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.

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.   

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?”

A Worthy Charge for Both Sanders and Paul

Bernie Sanders quixotic charge at the Federal Reserve Bank is as pointless as Rand Paul’s demand for an audit of its books.  The bank is so far from the reality of everyday life that its followers are just reading tea leaves. Bernie showed some understanding of the Wall Street problem when he described in the first Democratic primary debate the phenomenon of regulatees regulating the regulators.  Its called Regulatory Capture defined by Nobel laureate economist George Stigler, “Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure; it creates an opening for firms or political groups to behave in ways injurious to the public (e.g., producing negative externalities). The agencies are called captured agencies.”  Yet he still believes regulating the captured finance industry is still possible!

Though they approach it from diametrically opposed ideological views Sanders and Paul agree that TBTF (Too Big To Fail) banks need to be converted to NTBTF (Not Too Big To Fail) as soon as possible.  A very simple suggested law written in the manner of our forefathers with general markers and no attempt to micromanage would be that financial institutions; be they bank, insurance or fund, control no more than one percent of GDP (Gross Domestic Product) in assets.  Those in charge of assets greater than that would be required to split into a sufficient number of separate companies with each at or below the legal limit.  Companies that grow from below 1% to over 1.5% would be required to split in two bring both halves to a level below 1%. The splits can be inexpensively done for its stockholders by distributing shares of all 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”.  

If the law is kept simple with no exceptions worked in by the powerful Wall Street lobby in Washington then in one fell swoop the concentration in banking is reduced to a level that prudence, fear of failure, is ingrained in the system.  The NTBTF value in a $18 trillion dollar economy would be $180 billion which would give approximately ten J P Morgan Chase banks units for distribution to its stockholders. Think of it as the banker’s employment opportunity act which would require ten Jamie Dimons et cetera, et cetera but less dependence on the profit from risky derivative instruments built on hair trigger slivers of leveraged assets. Instead of a government guarantee banks would have to rely on counterparties with strong balance sheets and honest dealing and no more dependence on a credit agency’s rating coerced with a wink wink as pictured in “The Big Short”, Hollywood’s latest and very good explanation of what hit us in the Great Recession of 2008.

Reduced concentration in banking would do much to alleviate the other political bugaboo, income inequality. With fewer assets under each bank’s control the less the incentive for brainless control of assets so that fewer assets sustain stagnant accounts and more effort is put into productive Investments.  Banker’s income would be more of a reflection good management rather than the automatic doling out of a sliver from a giant asset base under management.  Also with many small banks, the lobby in Washington would have a much harder time to practice regulatory capture. Politically this proposed simple bank law would be opposed by the establishment, that would be Republican elites and Hillary Clinton. it’s a worthy charge for both Sanders and Paul.

Greenspan let a Market Killing Machine Develop under his Watch

My response to Paul Krugman's comment that many influential, seemingly authoritative players, from Alan Greenspan on down, insisted not only that there was no bubble but that no bubble was even possible.


Former Federal Reserve Chairman Alan Greenspan was confident that the market would self regulate but his confidence was misplaced during the housing bubble when a grotesque concentration in banking developed because of the perception that the government would not let big banks fail. In other words, he betrayed his Ayn Rand Libertarian heritage by letting a market killing machine develop under his watch.

Fixing Fannie & Freddie

Jim Parrott and Mark Zandi just scratch the surface of the Fannie and Freddie question which should first eliminate the home ownership bias of the tax code that favors just the top ten percent of income earners.