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How to cut megabanks down to size

nytimes.com

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Re: How to cut megabanks down to size

#51

Post by rayiner »

RockyMcNuts wrote: post #50
rayiner wrote: post #42

Earlier quoted context omitted.

Because it's a narrative with no basis in fact? The smaller banks were the ones hardest hit by the popping of the financial bubble. GS/MS/JPM didn't need the bailout, Lehman and Bear Stearns failed in a free market manner, and Merrill Lynch was bought out. It was the smaller banks that really needed the bailout money.

1) that's factually incorrect, 2 of the top five Wall Street firms failed (Lehman and Bear Stearns). 2) the other 3 (Goldman, Morgan Stanley, Merrill Lynch) would have failed after Lehman, the entire financial system had to be backstopped by the government. (If you look beyond pure securities firms, the largest insurance company (AIG) failed as well as the largest bank (Citibank - it effectively got nationalized and…

Most people in the financial sector do not think Goldman, MS, or JPM would have failed without the bailout. Lehman and Bear Stearns did fail, but their failure was largely handled within the banking system itself (a lot of Lehman being bought by Barclays and Bear Stearns being absorbed by JPM).

It's the smaller banks that struggled the most and continue to do so: http://articles.latimes.com/2012/jul/06/business/la-fi-banks...

Re: How to cut megabanks down to size

#52

Post by RockyMcNuts »

rwmj wrote: post #13

I'm confused by this. The large banks are (arguably) more efficient because of economies of scale, eg. less duplicated management, purchasing power. So it's probably not a good idea to limit the size of banks which is what this article seems to propose, because that'll make banking more expensive. But the flip side is: why don't we just let megabanks go bust? If they go bust, the government steps in, briefly national…

If you do that you're still subsidizing banks. The simple act of telling creditors that if the banks gets into trouble the government will step in, wipe out shareholders and keep depositors and creditors whole, makes credit more available to them. Of course I'd rather lend to a bank with that kind of backstop than a small savings bank/credit union.

And then if I'm a bank manager, I'm going to borrow as much as possible, and do a lot of high-risk, high return type trading, if it works out I make a ton of money, if I lose it's the government's problem.

Finally, it's not that likely for a Treasury official to tell a TBTF bank they're taking it over - it's an administrative nightmare, and the banks have captured the regulators.

So if a bank gets weak, markets will keep extending credit as long as there's a government backstop, and it won't get taken over, and management will keep playing double or nothing with taxpayers' money.

Re: How to cut megabanks down to size

#53

Post by RockyMcNuts »

rayiner wrote: post #51
RockyMcNuts wrote: post #50

Earlier quoted context omitted.

1) that's factually incorrect, 2 of the top five Wall Street firms failed (Lehman and Bear Stearns). 2) the other 3 (Goldman, Morgan Stanley, Merrill Lynch) would have failed after Lehman, the entire financial system had to be backstopped by the government. (If you look beyond pure securities firms, the largest insurance company (AIG) failed as well as the largest bank (Citibank - it effectively got nationalized and…

Most people in the financial sector do not think Goldman, MS, or JPM would have failed without the bailout. Lehman and Bear Stearns did fail, but their failure was largely handled within the banking system itself (a lot of Lehman being bought by Barclays and Bear Stearns being absorbed by JPM). It's the smaller banks that struggled the most and continue to do so: http://articles.latimes.com/2012/jul/06/business/la-fi…

every well-informed person in the financial sector knows what I said is true.

of course there are always some people who believe whatever they want to believe.

Re: How to cut megabanks down to size

#55

Post by skywalk »

ataggart wrote: post #25
josephlord wrote: post #14

Earlier quoted context omitted.

Smaller banks survived this crisis with relatively few failures but that has not always been the case (e.g. Savings and Loans crisis). However the fact that they can fail is critical and a sufficient reason to break them up even if it won't make them better. Banks that are too big to fail are too big to be allowed to exist. Government protection only for the commercial/retail part is an obvious but insufficient requi…

It's not clear to me how "bigness" matters. The article makes clear that small banks were exposed to disciplining market forces, but for large banks such forces were obviated by government protection. Worrying about size seems to miss the point.

"Bigness" matters because only a few of the large banks are primary dealers [1] - they directly play a role in US treasury auctions. All the other investment banks that aren't primary dealers only play a part in the secondary market. Part of this relationship is also the agreement that large banks are always making markets [2] and providing liquidity for highly-traded Fixed Income products - without someone to make the markets, no one would be able to trade. A large part of the global finance system is based on the ability to easily buy or sell these products, from the huge institutional clients like Fidelity, to the individual investor using their Schwab account (albeit even that is done through a much larger entity to access the market). The move towards computerization in the financial industry over the past 30 years has directly impacted the bottom line of these large banks (via smaller bid/ask spreads [3]), but has also directly lead to increased liquidity due to trading volume.

[1] http://en.wikipedia.org/wiki/Primary_dealer [2] http://en.wikipedia.org/wiki/Market_maker [3] http://en.wikipedia.org/wiki/Bid-offer_spread

Re: How to cut megabanks down to size

#56

Post by mdda »

stephengillie wrote: post #4
dmm wrote: post #3

Next time they blow up just let them all burn to the ground.

The people in charge are too afraid we'll go all "Lord of the Flies" on them without the banking system to motivate us into productivity.

Suppose JPM/Chase had failed. The day after, there would be no cash in the ATMs (unless the government stepped in). The USA would be in a Lord of the Flies situation very rapidly. And we wouldn't be interested in the bank bosses, we'd be interested in food.

Re: How to cut megabanks down to size

#57

Post by betakappaphido »

svachalek wrote: post #33
ataggart wrote: post #25

Earlier quoted context omitted.

It's not clear to me how "bigness" matters. The article makes clear that small banks were exposed to disciplining market forces, but for large banks such forces were obviated by government protection. Worrying about size seems to miss the point.

"Obviated by government protection" BECAUSE of their size. Thus the slogan "too BIG to fail". When big banks make money by taking crazy risks, they earned every penny and how DARE we try to tax or regulate them. When they lose money by taking risks, we need to bail them out for the good of the free world and how DARE we ask to be paid back. Small banks do not have this attitude.

Aka the privatization of profit with the socialization of loss. It's absurdity. Unless you're the profiteer.

Re: How to cut megabanks down to size

#58

Post by temphn »

RockyMcNuts wrote: post #53
rayiner wrote: post #51

Earlier quoted context omitted.

Most people in the financial sector do not think Goldman, MS, or JPM would have failed without the bailout. Lehman and Bear Stearns did fail, but their failure was largely handled within the banking system itself (a lot of Lehman being bought by Barclays and Bear Stearns being absorbed by JPM). It's the smaller banks that struggled the most and continue to do so: http://articles.latimes.com/2012/jul/06/business/la-fi…

every well-informed person in the financial sector knows what I said is true. of course there are always some people who believe whatever they want to believe.

And how many of those people benefited directly from the bailouts? The idea that banks can't be allowed to fail is the fundamental fallacy that has underpinned the last five years. Of course they will argue that they "needed" their noses in the public trough.

Re: How to cut megabanks down to size

#59

Post by kzrdude »

rwmj wrote: post #13

I'm confused by this. The large banks are (arguably) more efficient because of economies of scale, eg. less duplicated management, purchasing power. So it's probably not a good idea to limit the size of banks which is what this article seems to propose, because that'll make banking more expensive. But the flip side is: why don't we just let megabanks go bust? If they go bust, the government steps in, briefly national…

We have a structural problem, when things are "too big to fail", the normal democracy does not work anymore, the bank gets too powerful on its own and goverments can't regulate it effectively.

Moreover, bigger companies are not necessarily more efficient. A smaller company (or country) has the agility of a shorter decision chain.

Re: How to cut megabanks down to size

#60

Post by charonn0 »

The criminal actions[1] of Wachovia, Lloyds, Credit Suisse, Barclays, HSBC, et al have shown that the megabanks cannot be trusted to follow existing laws.

The robo-signing debacle[2] has demonstrated amply that the financial sector can't be bothered to verify their data before destroying the lives of thousands of people.

The LIBOR manipulation scandal[3] proves that even the industry's own measuring rods are bent and unreliable.

The last 5 years have revealed an industry rife with crime, deceit, and unabashed greed which has severely damaged the global economy and the quality of life for hundreds of millions of people. And the penalties for these actions pale in proportionate comparison to those imposed on a street-level drug dealer.

When a private enterprise becomes too essential to regulate effectively, it endangers the society in which it operates. Breaking it up into manageable chunks is the only viable option.

[1]: https://www.nytimes.com/2013/01/03/opinion/how-bankers-help-...

[2]: https://en.wikipedia.org/wiki/2010_United_States_foreclosure...

[3]: https://en.wikipedia.org/wiki/Libor_scandal

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