“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford
In case you were wondering what the cost is of “Too Big to Fail” banks, the Federal Reserve has an answer – $440 million (about $4 for every household in the US). If that seems low, well, it is. It’s just what it costs to have “enhanced regulation” of those banks that have been declared “systemic” – legalese for protected by you and I.
Where did that number come from? It comes at the end of a long, watered-down process that has finally defined just what it means to be one of the protected investment banks. It’s all the result of Dodd-Frank regulation that does more harm than good if this is all they can manage. But perhaps we can make a bit more out of it …
The new rules came down from the Fed on Monday. The tab for “enhanced regulation” that includes “stress tests” and a lot of little things is share among about 70 of the largest banks in the nation. These are the ones for whom there is an implicit guarantee that no matter what they do they will not be allowed to fail.
JP Morgan’s share is $44 million, which is a bit over 0.2% of their projected profits this year. As the largest bank they pay the largest cut, so it only goes down from there.
Why is this paltry sum being collected at all? In the original Dodd-Frank bill, a larger assessment designed to build up a $50 billion fund that would cover bailouts in the future – something of a FDIC for investment banks. It was derided at the time as nowhere near enough, given that the TARP in 2008 cost $418 billion. Nevermind. Even that was thrown out before the bill became law, as was another tax designed to discourage short-term borrowing. What was left was the li’l token tab to cover the extra regulation – and even that took 3 years to implement.
The problem with all this is that in the end Dodd-Frank winds up doing more harm than good. It has established a particular class of systemic banks that are good for a bailout without funding that potential bailout. What is the real cost of that?
When Moody’s shotgunned out a round of downgrades of investment bank bonds last summer Morgan Stanley got a special notice. They were cut down two notches over a series of goofs, including the botched facebook IPO. But they escaped third cut that would have thrown them into “junk” status. The reason given? The implicit guarantee that they are backed by the US taxpayers. Morgan Stanley is able to borrow at the same rate as a more solvent but smaller company simply because they are “Too Big to Fail”. This is how we get into a serious problem with socialized risk.
Keeping the institution alive is one thing, and that may be necessary. But has anyone ever lost their job or gone to jail? Sen. Elizabeth Warren of Massachusetts has been asking this, and the short answer is “no”. The longer answer was put rather eloquently by the freshman Senator, who has been on a tear against both the big banks and those who supposedly regulate them in Senate hearings:
“If an agency is unwilling to go to trial it is because they are “too timid” or lack resources. … The consequence is that if large financial institutions can break the law and drag in billions in profits and settle for a few million in fines, then they don’t have much incentive to follow the law. … Every time there is a settlement and not a trial, it means we didn’t have the days and days and days of testimony about what those financial institutions were up to.”
What is the cost of “Too Big to Fail” as a public policy? The price tag is a lot more than the $440 million that the Fed is assessing, but they know that, too. What’s important right now is that two things are going on simultaneously.
The watered-down nonsense that came from Dodd-Frank is making just enough headlines that it is highlighting the problem – even in the more business oriented press where the market distorting advantage of big banks is despised. And it’s fueling the sensible questions that Senator Warren, aggressively opposed by the finance industry, is asking as she grills the regulators who can’t even enforce the weak rules that are in place to any degree of satisfaction.
This is the kind of stuff that generates movements, even revolutions. Let’s see where it goes.
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It’s long past time for real reforms. This is ridiculous.
It is. Smaller banks have to peel away from the rest of the industry and demand solid regulation that levels the playing field.
You bring up interesting numbers. The problem is, People can’t wrap their heads around the Fractional Reserve System of how our money is actually created by creating Debt.
I know this sounds strange and most will go HUH?? But our world monetary system is built on Debt not money, which of course is how the bankers like it. It also doesn’t have to be that way for the system to work even better than it does now.
It’s very hard to explain in a small amount of space, but if you dig into the monetary system as it is set up, vs other options you will quickly see that the other options are much better in the short and long term.
I do like how Iceland dealt with their Bank Problems, they let them fail, and new ones appeared to take their place. Ones more stable and also understanding You’re Not To Big To Fail 🙂 We encouraged banks to fail.
Yes, the Iceland example was very much how it has to be done – they nationalized their big banks, kicked everyone at the executive level out, and prosecuted a few of them. Our own FDIC is a pretty good model, too – they often kick out the whole executive ownership of a failed bank on Friday, recapitalize it, sell it, and open again on Monday.
I opened with the Henry Ford quote for a reason – they really are just too much. The more anyone knows about the system the more you wanna revolution.
The system has to have a way for banks to fail. It’s the main way debt is forgiven on bad loans and everyone goes on with their lives. It’s how we put economic bubbles and big hangovers in the past.
I’ve said it here before and I’ll say it again – I think it’s gotten to the point where the sooner JP Morgan fails, the better. They are nothing but a drain on the real economy! I’d rather have Captain Henry Morgan, the pirate, get a federal guarantee on his plunder than give it to these bastards.
good update
Thanks!
This sorta began with the Savings and Loan meltdown during Ray Gun, when a hundred billion or so–small potatoes by today’s standards!–were stolen from the people without a lot of obvious public objection. Over and over, “they” have gotten away with it, to the point that the distribution of wealth is so unbalanced, and education and democracy so weakened, that one can well despair of peaceful reform. Let us hope.
It has been going on for a very long time now, and the stakes do only get higher. It will take a revolt of some kind before anything changes, I am sure.
The whole thing is so crooked. They have the Congress they bought, plain and simple. No one supports what we have right now and it’s obviously a big disadvantage for smaller banks. Why they don’t unite and demand change like you say I will never know.
Yes, I am longing for the day that small banks, credit unions, et cetera band together and separate themselves from the pirates! That is what it will take.
Sooner or later there will be a real anti-trust action against these big banks and it won’t be a moment too soon. The GOP should distance themselves from this group ASAP.
I would hope the Republicans would learn how unpopular this group is and move appropriately. It’s necessary, for sure – and for them as much as the nation.
Too big to fail is too big to exist. We should have covered the debts of financial institutions that were failing so that their debt didn’t bring down other institutions. Then we should have taken the failing institutions and dismantle it in an orderly fashion with the government getting paid first on any proceeds remaining at the end. If an institution gets too big to fail and it does fail then we should not allow it to continue existing.
Instead we bailed them out and basically gave them a guarantee that no matter what they do the US government will come to the rescue. That only encourages risky behavior by the exact financial institutions we don’t want taking huge risks because their collapse can seriously impact the economy as a whole. As you mention credit rating agencies are taking bailouts into account. Also the institutions themselves are taking it into account when considering risk. Simply put we set ourselves up for a repeat.
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You have completely omitted the fact that we are just now finding out about the LIBOR manipulation and it doesn’t stop there. The big banks have long been colluding to manipulate the rates and the BUY on US corporations with fiscal problems. We are seemingly stuck with high losses here in the US manufacturing arena and the market interference by the banks colluding with the equity firms like Bane Capital that operate on the edge of legality when they own the judges who give them permission to damage hundreds to thousands of real Americans by stealing their pension funding just to BAIL OUT their losses that THEY created by buying high. That should never have been condoned, but apparently the legal system has long ago sold out to Big Finance.
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