Citi’s Recidivist Rule-Breaking and Incompetence Shows Persistence of Too Big/Complex to Fail Problem

Remember how lots of people, from Elizabeth Warren to Trump, and many before them, have called for breaking up the big banks? And that that hasn’t happened? We’ll use the latest round of regulatory wet-noodle lashing of Citigroup, the poster child of “too big to fail,” to help illuminate the supposed impediments to breaking up Big Tech.

We’re now seeing a rehash of the “too complex to break up” assertions with the antitrust debates over Big Tech in the EU and even now in Congress. For instance, from tonight’s Wall Street Journal:

Days before, Facebook Inc. produced its own document contending that breaking it up would be a “nonstarter” for a number of reasons, including that the company’s constituent parts are already too complicated and interconnected for any of them—Instagram, WhatsApp, its ad business—to be spun off as individual companies or walled off as separate divisions.

“After many years of hard and costly work, Instagram and WhatsApp are now integrated into the same bespoke infrastructure that Facebook built from the ground up,” the company says in its report.

I will defer to big corporate IT experts, but I have a lot of trouble buying the claim that it’s oh so hard to unscramble acquisitions, particularly with respect to any company acquired not all that long ago. In fact, you can regard the Facebook quote as a coded admission. Generally speaking, it’s much harder to combine businesses with substantial IT estates than separate them. As we’ve pointed out, a lot of otherwise attractive deals in the banking industry don’t get done because the tech platforms of the two companies are incompatible.

So this isn’t a matter of “can’t be done”. Super rich and supposedly loaded with top Silicon Valley “talent” tech titans suddenly want you believe that they lack the money and the chops to do the job.

I also question the “too hard to separate” claim with respect to Google and YouTube. Yes, it would cost money to hive off these operations, but divorces are expensive. Another claim is in divesting major businesses, the tech platform company would assert it was having to give valuable intellectual property to the company it excised. Even if true, 1. the divested company could pay licensing fees for say three to five years and 2. if this intellectual property were really oh so valuable, the divested company would have strong incentives to protect it too.

Moreover, this “Oh we are so integrated” claim conveniently ignores the elephant in the room: Amazon Web Services, its cloud business. The cloud business is separate from the retail sales business from a commercial standpoint and any claims they can’t be separated should be regarded with prejudice. The real issue for Amazon is the cloud business is hugely profitable and the retail business, not much and not regularly (being cash flow positive due to paying merchants more slowly than it gets paid by consumers is a potential point bloody-minded regulators like the EU could attack).

If you were following the bank version “too big/too complex to break up” topic back in the crisis/post crisis period, you’ll remember that there were various schemes that fell short of that but intended not to have big sick banks wind up being bailed out, but instead be able to fail without doing systemic harm. We explained long-form why these schemes wouldn’t work. The core problem is that big banks operate internationally on a normal business basis, but failure and bankruptcy is a national process.

Mind you, there are other ways to deal with the “too big/too complex to fail” problem with banks, which is prohibition. They need to be kept from doing risky and stupid things. For starters, the baseline regulatory assumption should be not that “everything which is not prohibited is allowed” to “everything that is not allowed is prohibited.”

So let’s return to Citigroup’s latest foibles. On the one hand, one can argue that it’s not the worst behaved bank. Josh Rosner described at length a few years ago about how JP Morgan had far and away the largest rap sheet of any big bank. And from a sheer outrage standpoint, it’s hard to beat pilfering deposits, which is what Wells Fargo did as part of its fake accounts scandal.

On the other, Citigroup is the bank that’s had multiple near death experiences, which means regulators should have incentives and the means to keep their boots on Citi’s neck and get it to shape up. Remember how Citi nearly went bust in the early 1990s and was rescued by Al-Waleed? After having overdone it on Latin American debt, Citi took a flier on commercial developments in the late 1980s, and wound up with a lot of junior debt on see-through buildings. The rumor back then was that Citi had 200 bank examiners going over its real estate portfolios.

And in the financial crisis, Citi was the biggest player in SIVs (structured investment vehicles) and even worse, later revealed it held about $40 billion in CDO exposure it hadn’t reported. Oopsie!

FDIC chair Shiela Bair, in her book Bull by the Horns, revealed that she had wanted to declare Citi insolvent. But she had access to the data of only part of Citi’s operations. The Treasury and Fed withheld what they had, and told her that if she put Citi down, they’d pillory her for taking such drastic action based on obviously incomplete information.

Of course, if the information the other regulators had back then would have shown Citi to be healthy, you think they would have shared it with Bair.

Bair nevertheless did score a partial victory. She forced Citi to considerably shrink its balance sheet and scope of operations.

With this history, you’d think regulators would keep a particularly close eye on Citi. But the Beltway isn’t big on institutional memory.

The Office of the Controller of the Currency just fined Citibank $400 million for being a really poorly run bank. The Fed also sanctioned Citigroup, the holding company, for being generally lousy and for violating past promises to stop laundering money, but the Fed’s punishment was more on the order of having Citi write ten thousand times on a blackboard, “I’m a very bad bank and I promise to do better.”

Oh, and probably more consequential to Citi is a ban on making new acquisitions until the regulators think Citi has sufficiently fixed its controls.

I’m not making that up. It sounds a lot like CalPERS, which is truly alarming for an institution of Citi’s scale and ability to generate financial black holes.

First, from the OCC’s press release:

The OCC took these actions based on the bank’s unsafe or unsound banking practices for its long-standing failure to establish effective risk management and data governance programs and internal controls….

The agency also issued a cease and desist order requiring the bank to take broad and comprehensive corrective actions to improve risk management, data governance, and internal controls. The order requires the bank to seek the OCC’s non-objection before making significant new acquisitions and reserves the OCC’s authority to implement additional business restrictions or require changes in senior management and the bank’s board should the bank not make timely, sufficient progress in complying with the order.

In other words, this action was a sighting shot. The normally bank-friendly OCC has warned it could go as far as ousting top executives and board members if Citi doesn’t get its house in order.

Even allowing for the fact that risk control at banks is designed to be eyewash, the OCC Cease and Desist Order makes it sound as if no one at Citi is controlling much of anything. For instance:

(4)The OCC has identified the following deficiencies, noncompliance with 12 C.F.R. Part 30, Appendix D, or unsafe or unsound practices with respect to the Bank’s data quality and data governance, including risk data aggregation and management and regulatory reporting:

(a)failure to establish effective front-line units, independent risk management, internal audit, and control functions as required by 12 C.F.R. Part 30, Appendix D;

(b)inability to develop and execute on a comprehensive plan to address data governance deficiencies, including data quality errors and failure to produce timely and accurate management and regulatory reporting; and

(c)inadequate reporting to the Board on the status of data quality and progress in remediating identified deficiencies.

The OCC added that senior management and board oversight were inadequate.

The Fed had similar problems with Citigroup and added a few others, like reneging on promises to stop money laundering and foreign exchange market rigging, which had resulted in nearly $1.3 billion in fines in 2015:

WHEREAS, the most recent supervisory assessment of Citigroup issued by the Federal Reserve Bank of New York (“Reserve Bank”) identified significant ongoing deficiencies in implementation and execution by Citigroup with respect to various areas of risk management and internal controls, including for data quality management and regulatory reporting, compliance risk management, capital planning, and liquidity risk management;

WHEREAS, Citigroup has not adequately remediated the longstanding enterprise-wide risk management and controls deficiencies previously identified by the Federal Reserve, including in the areas described above and those addressed in (i) the Consent Order issued by the Board of Governors on March 21, 2013 to remediate outstanding deficiencies in Citigroup’s anti-money laundering compliance program and (ii) the Consent Order issued by the Board of Governors on May 20, 2015 to remediate outstanding deficiencies in Citigroup’s compliance and control infrastructure relating to its foreign exchange program and designated market activities.

As Benjamin Lawsky demonstrated when he led the New York State Department of Financial Services, any foreign bank caught out money laundering, and particularly being a recidivist, got hit with serious fines. By contrast, the Fed is giving Citigroup lots of homework, including putting some items on the board’s desk:

Within 120 days of this Order, Citigroup’s board of directors shall submit a written plan acceptable to the Director of the Division of Supervision and Regulation that describes the actions it will take to execute its oversight of the matters identified in this Order. The plan shall include the following four items:

(a) actions that the board of directors will take to hold senior management accountable for executing effective and sustainable remediation plans by committed deadlines;

(b) actions the board of directors will take to ensure senior management improves, and thereafter maintains, effective and independent enterprise-wide risk management, and that internal audit findings are effectively remediated;

(c) actions that the board of directors will take to ensure that senior management incentive compensation is consistent with risk management objectives and measurement standards; and

(d) actions that the board of directors will take to ensure effective reporting to the board of directors that will enable it to oversee management’s execution of the matters identified in this Order.

Oh, and Citi has to talk to the Fed often about its progress.

Now, you can blame the disconnect between the pretty serious-sounding deficiencies and more-bark-than -bite regulatory action to the business-friendly Trump Administration. Or you could attribute it to the lack of high profile stories of harm resulting from these gaping control failures. The Fed and OCC may be telling themselves they got to Citi before it did a Wells Fargo to itself.

However the other reason for soft gloves treatment is that Citi is a bomb that can’t be disarmed. Citi controls a unique payments system that is critical for all but the very largest companies doing business overseas. The really big boys can afford to have multiple foreign banks in their major offshore markets. For the others, a system called GTS provides essential plumbing. As we explained in 2010, when the press and pundits were still debating what to do about Citi:

GTS [Global Transaction Services] is a big cash management/information service. It is also a bread and butter earner for Citi. Per the Journal:

Otis Otih, the treasurer of candy maker Mars Inc., uses GTS to handle most payments to employees and vendors of Mars operations in 68 countries. “Citibank is the only truly, truly global company for us — I don’t see any alternative,” he says.

As an example of what the unit allows multinationals to do, an Asian subsidiary of a European company can deposit funds with Citigroup locally and the money will instantly show up on the ledger of the parent a continent away. The system makes it easier for corporate treasurers to manage their finances, and many corporate and government clients outsource a wide range of other finance work to GTS….

Executives told officials with the Treasury Department and the Fed that GTS’s technology and presence in more than 100 countries made it too dangerous for the U.S. to let Citigroup collapse….

While Citigroup is primarily known for its retail banking and credit-card businesses, the GTS unit is increasingly integral to the parent company’s functioning. Clients that move funds through GTS leave a lot of cash on deposit at the unit, which funnels the money to other parts of Citigroup for lending or other uses. GTS’s deposit-gathering muscle has grown more important since the financial crisis began, now providing about 40% of Citigroup’s $800 billion of deposits.

Yves here. GTS is a big piece of what makes Citi a difficult to disarm bomb. One of the swords of Damocles that the big bank had over the officialdom is that, prior to the crisis, it had $500 billion of uninsured foreign deposits. If Citi looked wobbly, sensible depositors would withdraw funds, and that could quickly morph into a run. Moreover, the any other international bank with meaningful cross border deposits could come under scrutiny…

The Journal argues that GTS is essential to Citi. This is rubbish. GTS is a sophisticated payments system and a source of low-cost deposits. It may provide a foot in the door, and help deepen some relationships, but let us face it, cash management and payments systems are at best assistant treasurer relationships at big companies. Proof of the pudding: it is a no-brainer that companies like Goldman, Morgan Stanley, Barclays, and UBS are doing complex, high margin transactions at companies that are also using GTS.

As we explained in later posts, due to crisis liquidity measures, Citi’s dependence on GTS-supplied deposits plunged. There was a window when it would have been feasible to force GTS to be spun out but the officialdom lacked either the alertness or the will to recognize that.

Back to Big Tech. Is anything that Big Tech does as societally as valuable as even Citi’s GTS service? Amazon is squeezing many of its vendors on price, copying their products, and abusing its warehouse workers. If Amazon were forced to break up its retail operations (by product lines? by spinning off its warehouse and logistics operations) American commerce would not go dark. If Google’s search engine were to go dark for a month, consumers would uses Bing and DuckDuckGo and Qwant. And who would be hurt if Facebook died, other than its employees and advertisers who go along with being cheated by its obviously bogus audience metrics?

There’s nothing even close to the “don’t touch that dial” concerns with meddling with major banks on the tech titan front. But far too many policy-makers and politicians are cowed by their donations and their undeserved Master of the Universe reputations.

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21 comments

  1. Carla

    “For starters, the baseline regulatory assumption should be not that “everything which is not prohibited is allowed” to “everything that is not allowed is prohibited.””

    I’m guessing that the word “to” should actually be replaced with “but that.”

    Reply
    1. Yves Smith Post author

      No, this is correct as written. The position banks take that regulators regularly accept is that anything that is not explicitly prohibited is permitted, when a big step forward would be that anything is not explicitly allowed is prohibited.

      Reply
  2. vlade

    It’d be possible to spin out WA from FB w/o too many problems (well, for WA. Not necessarily for the rest of the FB).

    Instagram, on the other hand, I could see how that could be too integrated across.

    There’s no reason why AWS could not be spun out, and the same holds for Google Cloud. YT should be again reasonably separable from Google search.

    On Citi – Citi and JPM are some of the worst US banks re IT (although BoFA brought in a lot of bad stuff to ML). What’s scary, is that they are still miles better than most of their EU and Asian competitors.

    TBH, I’m pretty sure Citi’s payments processing platform could be separated from Citi. But, as you say, I have my doubts whether Citi would survive it (the payments platform would).

    Reply
  3. Brian (another one they call)

    Is FB a monopoly in its present form? Is that counter to our laws? It appears that when you begin a business designed to be a monopoly and achieve it, that the law is different for some not others.
    We have several right now that appear to qualify.
    But CITI is continuing to show us they want to be like JPM and operate a crime family the way they want without interference. Worked for JPM and why not CITI?
    The CFTC won’t bark, neither will the SEC. Who will? The destruction of societies comes in many ways and this looks like a prime example of how to design it. There is this company named after a river that has destroyed the one I used to work with and that started right after the crash of 08, but they don’t seem to be charged with being the monopoly they are?

    Reply
  4. TomDority

    I am convinced that the legal game plan – for as long as it works – is to claim that wrongful actions are just mistakes, errors, oversights, too complex, our IT systems can’t handle, did not know the terms, mis-allocating charge as admisistrative expense instead of fee, too inter-connected, incompetence, etc.
    In every case the monetary gain is far more than the occasional slap on the wrist and that an individuals ability to raise a chalenge is too high for the nickel and dime takings by these con-man infested corporate fraud manufacturers

    Reply
  5. chuck roast

    Without getting too far down in the weeds we all know how these bankers operate. Money laundering is an essential function of the modern internationally integrated bank. An essential function of the swinging-door, high echelon, regulatory seat warmers of the OCC and others is to go play golf. This way vast sums of ill gotten cash can be turned into digits and safely tucked away in Delaware…er, an off-shore tax havens. Citi, Deutsch, Swedbank, Bank of Lithuania, FBME even the sainted Danske. They all do it, and are amply aided and abetted by the shadow banks. It seems that so much money is being stolen and swindled around the world that without a competent facilitation authority like GTS, the international flow of cash would be all stopped up. Think of all the lost vig! Moreover, if GTS were spun-out its opacity would almost certainly be decreased, and we also all know that the emperor must remain finely clothed.

    Reply
    1. chuck roast

      So here we are in Links: Bank of England asks banks how ready they are for sub-zero rates. I’m guessing that since the banks are likely to see their depositors disappear they must be scrambling for alternatives. Money laundering would seem to be a reasonably profitable alternative. The vig is excellent and the fines a reasonable CDB.

      Preceded in Links by: Central bank digital currencies: foundational principles and core features. A godsend for the bankers. With a bit of tinkering, they can overlay the Wells Fargo depositor scam on captive participants like credit card holders. If fiat bills are outlawed by the CB it will be digital wild west and “consumers” will be the prey. At a minimum, a bit of vig on every transaction.

      Reply
      1. Upwithfiat

        At a minimum, a bit of vig on every transaction. chuck roast

        Why should that be? Do citizens not have a natural right to store and use their Nation’s fiat FOR FREE, up to reasonable limits?

        Reply
        1. Synoia

          Yes, in a negative interest rate regime, money would be banked under the bed. Until all currency became digital and date stamped.

          At last – an application for blockchain? /s

          Reply
          1. chuck roast

            Yeah, I thought of that, but how do you blockchain register say a $100M digital rip-off? But, if GTS were stand-alone it could be made much more transparent. However, around here we all know exactly how “regulation” works.

            Reply
  6. Matthew G. Saroff

    First, their claim of “too integrated” is crap.

    Microsoft claimed this regarding Internet Explorers in the 1990s, and a hobbyist found a way to decouple IE from Win 98 in about 2 weeks.

    Second, there are actions that can be taken to loosen Facebook’s hold over the market without breaking it up:
    * Getting it out of the 3rd party registration market. (I.E. Non Facebook Games and apps could not use Facebook to log in)
    * An absolute moratorium on mergers and acquisitions. (Which would have the side effect of shutting down those startups whose only purpose is to get acquired)
    * Restrict the information that they can collect.
    * Regulate it like a public utility.

    Additionally, if you were to break-up Facebook, the first item that I would spin out would be the advertising business. The current oligopoly in online ad sales is good for no-one but Google and Facebook.

    Reply
    1. flora

      Here’s hoping that the Cicilline committee inquiry and report doesn’t get shoved in a drawer (because donors) by both parties’ estab. The report focuses on tech; the tbtf too-complicated-to-breakup argument also applies to big banks, imo. The inquiry is a useful template for taking apart the ‘too-complex’ argument.

      The basic thesis of this report isn’t a surprise, and consists of two basic elements. The subcommittee found that Apple, Google, Facebook, and Amazon are abusive monopolies. The report also noted that Obama and Trump era enforcers failed to uphold anti-monopoly laws, which allowed these corporations to amass their dominance.

      What makes these platforms unusually dangerous is that they are gatekeepers with surveillance power, and they can thus wield “near-perfect market intelligence” to copy or undermine would-be rivals. ….

      Over and over, the report just lays into the Federal Trade Commission and Antitrust Division for refusing to enforce monopolization laws and failing to stop mergers, even when they had evidence that such mergers were anti-competitive.

      https://mattstoller.substack.com/p/congress-gets-ready-to-smash-big

      Reply
  7. Synoia

    The larger the organization, the better spread are it’s Bribes (Campaign Contributions).

    If one group of our beloved leaders wished to break up one of our behemoths, It would have to be immediately after an election…

    Otherwise our beloved leaders would find the appearance of well funded challengers somewhat of a problem for their comfortable lifestyles.

    Breaking up, antitrust, was done, when the Unions provided much campaign contributions.

    I believe that to be more than a coincidence.

    Reply
  8. Sound of the Suburbs

    The financial system looks a lot safer than it is when you think banks are financial intermediaries.
    Our policymakers think banks are financial intermediaries.

    Our knowledge of banking has been going backwards since 1856.
    Credit creation theory -> fractional reserve theory -> financial intermediation theory
    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner
    http://www.sciencedirect.com/science/article/pii/S1057521915001477
    When you know how banks really work, you can see what’s going on.
    They don’t really stand a chance.

    Neoclassical economics exposes the weaknesses in the financial system.
    What’s wrong with neoclassical economics?
    1)   It makes you think you are creating wealth by inflating asset prices
    2)   Bank credit flows into inflating asset prices, debt rises faster than GDP and you eventually get a financial crisis.
    3)   No one notices the private debt building up in the economy (apart from the Chinese) as neoclassical economics doesn’t consider debt.

    Policymakers don’t realise it’s the money creation of bank loans that is making the economy boom as they head towards a financial crisis.
    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf 

    At the end of the 1920s, the US was a ponzi scheme of inflated asset prices.
    The use of neoclassical economics and the belief in free markets, made them think that inflated asset prices represented real wealth accumulation.
    1929 – Wakey, wakey time

    Why did it cause the US financial system to collapse in 1929?
    Bankers get to create money out of nothing, through bank loans, and get to charge interest on it.
    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
    What could possibly go wrong?
    Bankers do need to ensure the vast majority of that money gets paid back, and this is where they get into serious trouble.
    Banking requires prudent lending.
    If someone can’t repay a loan, they need to repossess that asset and sell it to recoup that money. If they use bank loans to inflate asset prices they get into a world of trouble when those asset prices collapse.
    As the real estate and stock market collapsed the banks became insolvent as their assets didn’t cover their liabilities.
    They could no longer repossess and sell those assets to cover the outstanding loans and they do need to get most of the money they lend out back again to balance their books.
    The banks become insolvent and collapsed, along with the US economy.

    When banks have been lending to inflate asset prices the financial system is in a precarious state and can easily collapse.
    This is the problem.

    What was the ponzi scheme of inflated asset prices that collapsed in Japan in 1991?
    Japanese real estate.
    They avoided a Great Depression by saving the banks.
    They killed growth for the next 30 years by leaving the debt in place.
    https://www.youtube.com/watch?v=8YTyJzmiHGk

    What was the ponzi scheme of inflated asset prices that collapsed in 2008?
    “It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.

    Reply
    1. Sound of the Suburbs

      They put lots of regulations into place in the Keynesian era to give financial stability.
      https://www.brettonwoodsproject.org/wp-content/uploads/2009/10/banking-crises.png
      “This Time is Different” by Reinhart and Rogoff has a graph showing the same thing (Figure 13.1 – The proportion of countries with banking crises, 1900-2008).
      We then removed them again for financial liberalisation and the financial crises came back.

      What did Glass-Steagall actually do?
      Policymakers couldn’t see what Glass-Steagall did, as they thought banks were financial intermediaries.
      It separates the money creation side of banking from the investment side of banking, and stops bankers producing securities; they buy themselves with money they create out of nothing.
      https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
      (There are intermediaries involved so it’s not obvious, but this is effectively what is happening)
      The whole thing turns into a ponzi scheme and you get a 1929 or 2008 type event.

      Who wants to buy one of my lovely synthetic CDOs?
      You’ve got to be kidding.
      The banks can then set up a market, and buy these things off each other with money they create out of nothing (intermediaries make it less obvious).

      Look at how sharply the price of synthetic CDOs is rising.
      Would you like to buy some?
      Yeah, they’ll be a good investment.

      1929 and 2008 look so similar because they are.
      https://www.youtube.com/watch?v=vAStZJCKmbU&list=PLmtuEaMvhDZZQLxg24CAiFgZYldtoCR-R&index=6
      At 18 mins.
      1929 and 2008 – Minsky Moments, the financial crises where debt has over whelmed the economy.
      They did save the banks this time, which avoided another Great Depression.
      They left the debt in place, which caused a balance sheet recession.

      Reply
    2. Sound of the Suburbs

      What is the fundamental flaw in the free market theory of neoclassical economics?
      The University of Chicago worked that out in the 1930s.

      The free market thinkers at the University of Chicago were just as keen as anyone else to find out what had gone wrong with their free market theories in the 1920s.
      The Chicago Plan was named after its strongest proponent, Henry Simons, from the University of Chicago.
      He wanted free markets in every other area, but Government created money.
      To get meaningful price signals from the markets they had to take away the bank’s ability to create money.

      Henry Simons was a founder member of the Chicago School of Economics and he had worked out what was wrong with his beliefs in free markets in the 1930s.
      Banks can inflate asset prices with the money they create from bank loans.
      https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
      Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
      “Simons envisioned banks that would have a choice of two types of holdings: long-term bonds and cash. Simultaneously, they would hold increased reserves, up to 100%. Simons saw this as beneficial in that its ultimate consequences would be the prevention of “bank-financed inflation of securities and real estate” through the leveraged creation of secondary forms of money.”
      https://www.newworldencyclopedia.org/entry/Henry_Calvert_Simons
      Real estate lending was actually the biggest problem lending category leading to 1929.
      Richard Vague had noticed real estate lending balloon from 5 trillion to 10 trillion from 2001 – 2007 and went back to look at the data before 1929.

      Henry Simons and Irving Fisher supported the Chicago Plan to take away the bankers ability to create money.
      “Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929.
      This 1920’s neoclassical economist that believed in free markets knew this was a stable equilibrium. He became a laughing stock, but worked out where he had gone wrong.
      Banks can inflate asset prices with the money they create from bank loans, and he knew his belief in free markets was dependent on the Chicago Plan, as he had worked out the cause of his earlier mistake.
      Margin lending had inflated the US stock market to ridiculous levels.

      The IMF re-visited the Chicago plan after 2008.
      https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf
      It looks like they did have some idea what the problem was.

      Reply
  9. Bob Goodwin

    I work medium high-up in big tech. I know for a fact that virtually all donations and virtually all sympathy is to the democrat party. They have been able to count on the past R party to be libertarian enough to support ‘free trade’ to their advantage, but in the anti-globalist Trump variation of the R party is not particularly sympathetic to information monopolies that seem to present biased information.

    The challenge will be much like it is for banks. Big tech would LOVE to be regulated. Then they can control the regulators and maintain their monopolies like the banks have. Regulation is great until there is corporatism, which is exactly what globalism is.

    Reply
  10. ChrisPacific

    Good to see another one of these articles after all this time. It’s been a while now since we revisited the GFC villains in any detail.

    I recall Citi being a governance basket case back in the crisis period, and I also recall that there was no serious attempt to address that on the part of regulators or government – just a lot of bailout programs intended to sweep problems back under the rug. Now we take a look again over a decade later and it turns out that – surprise! – Citi is even more of a governance basket case. Who could have predicted that? It’s almost as though rewarding bad behavior with bailouts and letting execs keep their big bonuses leads to even more bad behavior! Perhaps we should take note of that lesson when it comes to dealing with Big Tech.

    As for this Facebook claim:

    “After many years of hard and costly work, Instagram and WhatsApp are now integrated into the same bespoke infrastructure that Facebook built from the ground up,” the company says in its report.

    I have the same criticism as everyone else. It would only be hard to split them out again if they haven’t taken the time to design the merger process to be reversible. This is most certainly possible to do if you plan for it. If they chose not to take the extra time and expense to do it, then that was a business decision on their part. They will certainly have been aware that the acquisition carried anti-trust risks (I’m sure a review of their SEC filings during the period in question would confirm this). This means they will have a contingency plan in case they are ordered to split them back up (or if they don’t, they’re grossly negligent and will probably end up facing a shareholder lawsuit if it happens). If there’s a cost associated with it, it’s one that they will have been tracking as a business risk, and that they were presumably willing to take. I’m guessing that action point 1 of that plan is to pretend that there is no plan, hyperventilate about how breaking them back up would mean the end of one or both companies, and hope it’s enough to scare regulators off.

    Leaving all that aside, even if this was perfectly true, it’s beside the point. The fact that something took years of hard and costly work is not a justification, or an argument against reversal. I can name many examples from history of things that took years of hard work and still had a net negative impact on the state of humanity as a whole. (Off the top of my head: the Holocaust, the Inquisition, the African slave trade). Even Microsoft got this – I don’t recall them saying anything in their anti-trust hearing about how much time and effort they’d invested into stifling all competition and expecting sympathy. The fact that Facebook thinks this is at all relevant suggests they’re either unprepared or being disingenuous.

    Reply
    1. Upwithfiat

      If you were following the bank version “too big/too complex to break up” topic back in the crisis/post crisis period, you’ll remember that there were various schemes that fell short of that but intended not to have big sick banks wind up being bailed out, but instead be able to fail without doing systemic harm. We explained long-form why these schemes wouldn’t work. The core problem is that big banks operate internationally on a normal business basis, but failure and bankruptcy is a national process. Yves

      A simple solution to that is to allow EVERYONE, including foreigners, to have a Central Bank account since those are inherently risk-free (if a proper central bank)?

      Private banks could still exist but with explicit warnings that their deposits are at-risk.

      In other words, let’s have an additional but risk-free payment system to the one that must work through private banks so that they can no longer hold the economy hostage.

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