut down the derivatives casino and reduce the players to manageable size. You can’t hope to do this as long as bribery of Congress Critters is legal. This gives you some idea of the liklihood of meaningful reform.

        We need more and better pieces on how to survive in this eco-political world we are stuck with.

        1. kris

          This is a big misunderstanding. Derivatives market is not a casino. If you go to a casino, you have 100% margin. You pay $100 you bet $100.
          In derivatives, you pay $100 and you bet $10000.

          It’s LEVERAGED THEFT

          1. jake chase

            Heads they win, we lose (bubble); tails they win, we lose (crash). None of these bets should ever have been permitted. There was no upside, except for the looters grabbing bonuses and free stock.

      3. Jackrabbit


        Maybe you could clarify this?

        It seems to me (and I think others as well) that the primary failure was not ‘over-connectedness’ but a combination of sub-prime underwriting and trust in the system of TBTF Banks, Rating Agencies, and their captured Regulators.

        Over-connectedness *IS* a problem, but only after one or more TBTF Bank(s) gets into trouble. And the combination of immense political power and rapacious greed seems inherently destablizing.

        Furthermore, the power of the Banks is demonstrated by how the risks of sub-prime WERE ‘contained’ – for the Banks – who were able to pay record bonuses in the years that followed. This, despite continuing to be on life support.


        Then there is derivatives, the core of the over-connectedness problem.

        Regulation of Derivatives has proven to be impossible in the face of TBTF opposition. So, as a practical matter, is it possible to address over-connectedness given the political power of TBTF?

        In fact, isn’t it largely over-connectedness via derivatives and basic/core banking that make large banks so systemically important and therefore warrant their special privileges. They will never (willingly) give these up because having these gets them makes them TBTFail and TBTJail.

        1. financial matters

          This is the sort of thing that seems to have people worried but I haven’t really seen anyone try and describe these dangerous derivative positions already in place. It would seem very important to understand who the counterparties are and how they can start to be unwound especially since many of them were based on fraud such as libor manipulation.

          “”German banking giant Deutsche Bank has more than 55 trillion euros (which is more than 72 trillion dollars) of exposure to derivatives. But the GDP of Germany for an entire year is only about 2.7 trillion euros.””

      4. washunate

        Yves, just wanted to say thanks for the explanation. I really appreciate what you do here having a forum where people can try to actually think through things and try to figure out what is really happening in our country.

        I think philosophically I come at this a little bit farther down the road, if you will. (Between the 2000 election and Enron and lack of prosecution for even the most blatant prisoner abuse and fraud, my well of good will for our leaders and their respect for the rule of law was pretty much sucked dry – we are not run by flawed humans doing their best; we are run by a psychopathic predatory gang of criminals who have no concept of public good or noblesse oblige.) I think the collapse has already happened – the interconnectedness is already too much. All we have left is managing the fall. The bottom half of American households already have essentially no stake in our present system of political economy, the government already runs the banking system, black men are more likely to go to prison than graduate from college, and that’s with things ‘functioning’ more or less properly.

        I don’t view that as pessimistic – to me, it is fundamentally optimistic to be willing to confront reality where it is, rather than having to sugar coat it.

        But I do sympathize with the perspective that there is still enough of a stable system to be worth protecting – in fact, I hope you are right. In particular, it’s challenging for those of us not familiar with how the banking system actually works in detail, because we just don’t know exactly what is happening or how one part affects other distant parts. All we know for sure is that the current system is unsustainable, and the people in power in this country aren’t doing anything about it.

  12. F. Beard

    And Of course, higher capital requirements are pro-cyclical during the bust so they should be combined with massive doses of deficit spending to compensate.

    The ideal deficit spending would be to send equal “Restitution Checks” to the entire US population for the harm caused by the government-backed counterfeiting credit cartel.

  13. allcoppedout

    I’m sceptical of any plan for the banks that doesn’t treat all of what they do as a cost under as much competitive pressure as any other product or service and strict accounting rules after a collapse of offshore dealing.

    In the UK we are being told RBS may be fit for the tax-payer shares to be sold off next year after a minor return to operating profit. I can’t read the balance sheet, don’t know any of the accounting is reliable and can’t work out how the now greatly reduced edifice intends to make good returns without trying to repeat the bad old days. It is currently being sued over a previous rights issue and can’t find anything to assure me accounts in 12 months time would be any more accurate or what the share price would be without QE.

  14. mmckinl

    Battle of the Titans indeed … As there are fewer and fewer profitable deals all these institutions are competing for scraps to feed their insatiable appetite for relatively safe high yield investments.

    The bubbles are gone now and there is so much capital in so few hands that all real returns are being crushed. We are in the end game … where the oligarchs start taking each other on. A Ponzi fractional reserve financial system must have fresh kill.

    That being said let the games begin … Somewhere, sometime these TBTF banks must be brought to book and right now is as good a time as any. There is no painless way out of the black box derivative contruction that the banksters have created …

    1. psychohistorian

      The derivative black box is being strapped to all the pension funds and foreign banks so the inherited rich will have both America’s nukes and the threat of blowing up the world financial system to use as tools of fear to maintain control a bit longer.

      Its both sad and laughable. What to tell the children when they ask what civilization is?

  15. Ms G

    “Senators tell Feds to back off bank-centric standards for insurers” you can see Brown and Vitter making arguments against tightening restrictions on insurers that are actually very much like those the big banks are making against their bailout bill.”

    Brown and Vitter oily Lackeys of Insurance. How disgraceful. We’ve been focusing on the Congressional Bank Lackeys. But of course there’s the also the Congressional Lackeys for Insurance and Real Estate. Because FIRE.

    How do people like this in powerful positions look at themselves in the mirror, or into their children’s eyes, or at whatever deity they worship (if any).

    1. Doug Terpstra

      I suppose the undead lackeys avoid mirrors for good reason; there’s no longer light in their eyes and no reflection in the looking glass. As Lambert said of Obama some time ago, his eyes are dead.

      Vitter is the perfect, iconic senator — as both whore and customer john. Seeing his wife stand by her man as he confessed his “sins” was revolting.

  16. kris

    I do not understand how come everybody is brainwashed with this idiocy that the great depression was because of lack of credit. Credit has never been a problem, never.

    What was a problem was that after WW1 there was no world policeman (like USA today) hence countries were not engaged in world trade and got into severe protectionist policies.

    Shrinkage of world trade led to shrinkage of real goods which forced the gov to shrink the amount of money, otherwise they’d end up like in Weimar.

    Lack of credit has never ever been the cause of anything, only the effect.

    This world depression led to WW2 which made USA come out as intact winner and strong manufacturing base built to supply weapons but readily converted to supply real stuff.

    That’s it. Enough with this idiocy of ‘lack of credit caused great depression’.

    1. kris

      That being said, nothing, absolutely nothing will happen with big banks get chopped up.

  17. greg

    Read Griftopia by Matt Taibbi:

    Page 116:

    “…Goldman (Sachs) was really holding a gun not only to the head of AIG but to the thousands of policyholders who, somewhere outside the room and all across America, had no idea what was going on. Baically what was happening was that Blankfein and the other Goldman partners wanted the money AIGFP and Cassano” (the name of an AIG employee) “owed then so badly that they were willing to blow up the other end of AIG if needed, to make that happen. Even though they weren’t really in danger of losing any money by holding on to Neuger’s securities, they were returning them anyway, just to force AIG into a crisis.” (Neuger was another AIG employee. He lent securities, taken from AIG subsidiaries, to big banks, including Goldman, then took the money he recieved for them and bought mortgage backed securities. And we know what those were eventually worth.)
    “With Texas ready at any moment to move in and seize the AIG subsidiaries, all Goldman had to do to create a national emergency was make that one last giant collateral call on Neuger’s business. If it did that, all the other banks would follow, the run on Neuger’s business would continue, and AIG would be forced to try to raid its subsidiaries. That in turn would force the states to step in and seize the subsidiary insurance companies.” (And the policy holders would be paid pennies on the dollar, since the subsidiaries had been gutted by Neuger.)

    page 114:

    “…Had Texas gone ahead and seized those subsidiaries, all the other states that had AIG subsidiaries headdquartered within their borders would almost certainly have followed suit. A full-blkown run on AIG’s subsidiary holdings would likely have gone into effect, creating a real-world financial catastrophe …Thousands if not tens or hundreds of thousands of people would have seen their retirement and insurance nest eggs depleted to a fraction of their value, overnight.”

    Breaking up the banks would still leave the insurance companies able to do stupid, but it is a step.

    1. dabhand

      Stockman asserts that AIG/fp never had access to those subsidiary assets and so the interconnectedness/contagion was a falsehood that never got discussed. It simply enabled Paulson and other animals to ensure k street got bailed out from highly geared bets that had finally gone wrong.

      1. greg

        If AIG never had accesss to the assets of those subsidiaries, why would the states bother to even think of seizing those subsidiaries, much less go through all the motions Taibbi discusses?

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