The Battle for Bank Reform Begins Now

One day after the loss of Ted Kennedy’s senatorial seat to the Republican Party, President Obama has turned his administration upside down. Thrust into the background on economic and financial matters are his Secretary of the Treasury and chief economic adviser ”“ Timothy Geithner and Larry Summers. Resurrected from policy limbo is Paul Volcker, who has been counseling a completely different approach to the banks.

Obama has a reputation for a cool demeanor and deliberate, consultative decision making. Unless he is acting out of character, this change is not a panicky reaction to the Massachusetts election. He’s thought it over, discussed it at length with his advisers, and used the loss in Massachusetts as an opportunity to announce this about-face. On the other hand, senior Democratic leaders in Congress seem not to have been aware of this policy shift, and there are many critical details not yet thought through or announced by the Administration, making it difficult to judge whether Congress will even pass enabling legislation.

One thing stands out for sure. The liberal wing of the Democratic Party has been calling all year for Obama to get tough on the banks and stop feeding them bailout billions. Month by month, the banks have benefited from taxpayer largesse, built up their profits and bonus pools, and politely attended White House meetings without making any commitment to changing their behavior. In fact, in one instance several bank CEOs didn’t even bother to show up at a meeting Obama himself chaired. The President, in short, has been dissed by the big banks, and today was the first time that Obama acted in frustration at this behavior. In so doing, he sided with the liberal wing of the Democratic Party, and judging from many public opinion polls, he sided with an angry and disillusioned public.

This may or may not put to rest an argument that has been begun within the Democratic Party over the correct interpretation of the Massachusetts results. Blue Dog congressmen and turncoat independents like Joe Lieberman insist it is time for the party to move to the ”œmiddle”, which usually means start negotiating with the Republicans on their terms and ultimately give in to them. Liberals, and now Obama seems to be acknowledging this, say that the voters are furious over the administration’s constant concessions to the banks while the average person is suffering grievously in this recession.

You’ll read and hear from the pundits in the media that Obama has nothing to lose by taking on the banks. This is a concession to the liberal view that the bank bailouts and their subsequent profits and bonuses are terribly unpopular in the country. In fact, one thing that may tie together the Tea Party activists and the liberals is their fury at the banking industry. Obama therefore has a chance to buttress his dwindling support among liberals, and at the same time at least neutralize some of the disdain he receives from the Palin-Limbaugh-Hannity wing of the Republican Party.

He has another hurdle to overcome, however, and that is the gulf that tends to exist between his rhetoric and his actions. President Obama has disappointed his supporters time and again with actions that are completely different from what he promised in the campaign. For the moment, we have only a broad outline of what this banking reform proposal is, and we don’t know what the inevitable pushback is going to be. We only know that Obama is aware he has a big fight on his hands over any banking reform, and that he says he relishes the battle.

He has a chance with this struggle to establish his bona fides as a politician, or dare we say a leader, who has the interests of the average person at heart before those of corporations and fat cat lobbyists. Just think, though, of the forces that will be arrayed against him. He will be taking on powerful Congressional committee chairmen who derive their power, and most importantly their campaign contributions, from the financial industries within their committee purview. They have their potential survival in Congress at stake if they offend the banks.

Coincidentally, the Supreme Court today granted extraordinary powers to corporations to advertise and potentially determine the outcome of elections. Citigroup, JP Morgan Chase, Goldman Sachs and other banks flush with taxpayer bailout money can now spend it on endless commercials opposing any banking reform. They can also target any Congressman who supports such reform, and make Obama’s life doubly difficult.

To win this fight, Obama is going to have to corral all the major Congressional committee chairs into his corner. He will have to give them simple, understandable talking points describing what he wants to accomplish, and it will be important they all stay on message. He will have to show that banking reform is essential for economic recovery. He will need to brush any Republican who instinctively says no to any reform initiative as a corporate tool and enemy of the people. He should already have the Democratic Party, as of this morning, preparing a multi-million dollar campaign budget for commercials damning the banks, and spelling out the importance of his reform program. He will have to show leadership, leadership, leadership ”“ something not much in evidence so far in his presidency ”“ and he will need to do all this while worrying about health care, wars in Iraq and Afghanistan, unemployment, foreign crises, and deficit spending. He will need to understand he is in a fight for his presidency.

One good thing in his favor is the simple fact that we are not talking about the banking industry as a whole in this reform effort. We can count on one hand the banks involved: JP Morgan Chase, Citigroup, Bank of America, Morgan Stanley, and most of all Goldman Sachs. The stocks of all of these banks took a beating today, though interestingly Wells Fargo did not, because the stock market was busy buying the regional banks that they think are going to benefit from breaking up the big banks. Wells Fargo does not have the deep bond trading, securities issuance, asset management, proprietary trading, hedge fund, and leveraged buyout businesses the other banks have and which puts them in a league all their own within the financial industry.

In its essence, it appears the Obama reform initiative is going to give these big banks a simple choice: if you want to stay a bank, as members of the Federal Reserve System with access to taxpayer funding and bailouts, you must get rid of all of these extraneous investment banking businesses. This is very much in keeping with the philosophy of banking Paul Volcker has always had: if banks are going to be protected by the public purse, they are going to be fundamentally in the business of making loans to businesses and individuals, and managing their credit risks with great prudence and under strict regulation. There is no room in this philosophy for proprietary trading, securitization schemes, derivatives innovations, or hedge fund activity.

Of all the big banks, the one that stands in a class all its own is Goldman Sachs, which has refused to do any lending despite now being a bank, and which is really a massive hedge fund with enormous funding and informational advantages as a bank. Goldman Sachs stands to be booted out of the banking universe and left to fend on its own without any government apron strings, so it’s no surprise their stock was down over 4% today.

Reforms of this nature are very much like restoring the Glass-Steagall separation of commercial and investment banking. In addition, the concept of limiting the size of the big banks through controls over their deposit taking activity will have enormous consequences, because it says that these banks will no longer be in the business of growing through buyouts of other banks. This will strike at the core function of the hedge fund industry, which relies for its leverage by borrowing enormous sums from big banks. Similarly, the leveraged buyout industry and its rapacious appetite for equity extraction will be constrained in a world of small banks.

We are already hearing criticisms of this reform initiative being expressed by various business reporters and commentators. It is said that banks cannot differentiate proprietary trading from their trading activity with their customers, which often requires the bank to maintain some position in the market. This is merely a canard. It is simple work to insist that any trader be connected to a team of marketers funneling customer business to the trader, and that trading positions be limited to a certain size and maturity and maintain a defined percentage of business relative to trades done for customers. Proprietary trading desks have none of these features and can easily be shut down without any consequence for the bank’s customers.

A more serious criticism is that corporations do need big banks to handle the financing of mergers and acquisitions. It is going to be the case that some of these deals will not be done in the future if Obama’s initiatives take place. It should be asked, though, whether the economic consequences of smaller and fewer mergers and acquisitions is all that great. Most of this business in the past decade has involved enormous amounts of debt that now we find cannot be paid back. It may be a good thing if companies were limited to mergers and acquisitions that were paid for mostly by cash.

What is ironic about this reform program is that these changes are inevitable anyway. The big banks have destroyed their franchises, and with this they have closed down or severely crimped the hedge fund and leveraged buyout businesses, which rely on high amounts of leverage. The banks are going to take years to recover their ability to lend billions of dollars in a single loan, and they are not going to be able to revive the securitization business except for the sorts of deals which are demonstrably of high credit quality and low risk.

Goldman Sachs has its own troubles to resolve. Traditionally this firm was managed by the investment bankers, but ten years ago management power shifted for the first time to the traders. Lloyd Blankfein is the first CEO to come up through the trading side. Trading represents around 75% of annual revenue at Goldman Sachs, but the cost to their franchise has been so high that they are facing the choice of going off into the wilderness as a hedge fund, or restoring their firm to a traditional investment bank. It will be interesting to watch them resolve this conflict.

Unsaid in these proposals is anything about the future role of the Federal Reserve. The public lumps the Fed in with the banks and the administration as all part of the financial industry complex, but the Fed is in a peculiar position all its own. It is not part of either the Executive or Congressional branch, and has always operated independently and secretly. Many of the bailout actions taken in 2007 and 2008 were done with some consultation with the Treasury Department, but largely as independent initiatives of the Fed.

President Obama is going to have to figure out how to influence the Fed. He has already reappointed Ben Bernanke to the chairmanship of the Fed, and unless he quickly withdraws that appointment he is going to be saddled with someone who acts on his own. Moreover, there is growing evidence that Bernanke doesn’t really have the competence for the job. He gave a speech a week ago insisting that the Fed’s low interest rates in the early 00’s did not contribute at all to the housing bubble. You can bet any amount that Paul Volcker thinks this idea is completely fatuous.

Finally, looking at all this with a long term perspective, Barack Obama has just taken away the biggest credit punch bowl ever placed before the American public. For almost 25 years US companies and consumers have feasted on a cornucopia of cheap credit, accentuated by securitization, derivatives, home equity lines of credit, and other tools that made it impossible to resist taking on debt. The public became gluttonous and we are now suffering the consequences. Every instinct and every action so far of men like Ben Bernanke, Timothy Geithner, and Larry Summer has been to restore that cornucopia to its ”œrightful” place at the center of the economy. What Barack Obama, and in particular Paul Volcker are doing is bringing the economy back to a simpler time. They are doing this because they perceive they have to, and because they can. The amount of credit circulating in the economy is a fraction of what it was two years ago, so an idea that would have been deemed crazy and irresponsible in 2007 is now possible and rational today.

Even though these ideas are certainly going to come to pass over the next 10 ”“ 15 years, because the US simply has no more room for debt binges, Barack Obama has now set the stage for a more rapid change. He will be able to define the debate over what banking should be in this country (and all other countries will be taking cues accordingly), but he will have to fight aggressively and cleverly because the big banks have no intention of going into a quieter and far less lucrative world unless they have no choice.

Nor does President Obama have any allies of importance in this fight, unless you count ourselves, the voters. The public needs President Obama to show guts and leadership, but he in turn needs an outraged public to keep the pressure on Congress and the media. This is a battle that will define our economic circumstances for the next 25 or 50 years. Does the US have what it takes politically to do what our ancestors in the 1930s did after learning the same bitter lessons we are experiencing every day?

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Numerian is a devoted author and poster on The Agonist, specializing in business, finance, the global economy, and politics. In real life he goes by the non-nom de plume of Garrett Glass and hides out in Oak Park, IL, where he spends time writing novels on early Christianity (and an occasional tract on God and religion). You can follow his writing career on his website,

25 CommentsLeave a comment

  • Here’s what I heard Barney Frank say on Rachel Maddow’s show about

    “Coincidentally, the Supreme Court today granted extraordinary powers to corporations to advertise and potentially determine the outcome of elections.”

    Free speech has consequences.

    Barney suggested removing corporation privileges, granted only by law, such as their limited liability.

    As I understand his suggestion it could be, “You can have free speech, with unlimited liability. The management and shareholders would now become liable for the corporation’s activities.”

  • I hope it’s practical.

    I also liked Warren Buffett’s proposal today that any CEO of a bankrupt company lose the entirety of his fortune and that of his wife (so he can’t shelter assets). I think, though, he meant to say spouse. We can’t leave out people like Carly Fiorina.

  • equivalence? Could Congress do it? Could the President do it? Who decided, at some point, that Corporations have the rights people have? Were these elected officials? Can it be reversed???
    Does anyone know the history of this? I know, I can Google it, but I trust more somebody here who may have spent some time researching this.

  • Sonia Sotomayor has indicated that perhaps that decision should be revisited.

    But Justice Sotomayor suggested the majority might have it all wrong — and that instead the court should reconsider the 19th century rulings that first afforded corporations the same rights flesh-and-blood people have.

    Judges “created corporations as persons, gave birth to corporations as persons,” she said. “There could be an argument made that that was the court’s error to start with…[imbuing] a creature of state law with human characteristics.”

    This straight dope column suggests that the Supreme Court never actually ruled that corporations are persons, but an enterprising court reporter / clerk inserted it in the ruling. It seems that the court didn’t object to the idea, though.

    We’ve dealt with some weird topics in this column–quantum mechanics, penile lengthening, Circus Peanuts. But for my money the personhood of corporations proves there’s nothing so strange as the law.

    Most people have a general idea what corporations are. Some may even know that, for most of U.S. history, corporations have been considered “artificial persons.” The concept isn’t as nutty as it sounds. From a legal standpoint, corporations can do many of the same things that natural persons do–buy and sell property, hire and fire, sue and be sued, and so on.

    What most people don’t know is that after the above-mentioned 1886 decision, artificial persons were held to have exactly the same legal rights as we natural folk. (Not to mention the clear advantages corporations enjoy: they can be in several places at once, for instance, and at least in theory they’re immortal.) Up until the New Deal, many laws regulating corporations were struck down under the “equal protection” clause of the 14th Amendment–in fact, that clause was invoked far more often on behalf of corporations than former slaves. Although the doctrine of personhood has been weakened since, even now lawyers argue that an attempt to sue a corporation for lying is an unconstitutional infringement on its First Amendment right to free speech. (This year, for example, we saw Nike v. Kasky.)


    When the case reached the Supreme Court, Chief Justice Morrison Waite supposedly prefaced the proceedings by saying, “The Court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution which forbids a state to deny to any person within its jurisdiction the equal protection of the laws applies to these corporations. We are all of the opinion that it does.” In its published opinion, however, the court ducked the personhood issue, deciding the case on other grounds.

    Then the court reporter, J.C. Bancroft Davis, stepped in. Although the title makes him sound like a mere clerk, the court reporter is an important official who digests dense rulings and summarizes key findings in published “headnotes.” (Davis had already had a long career in public service, and at one point was president of the board of directors for the Newburgh & New York Railroad Company.) In a letter, Davis asked Waite whether he could include the latter’s courtroom comment–which would ordinarily never see print–in the headnotes. Waite gave an ambivalent response that Davis took as a yes. Eureka, instant landmark ruling.

    They sicken of the calm, who knew the storm.

  • Someone read your previous article.

    No more binges because that leads to purges and those are simply too painful to endure, if this is an indication.

    I appreciated your comments on M&A. What are the discernible benefits to the acquired firms and their customers? I’ve never seen any data on that. I was privy to some internal data on a former mega firm that got merged out of existence. It showed the acquired entities and outcomes. The success rate was paltry, at most.

    While mergers and acquisitions have their place, I suspect that the effort can be handled in some way without buying the entirety of the current system.

  • The return to shareholders is low single digits at best, but often negative looking out five years after the event, and judging just by where the stock price goes relative to the industry.

    When it comes to structured buyouts, this is an industry worthy of a Congressional investigation, but unfortunately the issues are probably too complex. The degree of equity extraction gussied up as cleaning up a poorly run firm is overwhelming. Most of the victim firms are not poorly run but are in tough competitive situations. The buyers loot the retained earnings and pension plans and anything else they can liquidate, and they load up the firm with debt and then extract dividends immediately for themselves. It’s disgusting this is allowed to go on and be called capitalism. This business needs to be highly regulated, including when the big banks do it. I see no evidence Washington even understands what damage has been done here.

    Maybe the market is about to extract justice on these guys. A few of them have been using the market rally to unload some of their dogs, even if they don’t get their usual 25% p.a. return. Let’s say Robert Prechter is right and the Dow is heading to 400 in the next few years (yes I know it sounds preposterous but I’ve learned not to dismiss him). The structured finance and leveraged buyout guys are going to be devastated and many wiped out. It will restore my faith in the markets and tell us that no one can legitimately make 25% returns year after year – there is ultimately a balancing out.

  • The compromise made with conservatives in 1868 to pass the Fourteenth Amendment that freed slaves, also ‘liberated’ corporations and made them persons as well. The door opened a crack at that time, and it was not clear whether corporate personhood extended to the Bill of Rights, but it did meant that their Charters were made permanent.

    The decisive case was an 1886 Supreme Court case called Santa Clara County v. Southern Pacific. That decision gave corporations protections of the Bill of Rights.

    Huge strides were made in the 1970s through Supreme Court rulings that awarded them Fourth Amendment safeguards against warrantless regulatory searches, Fifth Amendment double jeopardy protection, and the Sixth Amendment right to trial by jury. These blunted the impact of the Clean Air Act, the Occupational Safety and Health Administration Act, and the Consumer Product Safety Act, which were enacted to protect workers, consumers, and the environment.

    This is the first time it extended to rights of political speech as persons.

  • Huge strides? That almost sounds like an endorsement.

    And the Fourteenth was not intended to liberate corporations – rather to define the relationship between state and natural born citizens qua their role as citizens. In this respect another perverse reading extended that amendment to the relationship between state and its workers.

  • I understand the impulse of separating the banks from private equities and hedge fund capital, and those kinds of investment banking markets. However, this was a secondary result of the banking crisis in my view.

    Is this the right target? Not that I don’t agree that “casino” banking chould be limited again with a sort of Glass-Stegall lite which is what Volker calls it. But the banking crash was actually the result of firms that did not take any deposits, like American International Group and Lehman Brothers. Most losses were not related to equity trading or hedge funds (at least the impetus of the collapse). The collapse was outright bad lending with privately raised capital(think of Washington Mutual, Wachovia and HBOS).

    How can that be controlled? This was where the crisis originated, and public money was not involved.

    AND I still want to see anti trust. The way to prevent too big to fail is to prevent ‘too big.’ I also think that investment banks have to be required to maintain higher equity to at-risk-capital/investment ratios similar to their bank counterparts.

    I am interested in your thoughts.

  • NYT Blog – Various news reports that Tim Geithner is privately opposed to the new Obama bank plan — which isn’t that much of a surprise, but he should not be talking about it (if he is).

    What we do have is this PBS interview, in which he certainly isn’t doing much to back the concept. The correct answer to “In essence are you saying that big banks need to be broken up” is “Yes”; add some qualifiers if necessary — “we’re not talking about a sudden disruption, but about new rules of the game, but the eventual goal is smaller banks that aren’t engaged in inappropriate activities” or something like that.

    As it was, Geithner might as well have had a chyron underneath as he spoke, with the words DON’T WORRY, WE’RE NOT GOING TO TAKE ANY REAL ACTION.

    I don’t know what’s really going on here, but Obama needs to find some officials who can talk about taking on Wall Street as if they mean it.

    comments at link

    The origin of the universe has not as yet been shown to be a conspiracy theory

  • So, this key point, which is one of the threats to our democracy, was all started by a freaking clerk? Of course, if the Supreme Court took the issue on now, they would not change anything.

  • It is perhaps the Achilles heel of American Democracy. This reading of the constitution could destroy the ability to elect leaders.

    Sotomayer by the way has it spot on. One of her remarks was very apt. I paraphrase, but she said something on the order of, “We all have to recognize that a corporation is not a person.”

    Here is the quote:

    Sotomayor suggested the majority might have it all wrong — and that instead the court should reconsider the 19th century rulings that first afforded corporations the same rights flesh-and-blood people have. Her quote: “Judges created corporations as persons, gave birth to corporations as persons. There could be an argument made that that was the court’s error to start with…[imbuing] a creature of state law with human characteristics.”

  • The epicenter of the financial crisis was what the public calls Wall Street, but this meant different things ten years ago than now. Under Glass-Steagall, the ability to take in deposits was a hallmark feature of commercial banks, which then made loans to businesses and consumers and for the most part managed credit risk. Until around 1995 there was no such thing as a chief risk officer in a bank – just the chief credit officer, since that encompassed 90% of the risks.

    In the 90s things got blurry. Merrill Lynch had developed the money market account, a quasi bank checking and savings account that lacked FDIC insurance but made up for it with private insurance. This allowed investment banks on Wall Street to expand through a stable source of funding, and even to engage in lending to companies, previously a no-no. I remember when Merrill set up a credit department complete with a chief credit officer to arrange an approval process for the loans being made.

    By the same token, Bankers Trust and JP Morgan encroached on Wall Street’s territory by commencing underwriting activity for corporate bonds. Citibank and others joined this process, and also began selling their own securities backed by credit card and auto receivables. Now the big commercial banks were heavily into bond issuance, plus helping clients with mergers and acquisitions.

    Big banks were also buying each other up. Chemical bought Manufacturers Hanover, then Chase, which purchased JP Morgan and then Bank One, and so on. By 1999 there was a highly concentrated industry of commercial banks butting up against the remaining investment banks, and Glass-Steagall was thrown out by Congress partly on the grounds it was already redundant.

    This set the stage for a securities issuance free-for-all in the 00’s, with collateralized debt and loan obligations being prominently featured and useful tools to pump up the housing bubble. It is true that the bubble began earlier by Fannie and Freddie pretending to be central banks and guaranteeing trillions of dollars of mortgage securities, but they were both forced out of business in 2004 over accounting irregularities. The bubble would have died then and there if Wall Street hadn’t stepped up and replaced Fannie and Freddie. The way they did it wasn’t to guaranty the mortgage-backed securities, it was to get Aaa ratings stamped on these securities like an alchemist converting dross to gold. Credit standards completely collapsed in 2004 because the investment banks didn’t have to care about credit risk; after 90 days of sale they were legally off the hook for whatever went wrong with these securities.

    This period from 2004 to 2007 was critical to topping off the housing bubble with trillions of dollars of bad securities masquerading as Aaa paper as good as Treasuries. The largest players were Goldman Sachs, Merrill Lynch, Lehman Bros., Bear Stearns, Morgan Stanley, Citigroup, JP Morgan Chase, and Bank of America. Mortgage issuers like Countrywide and Wsshington Mutual fed their mortgages into the Wall Street machine for packaging into blue chip bonds sold around the world.

    Then the music stopped. Defaults on the underlying mortgages began appearing in 2006 and really accelerated into 2007. The secondary market for these instruments dried up and their value, always tricky to assess because of their complexity, fell to pennies on the dollar. This bankrupted two Bear Stearns mortgage securities funds, and the game was over.

    I’m giving all this history because of the need to understand who the players were when the liquidity crisis hit in 2008. At that time there was a flaw in the US financial system that was exposed. When liquidity is scarce, everybody wants to “run to Mother”, as Paul Volcker has quaintly put it for many years. This means rely on the Fed and thus the taxpayer for back-up lines of credit to get through the crisis. Except the traditional Wall Street investment banks had no such access.

    When this access was denied to Lehman Bros., they were defunct within a day. That left three big investment banks standing. Merrill Lynch, which was crippled by a huge portfolio of mortgage-backed securities, was pushed into the safe arms of BOA. Goldman and Morgan Stanley were given banking licenses and unlimited access to Fed liquidity, which saved their hides.

    The Fed may have saved the day for the markets and stopped a panic, but it created a significant structural problem in the financial world. The two new banks weren’t commercial banks and it would take a long time to get them to look like real banks. Goldman Sachs made it clear it was happy with all the benefits of being a Fed member, but had no intention of turning itself into a commercial bank.

    I have long felt that this was a festering sore that had to be resolved eventually, if only because Goldman Sachs now had a means of minting money with cheap deposits and zero interest rate financing from the Fed, but it was in reality a hedge fund earning up to 30% ROEs. Goldman Sachs and Morgan Stanley if it wished (it didn’t) could trounce any of the other big banks in performance terms, and at the very least could pay their people like princes even though they were now lowly bankers. I was often surprised that someone like Jamie Dimon didn’t complain about this, but maybe that was going on behind the scenes or maybe these changes were too abrupt and not easy to digest. Sooner or later, this anomaly would need to be resolved.

    I thinker Volcker understands this with complete clarity. I think from his speeches he deeply resents the buccaneering attitude of GS, some of which is shared by JP Morgan Chase investment bankers and the old Merrill crowd at BOA. From a policy perspective, he must see great danger in allowing the public purse to be held hostage by people trading gigantic amounts for their own firm’s gain.

    So to go back to your original question, the financial crisis was brought to a boil, as was the housing bubble, by Wall Street, not hedge funds, not private equity (though these sectors benefited tremendously from the housing bubble). Now we have to figure out what we mean by Wall Street, and in a pure sense Volcker would say we mean taking deposits and lending only, like in the 1970s and 1980s. That means that Goldman Sachs has to decide what it wants to be: a commercial bank and Fed member, or a hedge fund on its own for funding and no backup in a crisis. Similarly, JP Morgan Chase and the other big banks have to either carve out the parts of its business that are like Goldman Sachs, or sell its banking license to someone else. Like I said, this is going back to the 1980s, which was also a much smaller economy with less credit needed or available. Under Obama/Volcker, we are institutionalizing the existing credit crunch by disallowing the revival of the credit machine that fueled the housing bubble, whereas for Bernanke and Geithner this is the core of their actions all last year.

    How do you prevent another Washington Mutual or AIG? There is an indirect answer only: eliminate Too Big To Fail. In other words, regulators should never be in a position to have to worry whether AIG’s collapse will bring down any US bank. No bank should be so big it will drag down another, and no bank should have exposure to an AIG that is so large it drags down the bank. If they do, let them fail, like Continental Illinois did when it was over-exposed to the oil industry and collapsing energy prices.

    This too I suspect would be Volcker’s answer to systemic risk and TBTF. If you don’t allow banks to jeopardize the system, and if you do allow them to fail, you have all the credit discipline you need.

    Finally, you mention higher equity to capital ratios for investment banks. This points to a serious flaw in the Obama/Volcker plan. If Goldman and Morgan Stanley revert to investment banking licenses, their existing regulator, the SEC, is too weak to monitor them. The SEC was deliberately stripped by Bush of all of its talent – it used to be a formidable adversary for the investment banks – and it might take up to 20 years to develop that depth of expertise again. I am waiting to hear how these investment banks are going to be regulated if they are thrown out of the banking system and the Fed’s arms.

  • After the advertising blitz everyone in America will be pro big bank. Obama will be anti investor and anti growth. That’s how easy it is to manipulate the public.

    The tea partiers will be calling hands off my lender. News stories will show that banks actually were not the cause of the crisis.

    Still not feeling very hopeful. If they can kill health reform and convince people that the status quo is better. Think of the corporate money that can be out there now.

  • I was involved in a company that tried to create and market internet and CRM oriented software for banks back in the 90s. We did not do well with that initiative because of the consolidation. Who would try to write and sell software to an industry that is consolidating? It is a loosing proposition for anyone trying to sell tools and systems. Take a look at banking software today. It runs on old very expensive proprietary architectures.

  • I have to agree. Every new move they make is designed to help the cancer metastasize more completely.

    As long as a few super wealthy individuals and corporations can choose government policy, pick the president and candidates, and shut out smaller businesses and private citizens, we will degrade back into a more oligarchic society characterized by a huge gap in the classes, and a resulting degradation of our lifestyles, education levels, and personal freedoms.

    So far, everything I have seen the politicians doing is designed to create exactly that kind of society – one where you and I are shut completely out of the process, while being lied to and fed junk information and junk food.

    If you want to see how our government is going to run, I’d suggest studyng Wal-Mart. The big corporate guns all seem smittten by the fact that Wal-Mart remains profitable.

    The cost in human terms simply doesn’t figure into the equations.

    After we choose a few McPresidents from the spread of McCandidates we will be blitzed with, we’ll have McGovernment.
    Most of the citizens will be humping at the counters for super-low wages.

    And the TeeVee will be blasting at us 24/7 about how free we are. Don’t like how broke you are? No problem, sit your ass on your thrift-store-bought couch with your Doritos and Budweiser, watch Girls Gone Wild, and fugettaboutit until you pass out and have to get up and go to your McJob again in the morning.

    Ah, freedom!

  • I’m in the software industry… and I don’t know much about the nuances of finance, but Mergers and Acquisitions seem to work fairly well in my industry. They take one of three forms:

    1. Large firm buys small firm with good technology, which then uses the large sales/marketing/customer advantage to get the products into more hands. This is the best kind… favored by Microsoft, Google, Apple, occasionally Oracle and IBM.
    2. Large firm buys a firm with mediocre technology but a good “support” revenue stream… They fire most of the R&D team, keep around the support team, absorb anything else worth keeping. This is the Computer Associates model, and it’s reasonably safe and cheap.
    3. Large firm buys out competition, shuts down development, and encourages existing customers to switch… ala Oracle buying Peoplesoft, or IBM buying FileNet.

    I’ve never looked at the hard numbers, but all 3 do seem to create shareholder value… is software an odd industry? What’s it like in others?
    Of COURSE you can trust the US Government! Just ask the Indians.

  • Mergers fail 83% of the time:

    A review of the academic literature:

    A CNN report:

    The tech industry does not appear to be much different from other industries in their merger results. However, your first example involving a Microsoft takover of a small firm with attractive technology I would think has a better chance of success than most acquisitions.

  • he wouldn’t have hired Geithner in the first place. It sent the wrong message, ushered in failed policies, and puts someone in charge whith a demonstrated record of incompetence. Disloyalty on top of it all … I suppose he’ll continue to undermine any efforts Obama makes that might benefit the people. What a sad excuse for a government we have.

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