Start the conversation
Comment on This Story
Or to contact Money Morning Customer Service, click here.
Anti-Wall Street sentiment makes for a good cover, but behind the scenes and rhetoric, legislators are working with the country's largest financial firms to fashion a new system that concentrates even more risk and reward at fewer banks.
And what's more, the underlying socialization of the system will guarantee the success of excess with the full faith and credit of taxpayers.
On Dec. 11, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, which among other things, creates a consumer protection agency, strips the U.S. Federal Reserve of certain powers and subjects it to politicization, calls for big banks to finance a $150 billion bailout fund and gives the government power to break up or coddle financial firms as they see fit.
The Senate will try and reconcile the House bill with an earlier version of its own bill. Legislators are hoping to have a final bill ready sometime in early 2010.
But, in a testament to the power of Wall Street, what's on the table is what works for bankers and the Street. The resulting de-facto socialization of American banking is nothing more than Wall Street's secret agenda to eliminate competition, grow bigger profit engines and rely on the perception of a socialized system to support cheap funding.
As far as banks growing, it would take several pages to list all the bank mergers that transpired over the past few years. And, a lot more are coming. The net effect of consolidation is that the top four banks in the United States already control $7.5 trillion of banking assets, which is 56% of all assets. That's up from $2 trillion or 35% of assets in 2000.
As far as Wall Street goes, a concerted shark attack on Bear Stearns, then Lehman Bros. Holdings Inc. (OTC: LEHMQ), then Merrill Lynch & Co. Inc. (which barely survived and was merged into Bank of America Corp. (NYSE: BAC), leaves Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Morgan Stanley (NYSE: MS), the still-teetering Citigroup Inc. (NYSE: C) and BofA in control of the vast landscape of investment banking.
But the unfortunate truth is that bigger is not necessarily better. Bigger may be sexier, but one size just doesn't fit all.
Big commercial banks and big investment banks and the re-marriage of commercial and investment banking in 1999 is tearing apart the fabric of credit extension and risk management that our economy relies on.
Wall Street has already won a clever and stealthy victory as the legislative posturing and populist pandering quiets down amid a surging stock market and signs of hope for the economy on the horizon.
The fallacy is that the doctrine of "too-big-to-fail" (TBTF) is being addressed. It's not.
The honest truth is that if legislators were to follow what the majority of academics and critics of TBTF are calling for, already too-big banks and investment banks would be broken up. They are already too big to fail. Have we really forgotten what just happened and what we're trying to fix? So, why aren't legislators attacking the issue?
Again, the truth is not being told. Big banks are leaning on legislators to facilitate and perpetuate the concentration of banking interests because it allows banks to eliminate competition and fatten margins. The problem is that if there are just a few of the same types of stores selling the same credit and investment services, there's going to be price collusion and a strong concentration of risk. We're not addressing TBTF; we're facilitating it.
As far as government power to break up TBTF institutions, doesn't that sound ridiculous? Do legislators think the American public is so stupid that it won't see that the planned interference of government in big business is a back-door route to socialization?
The House legislation gives the government power to keep TBTF faltering and systemically important institutions open and supported by taxpayer funding. If they are systemically important, they can't be unwound without across-the-economy pain and suffering. So, they will become wards of the state, perhaps permanently. This is where we're headed.
The $150 billion bailout stash the House is calling for big banks to fund is a joke. For some perspective, it amounts to less than one fifth of Bank of America's debt – not its assets which are in the trillions, but its debt.
There is little doubt that the Fed made mistakes in the past. And, there's no good reason that the Fed shouldn't be audited. What is in doubt and what there is no good reason to have is a politicized Fed. Is any incumbent administration ever going to raise rates in an upcoming election year? If your borrowing costs and the debt service you pay on your loans and borrowings are going to go up and choke you, are you going to vote for the folks who do that to you? That's why the Fed needs to be independent. Not unaccountable and not unfettered, just unencumbered by political winds.
Then there's the idea of a consumer protection agency. But, don't we already have a few of those? We have the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), the Office of Thrift Supervision (OTC), the Office of the Comptroller of the Currency (OCC), the Financial Industry Regulatory Authority (FINRA), the Fed, the Federal Deposit Insurance Corp. (FDIC) and several more state regulatory agencies.
Is another agency just another opportunity for smart players to play the regulatory arbitrage game? Apparently one size doesn't fit all, because legislators are already carving out favorite friends for exemption to oversight by the yet-to-be-formed new agency. Another agency? How about fixing all the agencies that failed us before?
The bottom line of what will be a quasi-socialized banking system is that the big banks presumably will be backstopped by taxpayers. That eliminates moral hazard. More risk equals more reward. And risks will be taken and leveraged. As long as institutions are not subject to market discipline and they can borrow cheaply with an implied government guarantee, bankers will swing for the fences, because they can.
The entire exercise of legislators jockeying to protect us from another Great Recession or Great Depression is an exercise in futility. They have already dropped the ball. Instead of heading into a pre-packaged socialization model, lawmakers need to be honest and do the right thing.
The right thing to do is steer away from socialization and back toward democratic capitalism. End too-big-to-fail, once and for all. Spread the pieces of dismembered institutions around the country and place credit closer to Main Street. We need to be governed by the people, for the people – not by Wall Street for bankers.
News and Related Story Links:
- House of Representatives:
Wall Street Reform and Consumer Protection Act of 2009
- CNNMoney:
Sweeping bank reform bill clears House
- Money Morning:
How to Profit From the "Evil Genius" of Goldman Sachs
- Money Morning:
U.S. Sen. Christopher Dodd's Plan for Financial Reform as Ambitious as it is Antagonistic
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
Great Article. I hope it's not too late to reverse the process.
"….by the people, for the people" What a novel idea!!!!
At this point my question is why not nationalize the banking sytem? It will be cheaper!
Isn't it true that the US Federal Reserve is actually privately owned by the major US financial institutions? It was formed in 1913 at a secret meeting of Government and leading New York financiers on Jekyll Island off the Georgia coast. The whole thing is fraudulent collusion on a gigantic scale and it was said back then in 1913 that they knew that the house of cards would need public bailout at some time – the only uncertainty was when. History has now seen that come to pass.
And of course nothing has changed. As you have said current legislation only strengthens the position of the big banks even more. It will take catastrophic financial collapse for the whole rotten edeice to be finally destroyed and this is also another certainty – the only uncertainty is when!
"It will take catastrophic financial collapse for the whole rotten edeice to be finally destroyed and this is also another certainty – the only uncertainty is when!"
My bet is sometime in the next 5 years, perhaps the next 2. We should be days or weeks away (if it didn't already start last week) from starting the most intense portion of the bear market, which itself is the biggest in nearly 300 years. Somewhere along the line, both the financial system AND the government that would bail it out will both be wiped out, and at long last, so will the insanity. Those who owe money will also be wiped out, while those who have even a little bit of ready cash will become the new wealthy. Time to pick which camp you want to end up in and prepare accordingly.
The reason why all nationalisation is negative is that it replaces the profit motive for decisiom making with the influence motive.
If public servants are staffing the banks, then when there is competition for funding, borrowers with influence such as a brother or cousin in the bank, or even a neighbour, will get the loan, not the most credit worthy customer. This process quickly becomes petty corruption and then systemic corruption.
When the bankers are accountable to shareholders for profitably and in order to keep their jobs and bonuses, they will act in the best interests of the bank and will do the job that they are supposed to be doing.
The role of Government should always be restricted to setting the rules for transparency,accountability and financial responsibility.
My view is that these rules should include the separation of businesses. Banks are granted a licence to operate as institutions of trust, borrowing from the community and lending carefully to the community. They should be entirely separated from "merchant banking" which is another expression for financial buccaneering.
When Governments allowed banks to operate in risk markets, the Governments were completely abandoning the basic principles of banking and as always, the community paid the price.
Today, retired, and at 70 years old with 25 years in executive positions in a large interrnational US bank in 7 countries and 13 different banking units, I believe that because the absolute lack of honesty of a large portion of today's financial market management plus misguided mandatory public controls – as demonstrated by this costly crisis – we should take care temporarily of our money. Banking is no more than a public service and there are no doubts that – as per today – there are loyal and honest public servants that can do better to manage this industry than the greedy fat cats. With time and due conditions we can go back to a private financial market. Actually, it looks as if some people are fanatic to continue with the old time bad practices that conducted to the various bubbles that had to be absorbed by foreclosures, unemployment and underemployment, huge budget deficits and incredible amounts of taxpayers money plugged into the holes of a bankrupted financial system. Or are they hackers being paid by the fat cats?
Ron is living in USA so he is a frog in a well. Similar situation of bank bubble happened in India, Banks were nationalized and India learnt hardway to put financial discipline with lot of restrictions. Indian brothers and parents cannot be so benovelent to get such easy loan as he wrote….could end up loosing job and in jail.
Indian nationalized banks are as competitive as any international private banks and more technically sound
Leo
I consider Ron Baldwin is probably correct under current conditions but control of hedonism can be implemented if the government is competant. I would suggest that a major resriction on the "corruption" of the investment banking system would be to get rid of the "Limited Liability" status which encourages the shareholders to be quite happy if the staff take massive risks to rob the "common investors" by a process of deceipt. I would also suggest that the bonuses not be deductable from corporate profits for tax purposes if they exceed – say 10% of the employees basic pay rate and that the value is taxable in the hands of the recipient at the time it is paid.
You are most probably correct about the socialization matter ; and the political factors underpinning it are too powerful to stop since the government has insidiously and surreptitiously succeeded in reversing the power of the taxpayers vote to the point where no election process can stand against the overwhelming socialistic powers-that-be .
^^ nationalizing banking wont fetch you anything ! the banking system works much better with private players !
Socialized banking system. Just another example of the ongoing 'looting' of America by those who are out to grab what they can as they expedite the failure of our economy and destruction of our way of life.
Good stuff
A good article.
As a resident of Sweden, I might seem marginal to what might seem a domestic American affair, but actually, what happens in the US affects people in Sweden as well, due to both our cultural ties to the US, and our financial ones.
I agree with Shah, in that the government meddling with the market, is not only a dangerous activity, but one that will ultimately fail, at the American taxpayer's (intense) expense.
People having failed in commercial activities, and then turning into politicians, or people refraining from commercial activities, in the first place, because they assume they would fail if they tried, are not the type of politicians to lead a commercial, capitalistic country.
What is needed is true capitalistic politicians, that understand that true capitalism would have sorted out this crisis at a minimum expense, to the American taxpayer, and that true capitalism would actually have prevented the whole situation from occuring at all.
True capitalism means true market discipline, as the full responsibility, for corporate decisions, then would fall back on the decision makers. They would reap the rewards, if succesful, but take the full penalties, if failing.
In Sweden we have a saying, that "it's always windy on the top", referring to that.
In a socialistic economy, that's not true; there doesn't have to be any wind at all, meaning the top brass can be very secure, despite making erroneous, or even catastrophic decisions.
So, actually, measuring the windiness on the top, in the private sector, is actually a gauge for how capitalistic a country is, or how socialistic.
Obama seems to carry a lot of socialism, on his agenda. Not surprisingly, his administration carries the lowest percentage number, to date, of people having held an honest, private sector work. That means a lot of non-proven, self-assurance, about how the markets work, and an ambition, to prove themselves.
Re problem-solving, via legislation, there is a bad precedent, the Roman Empire. Following the time axis, there was introduced more and more ardous legislation, to the point that it became practically impossible, for a Roman citizen, to know he was "doing the right thing", without the help of a lawyer. The Roman justice system was finally so entangled in complex laws, that it degenerated to the maxim "what the Imperator (emperor) decides is right."
The Roman justice system had, during that time, gone from "a few simple rules that everyone respects", to "a myriad of rules, that no one respects". I guess this is a good example of government meddling: The government,a nd it's bureucracy, thought they could solve every single situation with a law; a situation arised, and they formed a new law, or a new section to an existing law. Fianally, the Rman system of justice was in tangle-foot, as was the Roman economy and society.
I guess I am, despite being Swedish, a Constitutionalist. I go for Thomas Jefferson, and the Founding Fathers. They worked out the American constitution to the best of their abilities, fully aware of the perils of aforementioned.
Inspite of arresting deficits governent indebtedness the super power tactics of printing currency and thinking the surplus unit holder will never ask back the deposit is a myth of gigantic proportion. The so called TBTF's are just crooks who manipulate the risk mitigation through newer hybridisation system creation call it TARF payouts or manipulatimng the sytem further to control the world trade and maintain the world reserve currency status is the second myth which has made US already a diminished giant. The hidden agenda will not last more than 5 years the bubble that the NATO alliance has created has not been able to move the capital to the efficient investor who can ensure the risk premium returns with a guaranteed hurdle rate. Government are turning into a new page of high indebtedness whose pillars are crumbling as the castle build on sand. Growth has moved East be aware of the rising power of the middle class which is going to mange the new enterprises and create welath through value addition. Compete or be vanquished is my answer to western manipulations. The following excerpts of real state would be an eyeopener where we are going it will wipe out inefficient players in a jiffy. Declines in equity and real estate values wiped out $28.8 trillion of global wealth in ..2008 and the first half of 2009. Replacing this wealth will require more saving and less consumption, which may dampen global economic growth and necessitate significant adjustments by the banking business. In addition, we estimate that global residential real estate values fell by $3.4 trillion in 2008 and nearly $2 trillion more in the first quarter of 2009. Together with equity losses, this has erased $28.8 trillion of household and investor wealth as of the middle of 2009. Replacing this wealth will require a long period of higher saving. To put this in perspective, the world’s households saved about 5 percent of their disposable income in 2008, or $1.6 trillion: they would have to save that amount for 18 consecutive years to amass $28.8 trillion. Of course the actual time it will take is unknowable at this point, since it will depend on many factors, including household saving behavior, income growth, and asset appreciation.
Good article Mr. Gilani and good comments by many but especially Joachim Troilius. One missing argument is "Ending the FED". In less than 100 years, the world has destroyed real wealth by replacing money with fiat currency through their central banks. That can only take place on a massive scale through central banking. Today, there is not one currency that is specie. There is not one government debt free. Is there a government with yearly deficits that has accumulated debt to GDP below 50%? All currencies are inflated by at least 2-3% yearly. America has exported inflation via the reserve currency status. Government deficits are not paid by upfront, transparent taxes but hidden taxation through monetizing the debt. America has total debt including unfunded liabilities = to 10 times GDP. How can this possibly be paid off through taxes? It will need to be monetized by the FED. However, critical mass has developed that cannot be ignored without a real collapse of financial institutions. Collapse will ensure tyranny until the socialization of wealth has pushed all to object poverty. Then we will as history demonstrates, overthrow the tyrannical miscreants and embrace liberty once again. We could vote the bums out now. All of them. Republicans & Democrats alike. All of those Progressives who support the tyrannical views of Marx, Lenin, Mao, Keynes, Chavez and Obama. Let these self proclaimed Messiahs lead their false prophet disciples into the ash heap of history. Include Al Gore.
[…] Money Morning: "Financial Reform" Just Camouflage for Wall Street's Latest Power Play […]