Should we break up the 6 biggest banks in the US?

[NobleSavage]

Bernies proposal:

He has proposed breaking up the nation’s largest banks, saying the six biggest ones wield too much control over the economy. He has also proposed barring banks’ chief executives from serving on the Federal Reserve’s 12 regional boards of directors, saying their membership on those boards poses a conflict of interest and undermines regulation of the financial services industry.

Does't seem like a bad idea to me.

 

[repoman]

Internecine ethnic conflict of The Tribe just started by Bernie. Hope he can make it happen.

 

[NobleSavage]

Can a President give an executive order and just break up the banks? Can Congress pass a law and do it? Wouldn't it end up in the courts?

 

[Axulus]

Canada has its big five banks. Not a single one failed in the recent crisis.

If we break up our big banks, your large banks from Europe and Asia will come in to fill the void.

There are advantages to having large banks, especially with the size of the world economy.

The problem comes when they are "too big to fail", there needs to be safeguards to protect taxpayers and the economy from financial system stress.

Also, isn't it a bit dangerous by barring bank executives all together from these boards? They have unique insight into the current practices of the industry and the "shadow banking" practices that fall outside current regulations. Without that inside knowledge being used to help inform policy and regulation, you'll be driving blind and be even more likely to miss the next big catastrophe that the career bureaucrats never even knew was an issue.

What is Bernie Sander's financial system expertise to determine that this is the best course of action? Where are the Finance and Economic PhD's and peer reviewed journal articles lining up in support of this proposal?

 

[Valjean]

We did manage to break up the phone company, but since the corporate takeover of Washington, interfering with big business has become more problematic.

After the crash of '29 a lot of regulations were placed on banks that stabilized the economy for decades, but these have been nibbled away at in the past thirty years or so to the point that banking and business have become a wild West show.

We could, for example, begin enforcing the Glass-Steagall act again, separating ordinary banks from the investment firms that crashed the economy back in '08 with their reckless investments.

 

[Axulus]

Interesting column on the topic:

Here's an excerpt:

…the logic of cutting down huge institutions could mean splitting the largest ones into several pieces. Yet banks do not always come in easily divisible parts. Such a move could amount to eradicating the largest banks rather than splitting them up — and eradication is both politically unlikely and potentially disastrous for the economy. In short, if the resulting parts of a divided bank cannot turn a profit, the split-up may prompt the very bailout it was trying to avoid.

Another fear is that American money market operations would move to larger foreign banks, which would have a newly found competitive advantage. If a financial problem arose, we would either bail out the foreign banks or rely on a foreign central bank to protect our own interests. Neither option seems appealing.

Even if a breakup went well, the incentives for the new, smaller banks would be unhealthy. Those banks could make mistakes or take on bad risks without being punished very much in terms of capitalization or revenue, because of their legally capped size. Even if they made big mistakes, these banks would probably be pushing on the frontier of maximum allowed growth. Eventually, the competitive process would cease to make these banks tougher or smarter or leaner, and we would just be cultivating another kind of banking system where bad or irresponsible decisions don’t lead to financial failure.

Most important bank failures spring from correlated risks, like the bursting of a real estate bubble, that affect many banks at roughly the same time. Bailing out a large number of smaller failing banks may be easier than bailing out a smaller number of large ones, since it is easier to apply bankruptcy and the procedures of the Federal Deposit Insurance Corporation to the smaller institutions. But that outcome hardly gets rid of bailouts.

There is still another problem. The more a bank is legally limited in terms of easily measurable size, the more it may resort to off-balance-sheet activities to make up the difference. “Breaking up big banks” may really mean making these less-transparent bank activities much more important to a bank’s fate.

http://www.nytimes.com/2012/02/12/b...s-economic-view.html?_r=1&partner=rss&emc=rss

Read the whole thing for more detail. In short, penalizing size rather than failure is the wrong way to go. It is possible to be both large and safe as Canada has demonstrated.

 

[bilby]

Every large corporation I have seen is split into 'divisions'. To suggest, in the light of this fact, that the banks don't come in easily separated parts seems disingenuous.

 

[SimpleDon]

It is important to separate the consumer and commercial banking operation from the investment banking operation.

It is important to return investment banking back to operations that invest other people's money from being speculators who risk their own money.

Why? Because banks have a unique part to play in our economy. They are chartered by the government with the ability to create money out of thin air. They do this whenever they make a loan. It is dangerous to couple this ability with speculation as we saw in 2008.

It is dangerous to not regulate either this ability or the speculation, as we saw in 2008.

It is not so much the size of the banks that is the problem, it is that we have allowed banks to develop in a very short time into a very dangerous mix of functions where a more prudent approach would have been to keep them separate.

 

[Jimmy Higgins]

Some seem to be forgetting something. The '08 crash happened in large part because of:

• DC didn't want to slow down the housing market as it was one of the only economy drivers at the time
• The Fed Chairman thought he was a genius for creating what was obviously a massive inflationary housing bubble
• Mortgage firms (small and large) selling short-term mortgages as long-term mortgages
• Mortgage firms (small and large) having people lie about details on their loan application
• Mortgage firms (small and large) were able to off load their risky loans as safe loans
• Absolutely no oversight from ratings agencies
• No where near enough liquidity to back up all of the loan

So the mortgage companies, big banks, ratings agencies, Fed, and DC were all asleep (or pretending to be asleep) at the wheel. We need to really look at the entire system.

 

[scombrid]

So the mortgage companies, big banks, ratings agencies, Fed, and DC were all asleep (or pretending to be asleep) at the wheel. We need to really look at the entire system.

Well I'm just a biologist and my brother is just an arborist. But we saw the writing on the wall a couple of years before the whole thing came unraveled. We were both home visiting our parents in December 2006. In the 10 years since I had moved away, their corner of the county had filled with McMansions that were selling from the low 300s on up. There had not be nearly enough economic growth in the area to justify that market. We concluded that the whole thing was a charade and that as soon as a few ARMs sparked some defaults that the bubble was going to burst and leave banks holding a lot of worthless property. Neither of us could understand how banks thought it was a good idea keep writing loans for $400k to people making $50k.

If we could figure it out then I have a lot of trouble believing that the big banks and ratings agencies didn't know exactly what they were doing.

What my brother and I did not know was that mortgage brokers kept writing the bad loans because they were collecting their fee and then passing the shitty loans into the investment market. So that is why the mortgage brokers kept doing what they were doing. What is baffling in hindsight is that the people buying the loans off of the brokers didn't know what was going on.

Down here in FL I watched shitty houses in marginal neighborhoods sell for $80k in 2004, $120k in 2005, $180k in 2006. How could anyone with any economic knowledge think that was a real and sustainable value increase such they they'd buy securities backed by those mortgages? That isn't just dumb in my opinion. It is criminal.

 

[dismal]

This is of course a non-problem because it was already solved by Dodd-Frank (unless you are lying racist Obama hater):

And finally, because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes. (Applause.) There will be no more tax-funded bailouts -- period. (Applause.) If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy. And there will be new rules to make clear that no firm is somehow protected because it is “too big to fail,” so we don’t have another AIG.

https://www.whitehouse.gov/the-pres...all-street-reform-and-consumer-protection-act

 

[SimpleDon]

Interesting column on the topic:

Here's an excerpt:

…the logic of cutting down huge institutions could mean splitting the largest ones into several pieces. Yet banks do not always come in easily divisible parts. Such a move could amount to eradicating the largest banks rather than splitting them up — and eradication is both politically unlikely and potentially disastrous for the economy. In short, if the resulting parts of a divided bank cannot turn a profit, the split-up may prompt the very bailout it was trying to avoid.

Another fear is that American money market operations would move to larger foreign banks, which would have a newly found competitive advantage. If a financial problem arose, we would either bail out the foreign banks or rely on a foreign central bank to protect our own interests. Neither option seems appealing.

Even if a breakup went well, the incentives for the new, smaller banks would be unhealthy. Those banks could make mistakes or take on bad risks without being punished very much in terms of capitalization or revenue, because of their legally capped size. Even if they made big mistakes, these banks would probably be pushing on the frontier of maximum allowed growth. Eventually, the competitive process would cease to make these banks tougher or smarter or leaner, and we would just be cultivating another kind of banking system where bad or irresponsible decisions don’t lead to financial failure.

Most important bank failures spring from correlated risks, like the bursting of a real estate bubble, that affect many banks at roughly the same time. Bailing out a large number of smaller failing banks may be easier than bailing out a smaller number of large ones, since it is easier to apply bankruptcy and the procedures of the Federal Deposit Insurance Corporation to the smaller institutions. But that outcome hardly gets rid of bailouts.

There is still another problem. The more a bank is legally limited in terms of easily measurable size, the more it may resort to off-balance-sheet activities to make up the difference. “Breaking up big banks” may really mean making these less-transparent bank activities much more important to a bank’s fate.

http://www.nytimes.com/2012/02/12/b...s-economic-view.html?_r=1&partner=rss&emc=rss

Read the whole thing for more detail. In short, penalizing size rather than failure is the wrong way to go. It is possible to be both large and safe as Canada has demonstrated.

These are pretty much the same arguments that were made to build the big banks from our widely distributed backing system. Most of them aren't any more valid now than they were then.

But yes, the problem isn't so much the size of the bank it is that we have loosened the regulations that limited their scope of activities. There is no reason to allow big banks to take on higher risks than small banks.

We got caught up in deregulation derangement. We can blame at least part of that on the conversion to big banks from small ones. The big banks have much more political power than banking as whole had in the small bank era. They can and did lobby to loosen regulation.

I don't know if you remember or realized but banking and banks were becoming less important and less profitable. One of the major reasons for a corporation to try to grow was to become independent of banks. It is not too much wrong to say that a modern corporation is its own bank. Corporations increasingly were relying on retained earnings and issuing corporate bonds to raise money for their internal investment and even for financing their own sales, financing their customers purchases rather than using the banks. This trend was helped by the intentional redistribution of money from workers and wage to the rich and profits. There was more money available to purchase corporate bonds.

What saved the banks was the widely profitable credit card business after the government effectively suspended usury. This also pointed the way for the banks to become even more profitable, by lobbying the government to allow it to.

Unfortunately, while it is true the banking business is a needed part of capitalism, it is part of overhead of capitalism and it burdens the productive economy. It stands today as the one business in the economy that has had negative productivity over the last hundred years. We pay more twice as much for banking financial services as we did in the early 1900's, in real terms.

 

[SimpleDon]

Some seem to be forgetting something. The '08 crash happened in large part because of:

1. DC didn't want to slow down the housing market as it was one of the only economy drivers at the time
2. The Fed Chairman thought he was a genius for creating what was obviously a massive inflationary housing bubble
3. Mortgage firms (small and large) selling short-term mortgages as long-term mortgages
4. Mortgage firms (small and large) having people lie about details on their loan application
5. Mortgage firms (small and large) were able to off load their risky loans as safe loans
6. Absolutely no oversight from ratings agencies
7. No where near enough liquidity to back up all of the loan

So the mortgage companies, big banks, ratings agencies, Fed, and DC were all asleep (or pretending to be asleep) at the wheel. We need to really look at the entire system.

Yes, you are largely right as far as you go. The obvious question that no one seems to ask is why did all of these things happen? What changed to cause these things to happen?

What caused the greater number of those things to happen at the same time was the invention of the tranced mortgage backed security. The idea that you could combine a large number of home mortgages together and that somehow the risky mortgages would become less risky. Then you could slice up the security into pieces across the whole and make them even less risky again. Your #5.

Then it dawned on them that they didn't have to slice across the whole because the same risk reducing magic would happen if they sliced across piece of the whole separated by risk. All of the risky, subprime loans were put together and then sliced up with only a small part of any one loan in each slice. And since the subprime trances carried the highest returns, they were the most popular, since there was no risk. Since they were so popular the originators were paid more for those loans and they were paid more the larger the loans were. Hence your #4.

Since the borrowers couldn't possibly pay back this high interest, large loan variable rate mortgages were written with a low initial fixed rate and for a short fixed term. Your #3

But of course, the returns for the mortgages were amortized across the entire term of the loan.

The deep dark unsaid reason that Wall Street considered the risk to be low on these loans was that they could foreclose on the house and turn around and sell it, the very definition of predatory lending. Why did this mitigate their risk? And why were people willing to sign for a loan that they knew that they couldn't pay back?

The same reason, because everyone knew that houses never go down in value.

This is what happened, of course, all of the money flowing into homes drove the prices up, a bubble, and prices did come down when the bubble popped and no one could sell and cover the loans, not the borrowers and not the banks.

Your #1, DC didn't want to dampen the housing market because it was driving the economy. Owning a home is a good thing, it is the way for most people to accumulate wealth. The important question is why was this asset bubble the only thing driving the economy?

Your #2, the Fed's role. Undoubtedly the Fed kept interest rates too low leading up to the 2004 election to help Bush's reelection. But the Fed did realize that the housing boom was turning into a bubble and that they did start raising rates after the election, but higher interest rates didn't dampen the boom. In fact the subprime damage was done in spite of relatively high rates. The important question is why the housing market didn't slow down in the face of increasing interest rates?

The answers to both questions in the above paragraphs is kind of the same and it requires me to beat a well worn solo drum. We have redistributed so much of our national income from wages, demand, to profits, supply, to supposedly drive the economy from the supply side. What has really happened is;

• The economy can now only prosper by building an asset bubble and by building consumer debt.
• The economy wants to be mainly demand, not supply, driven.
• Supply, capital, is now only money and the economy can produce as much as it needs.
• We stunted the demand driven capability of the economy by shifting so much money to the supply side because we did it by suppressing wages, the overwhelming source of demand.
• The housing bubble wasn't dependent on interest rates because the money that was being loaned was a part of this huge amount financial capital that has built up over the last thirty five years.
• Higher interest rates didn't deter the borrowers who were getting the low initial rates.
• Higher interest rates on the full term of the loans made them more attractive to investors, increasing the pressure to originate even more loans.

The failure of the Fed was in they assuming that the banks would self-regulate and pull back by themselves. The banks to avoid regulation were using third party originators like Ameriquest who were paid the same for a good loan as they were for bad one and had no reluctance to be predatory, to write loans that they knew couldn't be paid back. The Fed could have stopped this but they didn't.

It was made clear to the rating agencies that they wouldn't be hired if they came back with a low rating for the tranced mortgage backed securities. Your #6.

Liquidity is money and the problem was too much liquidity. You might have meant that there wasn't enough value in homes and not enough down payment to make the loans solid. Just a guess at your #7.

 

[ksen]

Bernies proposal:

He has proposed breaking up the nation’s largest banks, saying the six biggest ones wield too much control over the economy. He has also proposed barring banks’ chief executives from serving on the Federal Reserve’s 12 regional boards of directors, saying their membership on those boards poses a conflict of interest and undermines regulation of the financial services industry.

Does't seem like a bad idea to me.

Would also entertain a proposal to break up the 6 biggest bankers in the US.

 

[Jimmy Higgins]

Now for something completely different. The support of big banks? Big banks can handle losses, being big and all.

Between January 2000 and Jaunary 2008, 29 banks went under and required FDIC involvement. Since January 2008, 482 banks have failed. In general, in the calm years after the storm, about as many banks that went out in the 8 years prior to 2008 are going out annually.

 

[ksen]

Canada has its big five banks. Not a single one failed in the recent crisis.

And?

Why was Canada Exempt from the Financial Crisis?

If we break up our big banks, your large banks from Europe and Asia will come in to fill the void.

There are advantages to having large banks, especially with the size of the world economy.

What are the advantages and do they outweigh the disadvantages?

The problem comes when they are "too big to fail", there needs to be safeguards to protect taxpayers and the economy from financial system stress.

Keeping them from getting too big to fail in the first place seems like it would be a pretty good safeguard.

Also, isn't it a bit dangerous by barring bank executives all together from these boards? They have unique insight into the current practices of the industry and the "shadow banking" practices that fall outside current regulations. Without that inside knowledge being used to help inform policy and regulation, you'll be driving blind and be even more likely to miss the next big catastrophe that the career bureaucrats never even knew was an issue.

Where was all that inside knowledge that would allow us to not drive blind and miss the next big catastrophe before the financial crisis?

 

[barbos]

Bernies proposal:

He has proposed breaking up the nation’s largest banks, saying the six biggest ones wield too much control over the economy. He has also proposed barring banks’ chief executives from serving on the Federal Reserve’s 12 regional boards of directors, saying their membership on those boards poses a conflict of interest and undermines regulation of the financial services industry.

Does't seem like a bad idea to me.

It's a great idea.

 

[Loren Pechtel]

Some seem to be forgetting something. The '08 crash happened in large part because of:

• DC didn't want to slow down the housing market as it was one of the only economy drivers at the time
• The Fed Chairman thought he was a genius for creating what was obviously a massive inflationary housing bubble
• Mortgage firms (small and large) selling short-term mortgages as long-term mortgages
• Mortgage firms (small and large) having people lie about details on their loan application
• Mortgage firms (small and large) were able to off load their risky loans as safe loans
• Absolutely no oversight from ratings agencies
• No where near enough liquidity to back up all of the loan

So the mortgage companies, big banks, ratings agencies, Fed, and DC were all asleep (or pretending to be asleep) at the wheel. We need to really look at the entire system.

Fundamentally, the problem was reining in the out of control real estate market would have caused a recession. Thus everyone involved kept kicking the can down the road allowing the problem to grow bigger and bigger. It's the usual problem of people hoping the crash is on someone else's watch.

 

[Loren Pechtel]

So the mortgage companies, big banks, ratings agencies, Fed, and DC were all asleep (or pretending to be asleep) at the wheel. We need to really look at the entire system.

Well I'm just a biologist and my brother is just an arborist. But we saw the writing on the wall a couple of years before the whole thing came unraveled. We were both home visiting our parents in December 2006. In the 10 years since I had moved away, their corner of the county had filled with McMansions that were selling from the low 300s on up. There had not be nearly enough economic growth in the area to justify that market. We concluded that the whole thing was a charade and that as soon as a few ARMs sparked some defaults that the bubble was going to burst and leave banks holding a lot of worthless property. Neither of us could understand how banks thought it was a good idea keep writing loans for $400k to people making $50k.

Yeah. I saw it also and even about called the top of the market. I considered selling out but decided against it because I badly underestimated how bad the crash was going to be. Had we sold out and moved into a rental when I was thinking of it we would have ended up pocketing at least $200k.

Down here in FL I watched shitty houses in marginal neighborhoods sell for $80k in 2004, $120k in 2005, $180k in 2006. How could anyone with any economic knowledge think that was a real and sustainable value increase such they they'd buy securities backed by those mortgages? That isn't just dumb in my opinion. It is criminal.

I'm watching the same thing happen in China despite high down payment requirements.