Break Up the Big Banks

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It is rare nowadays that I agree with George Will on much of anything.  The man has become almost as nutty as today's Republican Party for which he typically acts as an apologist.  But in a column today in the Washington Post he talks about an issue where in my view he is directly on point:  it is time to break up the big banks who have been given a "too big to fail" status and all kinds of special privileges but have not been held to any increased accountability or responsibility.  Dealing with some of these banks on behalf of clients regularly the picture that emerges is one of arrogance, incompetence, and an utter unwillingness to work with even meritorious customers - despite receiving huge bailout sums themselves that were intended to flow down to borrowers and customers.  Here are highlights from Will's column:

If in four weeks a president-elect Mitt Romney is seeking a Treasury secretary, he should look here, to Richard Fisher, president of the Federal Reserve Bank of Dallas. Candidate Romney can enhance his chance of having this choice to make by embracing a simple proposition from Fisher: Systemically important financial institutions (SIFIs), meaning too-big-to-fail (TBTF) banks, are “too dangerous to permit.”

The problems posed by “supersized and hypercomplex banks” may, Fisher says, require anti-obesity policies equivalent to “irreversible lap-band or gastric bypass surgery.” The land of TBTFs is “a perverse financial Lake Wobegon” where all crises are “exceptional,” justifying “unique” solutions that are the same — meaning bailouts. This incurs “the wrath of ordinary citizens and smaller entities that resent this favorable treatment, and we plant the seeds of social unrest.” 

Endorsing the axiom (attributed to Napoleon) that one should “never ascribe to malice that which is adequately explained by incompetence,” Fisher says that TBTF banks “are sprawling and complex — so vast that their own management teams may not fully understand their own risk exposures, providing fertile ground for unintended ‘incompetence.’ ” 

Fisher’s rejoinder to those who impute “economies of scale” to such banks is that there also are “diseconomies of scale.” Fisher, among many others, believes the component parts of the biggest banks would be “worth more broken up than as a whole.”

“For all its bluster, Dodd-Frank leaves TBTF entrenched. . . . In fact, the financial crisis increased concentration because some TBTF institutions acquired the assets of other troubled TBTF institutions. The TBTF survivors of the financial crisis look a lot like they did in 2008. They maintain corporate cultures based on the short-term incentives of fees and bonuses derived from increased oligopoly power.”

Capitalism — which is, as Milton Friedman tirelessly insisted, a profit and loss system — is subverted by TBTF, which socializes losses while leaving profits private. And which enhances the profits of those whose losses it socializes. TBTF is a double moral disaster: It creates moral hazard by encouraging risky behavior, and it delegitimizes capitalism by validating public cynicism about its risk-reward ratios.

It is inexplicable politics and regrettable policy that Romney has, so far, flinched from a forthright endorsement of breaking up the biggest banks.

Barack Obama's "Learned Heplessness"

A column in yesterday's Washington Post looks at an issue that drives me to distraction: Barack Obama's failure to exhibit bold leadership and willingness to allow himself to be played by Republicans time and time again. Given the economic situation gripping the nation, bold measures and leadership are needed. Instead, we get timidity and a capitulation to GOP demands often even before serious discussions begin. This lack of leadership is what would make me consider voting for someone else in 2012 were the Republicans able to nominate a viable opponent - something that's admittedly a long shot given the manner in which the GOP leadership has come to be controlled by the twin Frankenstein monsters that control the GOP base: the Tea Party and the Christian Taliban. Here are some column highlights:
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Is Barack Obama a president or a pawn? And is there any difference nowadays? Seeing how narrow the boundaries of debate have become on the biggest issues facing the country makes the question unavoidable.
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On the central near-term economic issue – jobs – Paul Krugman has trenchantly described the “learned helplessness” gripping the White House. As a result we hear only timid ideas that can’t make a real dent. Ditto on the long-term debt, . . .
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But the phenomenon goes far beyond jobs and debt. On the issues of bank capital and Afghanistan, both of which will be the targets of momentous decisions in the weeks ahead, the options being debated seem just as inexplicably narrow and out of touch.
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Take bank capital first – specifically, the amount of capital large banks are required to hold as a buffer against loss. Inadequate capital at “systemically important” financial institutions was the main reason the housing meltdown led to epic taxpayer bailouts. Yet higher capital rules are being fought by big bankers, because such rules threaten their ability to pay themselves outrageous bonuses . . . . Why would we listen (again) to the self-interested pleas of the same folks that helped tank the economy even as they got rich, escaped prosecution, and passed the bill to the rest of us?
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Or take Afghanistan, where 100,000 U.S. troops will run through upward of $150 billion this year chasing what the CIA guesses are 30 to 100 members of al-Qaeda. No one supporting this decade-old war can define what “success” really means. Yet the troop withdrawal options the president will review starting this week range from 3,000 on the low side to perhaps 20,000 on the high. How can the “boldest” withdrawal option leave us with more troops in Afghanistan than Obama inherited?
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When the voices at the table are so deeply invested in the institutions and habits of mind that brought the economy low, or that have made Afghanistan a quagmire, how likely is it that the options they present to a president will really change things?
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A president’s power to shape events are more limited than we generally think. But a president’s power to shape the boundaries of debate are limited only by his imagination and by his appetite for political risk. From the looks of it, Barack Obama has plenty of imagination. So if he chooses not to challenge these boundaries, he’s a prisoner not only of entrenched forces arrayed behind the status quo; he’s a pawn, ultimately, of his own ambition.
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Frankly, but for the likelihood that the GOP nominate a nut case or someone out of the mainstream, Obama does not deserve re-election at this point. Millions of us voted for a leader but instead we got a timid follower.

2009 Was One of Worst Years on Record for Bankruptcies

As banks are once again making huge profits and doling out obscene bonuses - often to those who lead the economy into meltdown - Main Street is still reeling from the the economic collapse. I have a number of clients wpho never in their wildest dreams thought they would ever seek bankruptcy protection who are now doing recisely that. Typically, what puts them over the edge is the refusal of banks - the same ones that received billions of dollars in bailout funds - to work with them and allow restructuring of their debt. Still others were victims of the Wextrust and Maddoff ponzi schemes. At the same time, many law firms that do not do foreclose work or bankruptcy work are laying off attorneys and staff by the thousands. And what are President Obama and Congress doing? Basically nothing but meaningless talk. Banks that receive bailouts should be lending money, not paying the money out in bonuses. Likewise, programs aimed at restructuring residential mortgage loans need be made to work. Too often, borrowers send off requested application packages simply to have them disappear into a black hole never to be seen again. It is ridiculous. Here are some highlights from CNBC:
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U.S. consumers and businesses are filing for bankruptcy at a pace that made 2009 the seventh-worst year on record, with more than 1.4 million petitions submitted, an Associated Press tally showed Monday. The AP gathered data from the nation's 90 bankruptcy districts and found 1.43 million filings, an increase of 32 percent from 2008. There were 116,000 recorded bankruptcies in December, up 22 percent from the same month a year before.
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Arizona saw the fastest increase, a jump of 77 percent from the year before, followed by Wyoming (60 percent), Nevada (59 percent) and California (58 percent). Emile Harmon, who owns a law firm in Tempe, Ariz., said the firm has doubled its staff to handle the surge in bankruptcy filings. The lawyers have been steadily shifting away from their other areas of business, civil lawsuits and divorce cases. "Bankruptcy is kind of swallowing the whole practice." Harmon said. "There's little time to do other stuff."
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There's also no sign that things are slowing down. Harmon said bankruptcies have been coming in waves, first with those 18 months ago who had adjustable-rate mortgages, then with those who lost their jobs due to the housing downturn. Now he's finding wealthy individuals and business owners who have finally succumbed to lower incomes and shrinking home values. "A lot of the people we see were in a really good financial position two years ago," Harmon said. "People really look at you and say, 'I can't believe I'm here."'

Is Obama Blowing His Presidency?

While I concede that Barack Obama has inherited one of the worse messes in the history of the country as he begins his presidency, I am increasingly worried that he is missing the chance to show commanding leadership and push for the systemic changes needed to not only turn the economy around but also to usher in the "change" he promised throughout his campaign. Be it his timidity on pushing forward on gay rights issues to leaving - in my view - far too much of turning Wall Street around in the hands of the very people who helped create the current economic crisis, Obama just simply is not acting as the dynamic leader that I and so many others had hoped for - or what the country so desperately needs. On the economic front, if his administration blows the window of opportunity to stabilize the banking system, he will be behind the eight ball for everything else he seeks to undertaken. Sadly, his minions overseeing Wall Street do not seem to grasp this fact or the fact that regular citizens are just plain over Wall Street's apparently limitless greed and "let them eat cake" mentality. Frank Rich looks at the financial crisis in a New York Times column today which Obama and all of his staff ought to be required to read. Here are some highlights:

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Unless and until Barack Obama addresses the full depth of Americans’ anger with his full arsenal of policy smarts and political gifts, his presidency and, worse, our economy will be paralyzed. It would be foolish to dismiss as hyperbole the stark warning delivered by Paulette Altmaier of Cupertino, Calif., in a letter to the editor published by The Times last week: “President Obama may not realize it yet, but his Katrina moment has arrived.”

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Six weeks ago I wrote in this space that the country’s surge of populist rage could devour the president’s best-laid plans, including the essential Act II of the bank rescue, if he didn’t get in front of it. The occasion then was the Tom Daschle firestorm. The White House seemed utterly blindsided by the public’s revulsion at the moneyed insiders’ culture illuminated by Daschle’s post-Senate career. Yet last week’s events suggest that the administration learned nothing from that brush with disaster.

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It [AIG] has, in essence, been laundering its $170 billion in taxpayers’ money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Société Générale and Deutsche Bank abroad.

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But Americans do make the connection between their fears about their own jobs and their broad understanding of the A.I.G. debacle. They know that the corporate bosses who may yet lay them off have sometimes been as obscenely overcompensated for failure as Wall Street’s bonus babies. As The Wall Street Journal reported last week, chief executives at businesses as diverse as Texas Instruments and the home builder Hovnanian Enterprises have received millions in bonuses even as their companies’ shares have lost more than half their value.

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[R]hetoric won’t tamp down the anger out there, and neither will calculated displays of presidential “outrage.” We must have governance to match the message. To get ahead of the anger, Obama must do what he has repeatedly promised but not always done: make everything about his economic policies transparent and hold every player accountable. His administration must start actually answering the questions that officials like Geithner and Summers routinely duck.

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We must be told why taxpayers have so little control of the bailed-out financial institutions that we now own some or most of. And where are the M.R.I.’s from those “stress tests” the Treasury Department is giving those banks?

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As the nation’s anger rose last week, the president took responsibility for what’s happening on his watch — more than he needed to, given the disaster he inherited. But in the credit mess, action must match words. To fall short would be to deliver us into the catastrophic hands of a Republican opposition whose only known economic program is to reject job-creating stimulus spending and root for Obama and, by extension, the country to fail.