The “Too Big to Fail Banks” are Bigger and more Powerful. The Financial Crisis has not Ended … It’s Only Gotten Worse
Despite “Mission Accomplished” Announcement, the Giant Banks Are Worse Than Ever
Last week, Paul Krugman
said too big to fail is over:
There was indeed a large-bank funding advantage during
and for some time after the crisis, but it has now been diminished or
gone away — maybe even slightly reversed. That is, financial markets are
now acting as if they believe that future bailouts won’t be as
favorable to fat cats as the bailouts of 2008.
This news is part of broader evidence that Dodd-Frank has actually
done considerable good, on fronts from consumer protection to bank
capitalization ….
But as David Dayen
notes, Krugman’s stretching the facts:
The report [that Krugman relies on for his claim that too big to fail] doesn’t really
say that future bailouts won’t be as favorable to the fat cats, or even
that market participants believe that: it does say that large financial
institutions would likely continue to enjoy lower funding costs than
their counterparts in times of high credit risk (see page 40).
Furthermore, the report so completely second-guesses itself that it
shouldn’t be taken as evidence of anything, as the report itself states
in numerous spots. Presumably a Nobel Prize winner has come across
reports with muted conclusions before and would know not to get too far
out in front of the facts by amplifying them.
***
The report did not say that the advantage has “essentially
disappeared.” GAO ran 42 models to try and assess the subsidy. In 2013,
18 of those models effectively tested positive for the subsidy, 8 tested
negative, and 16 showed nothing. That’s fairly inconclusive, and not at
all as definitive as Krugman makes it.
***
Gretchen Morgenson reported on the same study in the news, and
managed to get it right, contrawhat Krugman thought he could get away
with on the op-ed page.
(GAO’s) methodology was convoluted and its conclusions
hardly definitive. The report said that while the big banks had enjoyed a
subsidy during the financial crisis, that benefit “may have declined or
reversed in recent years.” [...]
The trouble with this mishmash is that big bankers and even policy
makers will cite these figures as proof that the problem of
too-big-to-fail institutions has been resolved. Mary J. Miller, the
departing under secretary for domestic finance at the United States
Treasury, wrote in a letter about the report: “We believe these results
reflect increased market recognition of what should now be evident —
Dodd-Frank ended ‘too big to fail’ as a matter of law.”
Not exactly. As the report noted, the value of the implied guarantee
varies, skyrocketing with economic stress (such as in 2008) and settling
back down in periods of calm.
In other words, were we to return to panic mode, the value of the
implied taxpayer backing would rocket. The threat of high-cost taxpayer
bailouts remains very much with us.
There’s more: Morgenson actually watched the hearing about the
report, and found credible questioning of GAO’s methodology, in
particular the narrow way in which they defined the subsidy as entirely
about lower debt costs, instead of the lower cost of equity and benefits
to stockholders. I’ve also heard that bond prices, with their focus on
immediate-term risk, are simply an inaccurate indicator of short-term
borrowing costs, particularly those in the securities lending markets.
And a few days after Krugman wrote his piece, the Washington Post
reported:
Eleven of the biggest U.S. banks have no viable plan for unwinding their businesses without rattling the economy, federal regulators said Tuesday, ordering the firms to address their shortcomings by July 2015 or face tougher rules.
***
The Federal Reserve and the Federal Deposit Insurance Corp. called
the banks’ resolution plans, or “living wills,” “unrealistic or
inadequately supported.” They said the plans “fail to make, or even to
identify, the kinds of changes in firm structure and practices that
would be necessary to enhance the prospects for” an orderly resolution.
***
“Each plan being discussed today is deficient and fails to
convincingly demonstrate how, in failure, any one of these firms could
overcome obstacles to entering bankruptcy without precipitating a
financial crisis,” Thomas M. Hoenig, vice chairman of the FDIC, said in a statement Tuesday.
***
Regulators, especially Hoenig at the FDIC, worry that banks are generally larger, more complicated and more interconnected than they were before the meltdown.
***
And the average notional value of derivatives for the three largest firms exceeded $60 trillion at the end of 2013, up 30 percent from the start of the crisis.
***
“There have been no fundamental changes in their reliance on
wholesale funding markets, bank-like money-market funds, or repos
[repurchase agreements], activities that have proven to be major sources
of volatility.”
David Stockman – Ronald Reagan’s budget director –
writes:
The giant regulatory diversion known as Dodd-Frank has
actually permitted the TBTF banks to get even bigger and more dangerous.
Indeed, JPM and BAC were taken to their present unmanageable size by
regulators—ostensibly fighting the last outbreak of TBTF—who imposed or
acquiesced to the shotgun mergers of late 2008.
So now these same regulators, who have spent four years stumbling
around in the Dodd-Frank puzzle palace confecting thousands of pages of
indecipherable regulations, slam their wards for not having sufficiently
robust “living wills”. C’mon! This is just another Washington
double-shuffle.
The very idea that $2 trillion global banking behemoths like JPMorgan
or Bank of America could be entrusted to write-up standby plans
for their own orderly and antiseptic bankruptcy is not only just plain
stupid; it also drips with political cynicism and cowardice. If they are
too big to fail, they are too big to exist. Period.
And Michael Winship
notes:
In The New York Times, columnist Gretchen Morgenson writes,
“Six years after the financial crisis, it’s clear that some
institutions remain too complex and interconnected to be unwound quickly
and efficiently if they get into trouble.“It is also clear that this
status confers financial benefits on those institutions. Stated simply,
there is an enormous value in a bank’s ability to tap the taxpayer for a
bailout rather than being forced to go through bankruptcy.”
Morgenson adds, “Were we to return to panic mode, the value of the
implied taxpayer backing would rocket. The threat of high-taxpayer
bailouts remains very much with us.”
Financial professionals echo her concern. Camden Fine, president and CEO of the Independent Community Bankers of America, notes in American Banker (not
without self-interest) that while the size of big bank subsidies may
have “diminished since the crisis … the larger point is that the biggest
and riskiest financial firms still have a competitive advantage in the
marketplace. They can still access subsidized funding more cheaply than
smaller financial firms because creditors believe the government would
bail them out in the event of a crisis. No matter how you cut it, a
subsidy is a subsidy. And this subsidy is one that puts the American
taxpayer on the hook. …
“Meanwhile, the largest financial institutions are only getting
bigger. According to our analysis of call report data from the Federal
Deposit Insurance Corp., since the end of 2009, the assets of the six
largest financial institutions have grown each year. Their total
assets rose from $6.41 trillion in 2009 to $7.22 trillion in 2014 — a
total increase of $800 billion. The top six banks are also responsible
for more than half of the $2 trillion increase in total U.S. banking
assets in the years since 2009.”
***
As Senators Brown and Vitter stated, “Today’s
report confirms that in times of crisis, the largest megabanks receive
an advantage over Main Street financial institutions. Wall Street
lobbyists may try to spin that the advantage has lessened. But if the
Army Corps of Engineers came out with a study that said a levee system
works pretty well when it’s sunny — but couldn’t be trusted in a
hurricane — we would take that as evidence we need to act.”
We’ve noted for years that, the Dodd-Frank financial “reform” bill is a joke which:
- Was just a P.R. stunt which didn’t really change anything
No comments:
Post a Comment