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April 06, 2013 12:17 PM Megabanks, Hoist with Their Own Petard?

By Ryan Cooper

Ezra Klein had a very interesting positive thought in his column from yesterday:

The Capitol today is thick with financial wonks arguing that too-big-to-fail is too-big-to-exist and working to devise the policies that would break the banks into smaller pieces. Some say we need to dismantle the big banks totally. Others suggest levying a hefty tax on assets above a certain threshold so that size is penalized. Still others advocate onerous capital requirements that would make too-big-to-fail banks too cautious to implode. In a future crisis, reformers will have a menu of options to choose from. And, in a development that should worry the financial sector, these ideas have gained traction on the left and the right, among radicals and establishmentarians…
Wall Street has fought viciously against the Dodd-Frank financial reforms. A remarkable, 10,000-word article in this magazine by Haley Sweetland Edwards vividly details the coordinated attack the financial industry has mounted through the rule making process. There’s a real possibility that Wall Street will manage what George W. Bush memorably called a “catastrophic success.” If the financial sector is too effective at evading meaningful reforms, then it’s probably only a matter of time before some too-big-to-fail institution self- detonates, putting the entire economy at risk.

I’ve always thought the case for breaking up the banks was mostly a political one. In reality, no bank is “too small to fail”—a single small failure has historically been enough to start a catastrophic panic. Luckily, we have the FDIC to step in and smoothly take over a failing small bank and no one worries about it.

One could imagine a similar procedure for a really huge bank, where the government would step in and wind things down in an orderly way. But if you read Haley’s piece (and you really should) you’ll see the effect of the banking lobby’s power and money on the regulatory agencies. The bankers have lashed the poor buggers into a defensive crouch, and ground the gears of the rulemaking process nearly to a halt. The regulators—and there are ones that are really trying to do a good job, not just angling for a job on Wall Street—simply do not have the raw muscle to beat back that kind of assault.

Busting up the largest banks definitely won’t end financial sector lobbying. But nearly anything that hurts their power and influence is worth doing, especially if it’s big and obvious. Heaven knows the regulators could use a little bucking up.

Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper

Comments

  • Domage on April 06, 2013 1:32 PM:

    In a future crisis, reformers will have a menu of options to choose from.

    This is the operative sentence of the entire post. Nothing--absolutely nothing--will be done now or in the near future. It's going to take some future catastrophe--likely something on a scale much greater than even the Great Depression--to get regulations put in place that rein in Wall Street and break up the giant banks.

    But even then, there will be the rump of the GOP claiming that preventing disaster will actually cause disaster.

    Feh!

  • c u n d gulag on April 06, 2013 4:25 PM:

    I'm pessimistic about anything happening regarding regulating banking and finance in the near future.

    If what happened in 08-09 didn't scare the bejebus out of EVERYONE in this country, than it will take a full-blown Depression.

    And even in the middle of it, the bankers and financeers will feel like the government should bail them out, and probably will - "Hey, why not? They did it the last time."

  • iyoumeweus on April 06, 2013 7:59 PM:

    HOW “WE THE PEOPLE” ARE RIPPED OFF BY BIG WALL STREET BANKS
    Bank of America, Morgan-Chase, Goldman-Sacks, CitiGroup and Morgan Stanley together have assets which total one quarter of the nation’s economy. They form an oligopoly controlling the banking and financial markets with the ability to boost profits and bonuses while gouging their customers and consumers. These, tax supported Federal Reserve favored private corporations are in many ways like the old East and West India Companies, two other oligopolies, which dominated trade and the economy of the 1st British Empire at the time of the American Revolution. Our revolt was just as much a revolt against their monopolist dominance as it was against King and Parliament.
    Here is how they tax us today without representation, consent or knowledge:
    They control and keep artificially high interest rates on loans, credit cards and mortgages. They are the principle buyers of debt originated by smaller community banks, loan companies, mortgage firms and small financial institutions. These large oligopoly banks, the big Five, are making historically large profits on their investments by taking interest rates far higher than in the past. When the number and the competition among big banks decrease; the cost to the consumer/customer increases. This excess profit can be views as a corporate taxation without representation. Indeed, it is a rip off!
    The Big Five banks using their Hedge Fund partners engage in high speed trading using ultra-fast large computers they have the ability to execute millions of stock trades per second. When banks can trade in nanoseconds while you are trading in minuets, the nanosecond trader has a large advantage because they ‘see’ your trade buy the stock you are interested in and sells it to you making 1, 2 or 3 cents profit. Do this, once you make a penny; do this 10 million times and you are ripping off the system! This is taxation without representation on our pensions, our mutual funds, our IRA’s and our 401K’s, and we never even knew it occurred! Another, rip off!!
    All to often, Big bank money managers make trades based upon insider information not available to outsiders not in the know. Such trades are illegal but difficult to catch and harder to bring before a judge. If you do not get the upside; you are stuck with the downside. All too often the large profits of hedge funds and proprietary trading firms controlled by the too-big-too-fail banks come from such illegal insider knowledge. This is another example of corporate taxation without representation. Again we lose, our pensions, mutual funds, IRA’S and 401K’s all ripped off!!!
    The Big Five Wall Street banks and the Big Three credit raters, Standards & Poor’s, Fitch and Moody’s conspired in a pay-to-play shake down in which the raters would give undesirable ‘trash’ securities any rating the big banks selling said ‘garbage’ desired provided the assessed fees were high. Both the big banks and the credit raters profited, and an unsuspecting public, as well as, local governments, small not-for-profit corporations, pension funds and other sorts of investments were victims of criminally incompetent ‘gatekeepers’ and their worthless information. Corporate taxation without representation flourished while “We the People” got ripped off!!!!

    The largest tax burden Wall Street banks place upon us is the fact that as the banks grow larger our economic growth declines; thereby, killing jobs, tax revenue, opportunities while increasing debt and deficits. Andrew Holdane who has studied this phenomenon tells us, “There is a threshold at which private credit-to-GDP may begin to have a negative impact on GDP growth. That threshold is found to lie at a private credit-to-GDP ratio of around 80 to 100%.” Today the ratio is approaching 200%. As the financial sector grows larger and larger, the economic well being is sucked out of the nation. Inv

  • Cugel on April 07, 2013 12:24 AM:

    Have you ever done business with Bank of America? They are simply the worst run company in the entire world.

    Bar none. And anybody who does business with them knows it. They are so big and internally confused they can't make simple business decisions.

    They forget about mortgages they have put in foreclosure and never completed. The paperwork just gets lost in some labyrinthine department. The houses they own, the owners having moved out, can sit idle for years.

    I had a client this happened to.

    I wrote them a letter: "This house has been vacant for three years. My client has been discharged from his debts by bankruptcy 2 years ago so there's no longer any personal liability except continuing HOA charges because the title's still in his name. There's no insurance on the home. There's squirrels in the attic and mold in the basement and the whole thing could burn down at any moment. How about you let my client sign a quit claim deed to the bank?"

    Then then reversed themselves and accepted a short-sale they previously had rejected.

    They are so big that they simply can't manage their business. OF COURSE if they were split into about 10 different banks they would be run better. They couldn't possibly be run worse.

    No, it wouldn't solve the problems of criminal fraud and idiotic lending policies. But, at least they could operate in a commercially reasonable manner for a change.

  • Bob H on April 07, 2013 7:03 AM:

    Wall St. will eventually realize that the banks are worth more broken up than intact, and that there would be good money to be made managing the spinoffs. Then the banks will really be in trouble

  • Rick B on April 07, 2013 12:50 PM:

    @Bob H

    You would be correct if the goal of the Wall Street Bank executives was to make money for the banks or stockholders.

    Their behavior makes it clear that their goal is NOT to make more money.

    The banker's goal is to amass more political power and to escape regulation by any national government. Don't make the mistake of thinking that Wall Street Banks are U.S. companies. They are not. They are international institutions which operate more between nations than within them and since they are so large they are more powerful than any but the top four or five nations.