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

    WAG THE BANKS

    By Oxy Mora on Wed, 12/29/2010 - 2:11pm |

    Does Dodd-Frank's requirement that TBTF banks submit "funeral plans" open the door to dismantling the banks?

    This morning I listened to the interview on Bloomberg of Jason Cave, head of the FDIC's new Office of Complex Financial Institutions. The jist of it was that the Fed and FDIC now have authority to delve into the complex structures of TBTF banks (others like Insurance,etc., to be named) and that the institutions must provide "Resolution Plans" to show how they would be broken up in the event they were judged to be in default or in imminent danger of defaulting.

    It seems obvious that these "funeral plans" will be postulated by the banks and their designated pols as overregulation and will be fought tooth and nail. But their underlying fear, and my hope, is that the funeral plans will in the long term lead to dismantling of the banks into smaller units.

    I say "long term" because I doubt that Obama has any other systemic change in mind for the banks other than fleshing out the Dodd-Frank regulations. In the meantime, to keep myself sane, I have taken to trying to understand the steps and rationalization for downsizing banks. I don't think our trust in the economy will ever fully recover until the cause of the financial collapse is rectified. And I think the cause is and was, the banks were just too big--too big to manage and too big to regulate.

    Comments

    Funeral plans or bankruptcy must be reexamined. You have me interested in this discussion.


    by Richard Day on Wed, 12/29/2010 - 2:54pm

    Thanks, Richard. I lost the rest of the post, so maybe this is the best way to continue it.

    One of the things I wonder about is the specific justification for dismantling the banks. Sure, I think so, but does anyone else, and with what authority.

    The best thing I've found are remarks by Richard Fisher, President of the Dallas Fed. On April 24, 2010, this.

    "...my preference is for...an international accord to break up these institutions into ones of more manageable size--more manageable for both the executives of these institutions and their regulatory supervisors"

    What was interesting was Jason Cave's remark about the FDIC's Participation in the Basel Committees. They are pushing this idea of "Resolution Plans" for all banks. And this will be the FDIC's push as opposed to what they consider to be the more esoteric capital provisions of the Swiss--for example the debt to equity conversion trigger in the case of default.

    What Cave said is that the FDIC/FED/Treas would make the determination of whether bankruptcy was possible and if not they would put the bank into receivership--being guided by the Resolution Plans that the banks would already have provided.


    by Oxy Mora on Wed, 12/29/2010 - 5:06pm

    Richard, here are some of the other bits of information pertinent to a discussion of too big to fail.

    Fisher quotes Andrew Haldane, Exec. Dir. of Complex Institutions, Bank of England.

    Haldane estimates that the bank contractions and subsequent recessions have cost in the neighborhood of $60 Trillion in world growth and output--essentially four times the annual GDP of the U.S. The scope of this opportunity cost in terms of bailouts, stimulus, unemployment, loss of tax revenue is so enormous as to dwarf discussions of budget control, say with regard to Social Security cuts, etc. 

    Haldane also addresses the issue of bank size in terms of the industry's claims of greater economies of scale in large banks. Haldane says there are dubious economies of scale in the $50B--$100B range and in fact above $100B there may be diseconomies of scale.  


    by Oxy Mora on Wed, 12/29/2010 - 3:30pm

    Here are some references.

    Richard Fisher.  www.dallasfed.org/news/speeches/fisher/2010.

    Andrew Haldane. www.bankofengland.co.uk/publications/news/2010.

    Summary of Dodd Frank is found on this website. www.banking.senate.gov/public.

    Also of note is a paper by Johnson and Ferguson on the wesite of the Roosevelt Institute,

    www.rooseveltinstitute.org.


    by Oxy Mora on Wed, 12/29/2010 - 3:56pm

    Thank you for these further links.

    I did a comment elsewhere discussing a panel discussion on bankruptcy and the car bail outs.

    This will provide me with some homework, for sure!!


    by Richard Day on Wed, 12/29/2010 - 5:57pm

    Their world is already globalized, is part of the problem:

    designing rules to tackle large cross-border banks is harder: it probably requires most of the world’s developed economies to introduce new rules. That will take years.

    http://www.nytimes.com/2010/12/28/business/28views.html


    by artappraiser on Wed, 12/29/2010 - 6:29pm

    As far as I've heard, Basel II attendees were waiting for this country to take the lead; it didn't.


    by we are stardust on Wed, 12/29/2010 - 8:41pm

    During the financial reform debate Geithner argued that capital requirements should be referred to Basel III instead of being put into Dodd-Frank. Then the IIF, a bank lobbying group convinced central bankers and governments that capital requirements would be contractionary and impede recovery.

    Simon Johnson and others have shown that the contractionary arguments are ill founded.  


    by Oxy Mora on Wed, 12/29/2010 - 11:52pm

    Thanks, Artsy. Any new rules would presumably emanate from the Basel Committees. As I understand it the Basel III new capital requirements have already been approved by the G-20. These were watered down because of strong bank lobbying against higher requirements on the claim that they would be contractionary and would reduce lending. (This logic has been substantially debunked by a number of economists )The Swiss have increased the basic capital requirements for its two biggest banks to about 10% plus they've instituted other buffers which would put the captial ratio at 19% of assets by 2018--all of which exceeds the Basel III capital rules by a large measure.   

    I understood Cave to say that the U.S. is pushing the idea of "Resolution Plans" in the Basel Committees. Presumably that would have some impact on cross border banks.


    by Oxy Mora on Wed, 12/29/2010 - 11:30pm

    Floyd Norris makes an interesting point today on the long-term systemic change thingie:

    ....there is one lesson that has been overlooked: Just as big league baseball teams need a farm system to provide replacements for players who age or are injured, a banking system needs a second tier of institutions that can step in and become major league banks if necessary....


    by artappraiser on Fri, 12/31/2010 - 8:40am

    Artsy, just got back to my computer. Thanks very much for the reference. It ties into my next bank diatribe--I have only just begun to fight to break up the mega banks!


    by Oxy Mora on Mon, 01/03/2011 - 2:22pm

    Well I thought that if nothing else, he's got a couple nice charts for you. Smile

    BTW, I don't expect much response from dumping links on people's old threads. I figure maybe some day in the future when the person checks their history/tracking, they find a nice surprise. Meanwhile, it helps me remember the thread as a place where a lot of stuff on topic has been rounded up, and I can find a reference there if I am discussing it elsewhere, so it's selfish in a way.


    by artappraiser on Mon, 01/03/2011 - 2:28pm

    Recently, Volcker raised concerns about the implementation of a key provision of the bank reform statute designed to limit the collateral damage from a mega-bank failure.

    The former central banker, speaking to reporters from an event at the American Enterprise Institute, was talking about an element of Dodd-Frank knows as “resolution authority” that seeks to dismantle a failing big bank that’s deemed to be so big or so interconnected that if it collapsed suddenly it would threaten the economy’s stability.

    “I worry about everything, I’m a worrier. Everyone talks about resolution authority which is really a key. Nobody knows quite how it’s going to work. Nobody will know until it is tested, but there are several problems,” Volcker said in December. “We want to get greater international consistency. It’s not up to the U.S. alone.”

    In the event of an impending implosion, the mechanism would use U.S. taxpayer dollars to make partial payments to “healthy” creditors and counterparties of the failing firm so that they wouldn’t go down with it.

    from

    Jan. 6, 2011, 2:39 p.m. EST

    Volcker to step down as Obama adviser @

    http://www.marketwatch.com/story/volcker-to-step-down-as-obama-advisor-2...


    by artappraiser on Fri, 01/07/2011 - 2:42am

    also too:

    Jan. 7, 2011, 12:01 a.m. EST

    Stress test redux: Return of bank dividends

    Banks seeking to hike dividends must submit capital to the Fed by Friday @

    http://www.marketwatch.com/story/stress-test-redux-return-of-bank-divide...


    by artappraiser on Fri, 01/07/2011 - 2:45am

    Volcker's story in this administration has been a tragedy.  He was so completely marginalized by the Third Way economic team early on that he quit going to work and stayed home to work on his own.  The only time Obama needed him was after Scott Brown's election, and he trotted him out to announce his administration would back a 'modified' version of 'the Vocker Rule (re-instating Glass-Steagall'.  ("the only ting between you and the pitchforks is me" or whatever...

    Once Volcker had a mike, he was schooled about going 'too far' with the rule, and being 'dangerous to the creation of profits in the bsuiness community'.  Further joint appearances showed Obama's hand up Volcker's back, operating him as his Ventriloquist's Dummy.

    His allegedy quote above doesn't make much sense, it seems to be arguing in two different directions.  People like William Black do know how resolution trust is supposed to work.  Now Volcker may really mean he doesn't know how any of it will work with this bunch, given this Fed Chair, this Treasury Secretary, this FDIC.  At least some pressure is being brought to bear on them by State Attorneys General, citizens groups, and a few keen judges around the country.

    There are indications even Sheila Bair may be getting a little religion on the fraudulent mortgages disaster.

    All the best to you, Mr. Volcker; sorry you were used so cavalierly by the administration.


    by we are stardust on Fri, 01/07/2011 - 10:32am