The Bishop and the Butterfly: Murder, Politics, and the End of the Jazz Age

    Bernie's Wall Street problem (and ours)

    By Flavius on Tue, 05/17/2016 - 11:17pm |

    Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail...If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

    -- Bernie Sanders

    Reminds one of what Mary McCarthy said about Lillian Hellman: "Every word she writes is a lie, including if, but and 'the'."

    because they were too big to fail.

    Oh?

    Let's assume those financial institutions were half the size. What would the Fed etc have done? Bailed them out.

    Let's assume they were a sixth the size. What would it have done? Same thing.

    As in every financial crisis the banking system must be bailed out. Not because banks have loaned unwisely, no doubt some had. But because the nature of banking is that  banks never have enough money if all the depositors want their funds at once, cf It's a Wonderful Life.

                     tax payers would be on the hook again

    Again?

    When was the first time? The Government made a profit on the 2008/09 bailout.

    Bankers, financial executives, what will you,  come in all sorts and sizes. They put their pants on in the morning one leg at a time (unless they're wearing skirts--quick someone provide a substitute cliche).

    Taking the  enormous variety of  people who work in one section of society and forcing them into a category is more than intellectually lazy. It's incorrect. It's scapegoating. Been there, done that. It leads to books being burnt in bonfires. And  people.

    I recall the cold weekend in 2008 when my financial executive daughter and son in law got on a bus to go door to door for Obama in deepest, darkest Pennsylvania. I recall the afternoon in 1972 when I visited my friend J. in his cubicle at Salomon Brothers (which he later ran) with  walls decorated with Doves and McGovern posters.

    For all of the world's problems there's an answer that's simple, understandable, satisfying...and wrong.

    By the way my daughter and son in law didn't feel like taking a ride to Pennsylvania in 2012.

    Let's count the house. It's going to be Hillary vs Trump this fall. And the winner is............? You tell me. Or tell Mark Danner whose take in the current New York Review of Books is that Trump "might stand only one highly telegenic terrorist attack away" from winning. I'd like to see my daughter and son in law in Pennsylvania five months from now. Right now they wouldn't feel welcome. How many financial executives will be voting in New York, New Jersey and Connecticut in November? Enough to matter.

    Obviously real problems have to be addressed whatever the effect on the next election. As Obama did in 2009 when--with the help of some of those financial executives--he saved......General Motors.

    I like Bernie. He was an admired Mayor of Burlington who got re elected each time with greater and greater margins. He got dragged into custody by Mayor Daley's thu police force for doing the right thing . But in this case I'm left to decide whether he's just doesn't know what he's talking about. Or worse,  he does but he's decided not to tell us.

    Comments

    Flavius - In 2008-09, the big failing banks were "bailed out" in two-related ways that most financial institutions that could not pay their obligations had not been.  1) Their management was permitted to remain in place.  2) A receiver was not appointed to account for their assets and debits and then to liquidate the former in order to pay off the latter according to priority.

    Depositors were/are protected by FDIC but that protection does not insure the institutions but rather the individuals who lend them money.  Accordingly, the Federal Government could have protected depositors directly and let the banks themselves go under.  It chose not to.  Why?  They were "too big to fail".   https://www.minneapolisfed.org/news-and-events/presidents-speeches/lesso...

    What does this mean?  It means there weren't/aren't enough small, medium, and large banks around to perform the essential functions that the the few but ginormous banks have monopolized.  That's one crucial, although not the only, reason Sanders, Warren, et al. are calling for a new Glass-Steagall.


    by HSG on Wed, 05/18/2016 - 8:53am

    Hal, there were plenty of problems with the bailout, but Flavius is correct that the banks were not bailed out because they were too big. Hundreds of institutions of various sizes received emergency support from the Treasury without going into receivership or changing management. Here is a comprehensive list from 2008-9: http://money.cnn.com/news/specials/storysupplement/bankbailout/ It includes around 700 institutions with bailouts ranging from a couple million to 25 billion.


    by Michael Wolraich on Wed, 05/18/2016 - 10:56am

    The fact that the 2008 legislation included funds to "bail out" smaller institutions does not mean that Congress's motivation was other than to prevent the collapse of too big to fail institutions. Ben Bernanke and Hank Paulson told Congress the collapse of a small number of enormous banks would create a great depression.  Once the decision was made to make available tens, if not hundreds, of trillions billions of dollars to the managers of AIG, JP Morgan, and Citibank, it was not politically feasible to deny funds to smaller institutions. 


    by HSG on Wed, 05/18/2016 - 6:54pm

    The way debt gets sold as a product makes that product more important than any particular vendor. MM's point is that it is the size of the product that is more crucial to the shape of the market than the size of the vendors.

    This is an international system of exchange. If one is going to change anything fundamental about how it works, it has to be done on that level.


    by moat on Wed, 05/18/2016 - 7:09pm

     Once the decision was made to make available tens, if not hundreds, of trillions billions of dollars to the managers of AIG, JP Morgan, and Citibank, it was not politically feasible to deny funds to smaller institutions. 

    Then why didn't they bail out the homeowners who lost all their equity, their homes, and whose neighborhoods went to pot because of boarded up houses?  I have never understood this.


    by CVille Dem on Wed, 05/18/2016 - 7:31pm

    Just a quick add on and then I'm moving on.  There's a good New Yorker article published in 2014 about the 2008 crisis. Here are a couple of quotes from it:

    Paulson’s appearance [at a civil trial stemming from the bailout] didn’t do much to help [Hank] Greenberg’s case, it did shed new light on other aspects of the 2008 crisis, and, especially, on the immense sway that too-big-to-fail banks, such as Citigroup and Bank of America, continue to have over politicians and regulators. If there are any folks left who still need persuading that these cosseted financial giants ought to be cut down to size, they should go and read Paulson’s testimony.

    ---------

    The big banks . . .  were virtually all neck deep in the mortgage sludge that they had been warehousing, packaging, and selling to investors. That changed things radically. When Citi’s financial problems got so serious that other banks wouldn’t lend to it and it had to be rescued, Paulson and his colleagues at the Fed feared that imposing harsh terms—eminently justified on moral-hazard grounds—would encourage short-sellers on Wall Street to attack the stocks of other big banks. And that, in turn, could have led to a generalized collapse.

    Paulson didn’t say right out that the banks were untouchable, but that was clearly what he meant. Because of the risk of creating a domino effect, he and other regulators had to go easy on the likes of Citi and Bank of America. Paulson said that he advocated “fairness to the extent you can have fairness,” but “to me, stability trumped moral hazard.”


    by HSG on Wed, 05/18/2016 - 2:11pm

    I can't imagine that anyone thinks the banks don't wield outsize political influence.  But at what size would they not?  You could break them all up into little S&Ls, investment managers, boutique ibanks and trading firms and you would still have a massive financial services industry that could fund a group that would dwarf the NRA in terms of political influence. A "Big Bank Break-Up" would not actually change the size, importance or influence of the financial sector.


    by Michael Maiello on Wed, 05/18/2016 - 2:31pm

    The big banks all repaid their loans. Whyever should they have been put into a receivership?

    Some of the small banks protected by TARP were quietly allowed to repurchase their shares for 90 cents on the dollar.

    With or without Glass Steagal when the birds stop eating the bird seed i.e. when depositors want to withdraw all their deposits ,any bank will fail. And then the next domino . And the next.

    It's just a side light but the crisis came into perspective for me when GillianTett pointed out in the FT that one reason the big banks were in pretty good shape was that they  had very nicely protected themselves by "slicing and dicing" their mortgages  so the risk was "distributed " (thanks a lot) .

    Then AIG insured those loans thus undistributing what had been distributed. Duh.

     


    by Flavius on Wed, 05/18/2016 - 11:09am

    In the 80's the failure of 1,043 out of the total of 3,234 small Savings and Loan banks across the nation cost taxpayers over 100 billion dollars.


    by NCD on Wed, 05/18/2016 - 11:27am

    In the case of a terrorist attack, Hillary can point to the picture taken of her in the room with Obama as Bin Laden was taken out. 

    The Clinton campaign will make Trump look as disoriented as McCain did during the financial crisis and Romney did during Hurricane Sandy. 

    Financial crisis

    http://www.usnews.com/news/campaign-2008/articles/2008/09/24/mccain-susp...

    Sandy

    https://www.washingtonpost.com/politics/decision2012/hurricane-sandy-hig...


    by rmrd0000 on Wed, 05/18/2016 - 9:30am

    The subject of bank regulation and down sizing is incomplete without reference to some of the reforms which have taken place. 

    For example, Dodd Frank must be cutting some ice---otherwise why would Trump, now in the hunt for establishment money, be saying that it should be repealed?


    by Oxy Mora on Wed, 05/18/2016 - 12:39pm

    It would be hilarious to ask Donald for a detailed explanation as to why he thinks it should be repealed!!!!


    by CVille Dem on Wed, 05/18/2016 - 1:56pm

    "Because Chris Dodd is a loser and Barney Frank is disgusting."


    by Michael Maiello on Wed, 05/18/2016 - 2:11pm

    It's a four-fer

    damn democrat

    damn black administration

    let's get some of that banker money now going to Hillary

    Frank is a homosexual


    by Oxy Mora on Wed, 05/18/2016 - 2:23pm

    Flavius, you're the most interesting financier in the world.  You don't rescue the financial system every day but when you do, you bail out the banks.  I kid.  Very interesting perspective here and, as you say, the largest TARP recipients did what was asked of them, paid back their loans and bought back whatever preferred shares the government owned and a modest profit was made.

    There was an opportunity cost, however.  The bailout money could have gone to worthier causes and perhaps even higher return causes.  It is, in the end, criminal that the government took equity stakes in giant financial institutions that then turned around and continued to foreclose on millions of homes, forgiving little if anything.

    Also, with the exception of GM, non-financial businesses were left to fend for themselves.  That won't ever be right.  There wasn't enough to go around and the banks got pretty much all of what was made available. Still, in many ways, smaller and less diversified banks are riskier propositions. Goldman Sachs was not in any danger of failing, even had AIG not paid it. But many of AIG's smaller counterparties were and that's why the AIG bailout, one of the most egregious in terms of unfairness, was set up so that all counterparties got paid.  That this also funneled a bunch of money to non-US companies like Societe Generale and Deutsche Bank is even more galling.

    But a bunch of smaller banks could have also gotten into big trouble.  That what the S&L-led recession (also the result of a collapsing real estate bubble) of the early 90s was all about.  Little banks can securitize loans, too.  That's how new businesses like Prosper and Lending Club work. There's nothing inherently sweet and lovable about a small bank.

    Indeed, I often think that I would not like JPMorgan Chase, my bank, to be broken up. I like being able to find their ATMs all over the country so I can get cash without paying a crazy fee to some local bank I'll never do business with again.  I like having an 800 number to call.  I like that, if I didn't think Fidelity was so awesome, that I could move my IRA to the same bank that holds my checking and savings accounts.  In other walks of life, I do, I hate to admit, sometimes look for larger businesses with processes and procedures and customer services standards for when things go wrong.  The shop around the corner can also screw you, after all.

    I think part of what Bernie's getting at is that of all the players in the Financial Crisis, banks were punished the least and coddled the most and in that, I think he's right.  As a great moral tale, the Financial Crisis and the government's response, disappointed a whole lot of people on all sides and we're still seeing that play out in national elections.

    This is why people like Krugman keep trying to remind us not to turn it into a great moral tale in the first place. Markets ain't fables, though we keep seeing them through that prism.


    by Michael Maiello on Wed, 05/18/2016 - 2:10pm

    My wife had intended to implement "natural childbirth" during a pregnancy.  Didn't happen. The baby came fast.And healthy.Before the gyno even arrived.

    Later I was complaining to doctor friend who crossly and correctly said that the purpose of the whole enterprise had been achieved.

    Paulson /Nancy Pelosi and then Obama/Geithner were focused on preventing the international financial system from entering an 8 year  decline like 32's which was really only ended by the War (not  a covert critique of   FDR).

    Rahm Emanuel's "never waste a crisis" was a reasonable input but my response would have been "how much do you suggest we allow the peak unemployment rate to rise so we're fully exploiting this  crisis". A million unemployed is not just a number. It's a million people who drive sadly home and start to sell the house, take the children out of school and away from their friends, and look for someplace cheap to rent..

    In 2008/09 the A item was to prevent another 32. That was also the B and C item. Any effort diverted to designing the appropriate punishment for the banks  would have been...,let's just say, not useful.

    Bernie and all of us could properly discuss whether Dodd/Frank was sufficiently onerous. Barney would certainly be willing to comment. 


    by Flavius on Thu, 05/19/2016 - 6:33am

    Furthemore

    Let us assume your little group is on your way back from Everest but no Charlie

    Leader 

    Where's Charlie?

    Sherpas

    150 feet down the last  crevace cursing us

    CHOOSE ONE

    Leader

    Go back and pull him out

    or

    Go back and pull him out but first I'm firing the Sherpa in chief and I fining the rest of you  50 rupees

     


    by Flavius on Thu, 05/19/2016 - 10:25pm

    I was probably too hard on  Bernie's NYT op ed. I let myself expect he'd take that opportunity for a serious critique of the Democratic Party's position on how to deal with a financial  melt down. For shorthand let's call it Dodd/Frank.

    Given Bernie's reputation I had great expectations and I overly reacted to the same old,same old of "Too big to fail" and Glass Steagal .Yawn. 

    But of course there was no reason whatsoever for him to drop another MEGO on the readers. He wasn't addressing a class at Cooper Union or UVM. He was driving a stake in the ground (block that metaphor!) at the start of Presidential run. Later for Dodd/Frank. Let's have something stirring. 

    In an analogous moment Candidate Trump threw his supporters some red meat: a 2000 mile fence over or maybe under which he would expell 12 million human beings.Tough act to follow. I should have been grateful  Bernie contented himself with the ever fresh  TBTF and Glass Steagal. 

    Sorry Hal.


    by Flavius on Wed, 05/18/2016 - 10:04pm