Regulatory Relief for Banks that Rarely Fail. Why the Red State Rep Inaction?

You would think the Regulatory Relief For Banks that Rarely Fail proposal from former FDIC Vice Chairman Thomas Hoenig would have a gotten an enthusiastic reception in Congress from Red State Representatives working to favor community banks with simple regulation and devote the Dodd Frank burden on to the Wall Street behemoths with huge derivative and trading positions to defend. Not sure how Jeb Hensarling, chairman of the House Committee on Financial Services and Ted Cruz supporter, defends the inaction unless the financial lobby has him in their pocket. Congressman Jim Himes, Democrat of Hedge Fund Fairfield County Connecticut and minority member of Jeb's committee, has been contacted on this issue with no answer, but as a former Goldman Sachs executive we know where his heart is.    

Reduce Dormant Assets and Banks from Playing with Each Other

"Fed Proposes Rule Capping Business Among Banks" is a patch for an unwieldy operating system.  A simple rewrite would be for the Federal Reserve to require banks which control assets greater than 1% of the Gross Domestic Product to split into entities where they all control less. With less concentrations of dormant assets there is less for banker's to use to make derivative contracts.  

Stock Market is Rational Valuing Citigroup at 61% Fictional Book Value

That uncomfortable position is where some of the nation’s largest banks currently stand. For example, Citigroup shares are trading at 61 percent of its tangible book value, a measure of a bank’s equity that excludes items that are difficult to assess, like good will. And Bank of America stock trades at 75 percent of its tangible book value, down from a slight premium late last year.

Fictional Book Value, FBV, inaugurated here today.

Negative Interest Rates in Japan means the bad assets haven't cleared

Its darkest before the dawn but this More Americans Quitting Jobs as Labor Market Tightens headline is a very positive indicator for our economy and wage growth.  The bad assets swept under the rug with TARP have mostly cleared while those in Japan twenty five years ago have not.  Add Fukishima and the trashing of the country's nuclear utility investment and you have a mountain under a rug of denial.

Don’t Break Up the Banks so the Boys can keep on Playing with Themselves?

Financial institutions; banks in particular, require collateral to manage risk.  An unlimited stream of collateral deemed risk free fueled a growth in assets under management to a point where these banks are less efficient at allocating capital. To Big To Fail banks should be broken up into entities with less than one percent of GDP in assets under management to bring them back to their real purpose, which is to gather savings for real capital investment. Currently derivatives and the like are the investments the boys play at and our thirty year record of wealth and income concentration the result.   

Subprime Reasoning

Subprime Reasoning on Housing is a title that says it all for the argument David Beckworth and Ramesh Ponnuru  put forward of tight money causing the 2008 Great Recession. Its a macro view that believes a little adjusting of interest rates which were at a historical low of 2% was going to turn around "The Big Short's" well described bubble of fraud saddling the nation's families with mortgages that were impossible to pay off.

As a side note, another case of subprime reasoning is Paul Krugman's "Passive-Aggressive Two Step" blog post regarding Milton Friedman and Anna Schwartz's criticism of the Federal Reserves inaction in The Monetary History of the United States.  Monetarist are critical of the Fed for not being the lender of last resort so that banks failed and money contracted with a downward spiral into complete depression during the years 1931-33, well after the 1929 crash and the asset deflation. Krugman's dogmatic perspective to explain the facts unfairly is beneath a scientist and a Nobel Laureate, remember Milton got his long before and for enduring work; not so for Krugman.

Ratings Agencies are Conflicted

Gretchen Morgenson's Still Missing the Mark on Ratings brings into question whether the rating agency impartiality problem has been solved. As long as the agency's customer is the one asking for the rating there will be a conflict of interest.  Furthermore the requirement that an SEC approved rating agency be used to certify the credit worthiness of an instrument makes it all the more damming.

A Banker Who Eats What he Kills does more for the Public Good than a Fat Cat on Top of a Pile of Assets

A Personal Touch Lets Wall Street Boutique Banks Run With the Big Dogs is a headline that brings up a previously suggested law to split financial institutions into Not Too Big To Fail companies.   As explained before these splits could be inexpensively done by distributing shares of the different new entities to the shareholders of the original big company, very much in the same manner that the Bell Telephone company was split off into the various “Baby Bells”. Afterward consolidations up to one percent would be  allowed but the rule would further require that those who grow to 1.5% of assets to GDP would have to split again.  Such a rule would have many beneficial effects.

First and foremost is the benefit to the economy where diverse interests are fully served for the betterment of the public good.  For example, Sandy Weill’s vision of a one stop combined banking, investments and insurance company when forming Citigroup, and in the process eliminating the Depression era Glass Steagall act, was fatally flawed because it traded result for convenience.  The desultory perferomance came from what the boutique firm Evercore Partners founder Roger C Altman observed “at a big bank what you do or your group does, doesn’t move the needle” yet “people want to have impact.”  Without transparent result available big bank management sides towards the assets under management metric which is not a customer related measure.  Instead its the bank minions going out and convincing customers to save and invest in funds conveniently run by the bank and build a big books of assets to determine a manager’s bonus without ever asking, to paraphrase an old investment book title. “where are the customer’s bonuses?”