Subscribe to the NewsOptimism and Strong Earnings for Those Too Big to Fail
By Admin
Banks stocks surged with JP Morgan’s report on Friday of a 47% increase in profit, and Barron’s reports that while a Goldman Sachs predicts great things for the stock market in the coming year, the same government banking policies helping Wall Street are having a negative effect on Main Street.
One of the main issues of the financial crisis, how to keep the largest banks from being too big to fail and to keep them from having apparent political and economic leverage to profit again while smaller institutions and most Americans continue to struggle, is still unresolved. Here are a couple recent articles that challenge the status quo.
Christopher Whalen Article at Reuters, “It’s a Wonderful Life 2011”
Look at the just announced settlement between Fannie and Freddie and Bank of America, where the government-sponsored enterprises (GSEs) now controlled by the Obama Administration are providing what appears to be a huge subsidy to Bank of America to the tune of tens of billions of dollars. If you look at the most recent quarterly earnings disclosure to the SEC from Bank of America on future losses from the GSEs, then look at today’s settlement with the GSEs, which was approved by the Geithner Treasury, and it is hard not to conclude that the settlement was a gift.
The losses hitting Fannie and Freddie will be borne by the American taxpayer and not the bond holders of Bank of America. The single digit billions BofA paid to Fannie and Freddie is less than a quarter of my firm’s estimate of such losses prior to the announcement. And our estimates were by no means the highest.
How can bankers like JPMorgan Chase CEO Jaime Dimon, who settled his own tab with Fannie and Freddie on equally attractive terms last year, complain about Barack Obama when the supposedly liberal President is so generous with public subsidies for the zombie banks? The truth of the matter is that the federal government, through agencies like Fannie, Freddie, the Federal Home Loan Banks and the FDIC, have been calling the shots in the banking industry since the 1930s.
While American banks have, from time to time, shown a certain degree of independence, this in the form of speculative lawlessness known as “innovation,” all lenders in the U.S. are ultimately appendages of Washington. The degree of government support for the financial markets has never been greater in the history of the American republic and the largest players in the industry thereby exercise enormous political power. This is why calls from observers as disparate as Kansas City Fed President Thomas Hoenig, Vermont Senator Bernard Sanders and Dallas Fed President Richard Fisher to break up the largest banks are entirely on target.
Christina Freeland at Reuters on why the Wall Street Washington door continues to revolve:
As President Barack Obama’s new lieutenants settle into their offices in the White House, talk has turned again to the revolving door between Washington and Wall Street: William Daley, the president’s chief of staff, arrives from JPMorgan Chase, where he earned millions; Gene Sperling, the new top economic adviser, collected $887,727 from Goldman Sachs for advice on a charity project on a recent hiatus from government.
There’s nothing new about this tradition – indeed there was a time not so long ago when it seemed as if actually running Goldman Sachs was a prerequisite for serving as Secretary of the Treasury. But the triple whammy of the financial crisis, the trillion-dollar government bailout and the return of lavish bonuses to many on Wall Street while unemployment in the United States is stuck above 9 percent has cast the intimacy between political and business elites in a new, often more jaundiced light.
Simon Johnson at the Baseline Scenario opines about this week’s report from the Business Standards Committee at Goldman Sachs:
Our big banks have too little capital and are too large. Do not be deceived by the internal alterations and new forms of reporting put forward by Goldman Sachs. At its heart, the problems in our banking system are about insufficient equity in very big banks.
The case against increasing equity in the financial system is very weak – as King/Miles/Admati explain. Most of the opposition to greater equity is in the form of unsubstantiated assertions by people paid to represent the interests of bank shareholders (i.e., executives, lobbyists, and the like).
There is nothing wrong with shareholders having paid representatives – or with those people doing the job they are paid to do. But allowing such people to make or directly shape public policy on this issue is a huge mistake.
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