Category Archives: Too Big to Fail

Financial Reform Destined To Fail, Top Federal Reserve Official Says

Reforms instituted after the financial crisis to prevent future taxpayer-funded bailouts are bound to fail and will likely be weakened within the next few years, the Federal Reserve’s longest-serving policy maker predicted Monday.

The stark warning, offered by Federal Reserve Bank of Kansas City President Thomas Hoenig, who’s been warning about the rise of too-big-to-fail banks for more than a decade, comes as international regulators finalize plans to increase supervision of and toughen requirements on the world’s largest banking organizations as a reaction to the global financial crisis. Rather than break up big banks, politicians decided to simply subject them to more oversight.

Yet debate rages as to whether the requirements are too tough, or not tough at all, and whether regulators will have the backbone to follow through on their commitments. Republicans in the U.S. House of Representatives are trying to dismantle the domestic financial reform law passed last year; banks are screaming that lending will dry up, inhibiting the anemic U.S. recovery; and on the global level, regulators from some countries where large banks dominate the national economy (and thus enjoy overt taxpayer backing) are trying to weaken international accords.

For Hoenig though, the choice is clear when it comes to what to do with the financial institutions that caused the most punishing downturn since the Great Depression: break them up into pieces that regulators can understand and provide a backstop to entities engaged in the so-called real economy — but allow those dabbling in more risk-laden activities to fail.

The Obama administration and Congress chose the alternate route in passing the Dodd-Frank financial regulation law. To Hoenig, they made a mistake.

via Financial Reform Destined To Fail, Top Federal Reserve Official Says.


Obama to Propose New Limits on Banks –

WASHINGTON—President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return, at least in spirit, to some of the curbs on finance put in place during the Great Depression, according to congressional sources and administration officials.

The past decade saw widespread consolidation among large financial institutions to create huge banking titans. If Congress approves the proposal, the White House plan could permanently impose government constraints on the size and nature of banking.

Mr. Obama’s proposal is expected to include new scale restrictions on the size of the country’s largest financial institutions. The goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces. It couldn’t be learned what precise limits the White House will endorse, or whether Mr. Obama will spell out the exact limits on Thursday.

Mr. Obama is also expected to endorse, for the first time publicly, measures pushed by former Federal Reserve Chairman Paul Volcker, which would place restrictions on the proprietary trading done by commercial banks, essentially limiting the way banks bet with their own capital. Administration officials say they want to place “firewalls” between different divisions of financial companies to ensure banks don’t indirectly subsidize “speculative” trading through other subsidiaries that hold federally insured deposits.

via Obama to Propose New Limits on Banks –

via Obama to Propose New Limits on Banks –

Trading Profits Up 11 Percent For Banks; JPMorgan Chase Leads The Way

Despite controversy surrounding the financial instruments known as derivatives — and legislation that might finally start to regulate them — the nation’s top five banks are, for now, maintaining their stranglehold on the derivatives market, accounting for 97 percent of the $204.3 trillion in total volume last quarter, the Office of the Comptroller of the Currency reported Friday.

The lobbyists for the nation’s biggest banks are fighting ferociously against legislation that would regulate the over-the-counter derivatives market. What is now essentially a market in which traders deal directly with one another would instead be diverted to public exchanges or other central facilities, though major loopholes remain.

Overall, the nation’s banks saw an 11 percent increase in their trading revenue last quarter, turning a $5.7 billion profit — their fourth-best quarter ever.

JPMorgan Chase led the way in the third quarter, making nearly $3.1 billion off its trading and derivatives activity, a 60 percent increase from the previous quarter. The banking behemoth has earned more than $8.1 billion trading thus far this year, already eclipsing its year-end totals for each of the last two years.

Goldman Sachs’s profits declined 37 percent to $691 million, due to big losses on its foreign exchange trading, according to the report. Those losses were hedged by profits on interest rate contracts, but they weren’t enough to make up for the substantial decrease in overall profits.

Citibank continues to lose money off its trading and derivatives contracts. The partially-taxpayer owned bank lost $211 million last quarter and $238 million in the second quarter, the report shows.

Bank of America made $467 million last quarter, a $650 million swing from its second-quarter loss. Wells Fargo, on the other hand, turned a loss, losing $78 million in the third quarter compared to its $306 million profit during the second quarter.

At Goldman Sachs, trading continues to make up a significant part of the banks’ profits. Trading revenue accounts for 59% of Goldman Sachs’ overall revenues, according to the report.

via Trading Profits Up 11 Percent For Banks; JPMorgan Chase Leads The Way.

via Trading Profits Up 11 Percent For Banks; JPMorgan Chase Leads The Way.

Keep Wall Street risks away from Main Street |

The four biggest banks — JPMorgan Chase, Citigroup, Bank of America and Wells Fargo –now control more than two-fifths of all bank deposits, more than 66 percent of all credit card accounts and more than half of all mortgages in the U.S.Unfortunately, they also run trillions of dollars in risky trading ventures that could blow up in our faces again.We need to keep risk where it belongs — on Wall Street — and security where it matters — on Main Street. That way, if the derivatives cowboys want to take obscene risks, they can but without driving the rest of us to the brink of financial oblivion.

via Keep Wall Street risks away from Main Street |

via Keep Wall Street risks away from Main Street |

A Practical Way to End “Too Big to Fail”

If forcing breakups isn’t realistic, what is? One solution is to simply give banks an incentive to downsize. Philip Purcell proposed a practical way to do so earlier this week in the Financial Times.

Purcell, if you’re curious, is the former chairman and CEO of Morgan Stanley (NYSE: MS), and an unsung hero in my book. In 2005, he was ousted primarily because he wasn’t willing to engage in reckless risk-taking. He understood how dangerous it was.

But swinging for the fences was fun back then, so Purcell was replaced with current CEO John Mack, who swung wildly. Risk-taking ratcheted up. Three years later, the firm was nearly bankrupt. A coincidence, I’m sure. �

The answer

Anyway, Purcell’s op-ed in the Financial Times recommends a doable approach to overcoming “too big to fail.” In his own words:

Smaller banks are now required to have 8 per cent tangible equity per dollar of assets (the leverage ratio). This stronger capital structure will reduce bank failures.

Too-big-to-fail institutions, however, should have a higher ratio of 10 to 12 per cent … The public bears the cost of too big to fail. Since capital is the public’s main protection, it should be high.

via A Practical Way to End “Too Big to Fail”.

via A Practical Way to End “Too Big to Fail”.

McCain and Cantwell Want a New Glass-Steagall Law | Newsweek Voices – Michael Hirsh |

The blinding complexity and interconnections created by modern capital markets—especially because of the way nearly half a trillion dollars in derivatives trades linked the firms to each other—demanded that there be strong firewalls and capital buffers between Wall Street institutions and their affiliates, and between banks and nonbanks and insurance companies. Otherwise there would be no islands of safety—no healthy institutions left to come and rescue the day, as commercial banks traditionally had done since the days of J. P. Morgans famous bailout in 1907. The repeal of Glass-Steagall took things in precisely the opposite direction, eliminating most of the firewalls and inviting staid commercial banks into the buccaneering world of Wall Street trading. Representative Hinchey says it “was a recipe for disaster because these banks were empowered to make large bets with depositors money, and money they didnt really have. When many of those bets, particularly in the housing sector, didnt pan out, the whole deck of cards came crumbling down and U.S. taxpayers had to come to the rescue.”Today the walls between firms still seem low indeed, and trading in derivatives that are “over the counter” that is, out of public sight continues at an astonishing pace, having risen back up to nearly $600 trillion worth. One big danger sign ahead is that the biggest banks have gotten even bigger in the aftermath of the catastrophe, and under the new rules requiring swap dealers to post capital for margin requirements, the big banks are likely to monopolize even more of this derivatives market and become that much richer and more powerful.

via McCain and Cantwell Want a New Glass-Steagall Law | Newsweek Voices – Michael Hirsh |

via McCain and Cantwell Want a New Glass-Steagall Law | Newsweek Voices – Michael Hirsh |

Big Banks vs. Small Banks — Seeking Alpha

Big banks, in general, seem to be doing very well;

Small- and medium-sized banks, in general, are not doing so good.

This presents quite a dilemma for the Federal Reserve. The bailouts of the big banks have seemingly worked. The big banks were saved from the systemic risk that existed within the financial system (yes, Mr. Goldman Sachs (GS), you too would have failed if we had done nothing—Tim Geithner) and are now doing quite well. The Fed’s policy of keeping short term interest rates close to zero seems to be lining the coffers of these banks in record amounts.

The small- and medium-sized banks are another issue. These organizations, on average, do not seem to be making profits yet. Their loan losses really seem to be piling up and more is going to be asked of them in terms of reserves in anticipation of further losses. External capital does not seem to be readily available to them. And, they have more than 25% of their assets in cash and securities to help them through this period and to be able to pay off their own debt as it matures.

The Federal Reserve must take the condition of these smaller banks into consideration when considering a way to “exit” from its bloated balance sheet. Too quick of an exit could just exacerbate a situation that is already taxing the resources of these institutions.

via Big Banks vs. Small Banks — Seeking Alpha.

via Big Banks vs. Small Banks — Seeking Alpha.