Break up "too big to fail" banks: good idea or not?

[Screech]

http://www.commondreams.org/video/2013/03/27-1

U.S. Sen. Bernie Sanders (I-Vt.) said today he will introduce legislation to break up banks that have grown so big that the Justice Department has not pursued prosecutions for fear an indictment would harm the financial system.

...


Sanders’ legislation would give Treasury Secretary Jacob Lew 90 days to compile a list of commercial banks, investment banks, hedge funds and insurance companies that he deems too big to fail. The affected financial institutions would include “any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.”

Within one year after the legislation became law, the Treasury Department would be required to break up those banks, insurance companies and other financial institutions identified by the secretary.

Sounds to me like something that needs to be done, although I'm sure there would be extreme opposition from certain monied interests.....

 

[Craig234]

Not a good idea. A great idea.

This is where Bernie makes it clear who most of our officials represent - the monied.

I think he's the best member of Congress.

He leads what's in the interests of the public over and over.

 

[Bowfinger]

I'm always wary of the law of unintended consequences, but if these financial institutions are truly so big that their failure jeopardizes America's economic stability, I think there is no choice. We must either break them up into manageable pieces or nationalize them. Of the two, breaking them up seems less risky to me.

 

[Craig234]

I'm always wary of the law of unintended consequences, but if these financial institutions are truly so big that their failure jeopardizes America's economic stability, I think there is no choice. We must either break them up into manageable pieces or nationalize them. Of the two, breaking them up seems less risky to me.

Actually, having more nationalized finance may well be in our interest - for example, far-right North Dakota has a state bank that works very well.

But of course some people are allergic to the phrase and are already steaming out their ears at the suggestion. But we at least need a smaller size bank.

 

[Bowfinger]

Actually, having more nationalized finance may well be in our interest - for example, far-right North Dakota has a state bank that works very well.

But of course some people are allergic to the phrase and are already steaming out their ears at the suggestion. But we at least need a smaller size bank.

Right, and I'd agree if I was confident such a federal mega-bank would be run efficiently ... and honestly. My concern is concentrating so much power in the hands of a few bureaucrats could lead to the same sorts of corruption we've seen in private banking. That's why I said breaking them up is less risky, even though nationalizing them could be better in concept.

 

[Craig234]

Right, and I'd agree if I was confident such a federal mega-bank would be run efficiently ... and honestly. My concern is concentrating so much power in the hands of a few bureaucrats could lead to the same sorts of corruption we've seen in private banking. That's why I said breaking them up is less risky, even though nationalizing them could be better in concept.

I don't really see the risk. The government gets corrupted where there's profit.

Social Security is a massive program run efficiently and without government corruption much at all - but Wall Street wants to get their hands on it.

On the other hand, defense spending with mega corporations is pretty corrupt.

The government runs the large Tennessee Valley Authority and I hear nothing but good about it, while the power company here is run for profit -despite regulation - and a residential block blew up a bit ago and it was found that maintnenace had not been done as stated, reports were falsified, and other related corrupt things profit drove them to.

I'm open to hear how the government could make banks worse.

 

[Fern]

One massive problem here: the Frank Dodd bill imposed such onerous regulations that compliance is too expensive for smaller banks. I've posted info before showing it's causing a surge of mergers. In fact federal regulators have been advising smaller banks that should merge or go out of business because they wont be able afford compliance.

Now we want to break up the mergers we caused in the first place?

Frank Dodd needs to be fixed first. It needs to be rewritten to do what it was designed to do in the first place: Prevent to big to fail banks. The fact that we're now looking to address that problem in a different way underscores what a failure Frank Dodd was.

Fern

 

[lotus503]

http://www.commondreams.org/video/2013/03/27-1



Sounds to me like something that needs to be done, although I'm sure there would be extreme opposition from certain monied interests.....

Yes break them up, but not like standard oil was.

 

[EagleKeeper]

Careful thought on break ups.

Look at that has happened when ATT was busted up.

all those baby bells ended up coming back together without the added oversight.

they made all those promises if allowed to rejoin - what happened?

Bust up the banks - state that they can only have a certain percentage of assets or involvement in multiple states. they already have some limits.

Better make sure of the laws of unintended consequences.

 

[sandorski]

Break up or regulate them until they couldn't Fail if they tried.

 

[werepossum]

Break up or regulate them until they couldn't Fail if they tried.

Over-regulation can CAUSE failure.

I pretty much agree with Bowfinger. If these banks are truly too big to fail and must be bailed out, job #2 should have been breaking them into pieces that AREN'T too big to fail. Instead we bailed out the bigger banks and watched them gobble up smaller, weaker competitors to become even bigger. That's a pretty good example of the law of unintended consequences right there. (Unless you agree with Craig that all our politicians are either evil bastards in Spandex unitards out to kill Batman and make the rich richer and the poor poorer, or socialists.)

Step #1 should be to bring back Glass-Steagall and split banks back into two sectors, so that a crash in one does not automatically crash the other. Step #2 should be to decide what exactly "too big to fail" and then decide how to make our banks smaller than that. Step #3 should be to develop procedures to ensure that if we do screw up with the above, "too big to fail" does not mean "too big to not pay out our quarterly bonuses." And Step #4 should be to study how in the world I agree with Bernie Sanders on ANYTHING.

 

[chucky2]

I agree that too big to fail means too big to exist.

Which means anyone that agrees with that needs to start with breaking up the biggest thing that could fail, which is, the Fed Gov.

I love agreement on this issue. :thumbsup:

 

[ivwshane]

Break them up, if they are too big to fail and too big to hold accountable, break them up.
Keep the various bank types separate.

 

[ivwshane]

Actually, having more nationalized finance may well be in our interest - for example, far-right North Dakota has a state bank that works very well.

But of course some people are allergic to the phrase and are already steaming out their ears at the suggestion. But we at least need a smaller size bank.

This article has some good history in it and why more government banks would be good.

http://www.ritholtz.com/blog/2013/03/how-the-banking-system-is-destroying-america/

 

[werepossum]

This article has some good history in it and why more government banks would be good.

http://www.ritholtz.com/blog/2013/03/how-the-banking-system-is-destroying-america/

I don't think the author is being very honest. He implies that the Founding Fathers rejected private banks, but at the time of the revolution there were no private American banks. Banking was largely held as a monopoly of the Bank of England, with other (usually English) foreign banks taking what was left over by default. The problem wasn't that these banks were private, but that they were taking money out of the American economy.

Also, the author represents the decree requiring taxes to be paid in hard specie as driven by the banks, specifically "In 1764, the Bank of England used its influence on Parliament to get a Currency Act passed that made it illegal for any of the colonies to print their own money." This is nonsense. The Currency Act was driven as much by English merchants as by English bankers, but most of all it was driven by the King. England had been through at that time almost a hundred years of war (principally with France but also with other nations) for control of Europe and especially the colonies, including America. This culminated in the Seven Years War, part of which was fought in the New World as the French and Indian War. To fund that war's obligations under the Quartering Act, the British colonies were authorized to issue paper fiat money to pay for military supplies. There were no real limits on how much could be issued, so the colonial governments printed as much as they wished. Because the amount printed was always more than the amount removed by taxes, the pound Stirling (a unit of accounting, not a unit of silver) was devalued. Debts were more and more paid in fiat money that was worth less when paid than when the contract was written. When the war ended, the crown had no need for the colonies to issue fiat money and every reason to oppose it, especially for the Bank of England which was created (and still functioned) as the government's banker and debt manager. (As the colonial governments were part of the larger British government, the Bank of England as the government's banker was allowed to lend to them.) The bulk of the money paid in interest to the Bank of England flowed directly to the government, because after almost a century of war the government was very heavily in debt and ITS creditors demanded real money.

At that point in history, merchants usually operated by letters of credit and contracts - I agree to send you $1,000 worth of goods, you agree to sell them and in six months pay me $1,080. With fiat money, the colonial governments simply printed up whatever they needed to meet their obligations, so inflation ran high in a world where fiat money was the exception by far and inflation was generally low. That meant the British merchants had less real wealth to tax and the Bank of England had less real wealth to loan. In fact, one of the subsequent Currency Acts (there were several) prohibited the Bank of England itself from paying its debts in gold or silver, for the government desperately needed to borrow that hard cash to pay ITS debts. In fact, the gold shortage caused by war debts caused the Bank of England to start issuing paper money (backed by gold and silver in theory) not just for use over distances, but in wide practice. (Prior to that, paper notes were used mostly as a convenience, so that one could travel with a note for a thousand marks or pounds without actually having to carry the heavy and easily stolen coin or plate.)

On top of that, in 1773 the Currency Acts were amended to give the colonial governments the right to issue fiat money in amounts set by Parliament. This is why most historians consider the issue to have been a minor consideration; the idea that the author has discovered some great secret is just horse hockey.

In short, your author is not at all honest.

 

[Craig234]

Here's a problem with the banking industry. There's a legitimate, useful function for banking, that is justified and important greatly benefitting the economy. But that's a small part of what the industry now does - which is shown by how instead of receiving an appropriate, and even generous share of our economy's profits for their part of around say 10%, in recent years they've taken as much as over 40% of all profits.

That is a shift from the helping the economy role to the parasite draining the economy.

When they're doing things that are not economically productive, but just siphon wealth from the economy, from 'high speed trading' - which now makes up most of the trading on the stock market and has nothing to do with the idea of capital funding companies, only with siphoning from others, to other venture capital activies and 'gambling' and creating and popping bubbles for profit - they are a harm to society.

Banks ALWAYS have these interests to harm society. The question is, can the public interest prevent it? In democracy, it's supposed to.

What's the difference between having a king and class of nobles who profit from and enable those banks - and having those banks have so much money and lobbying power that they can force politicians to serve them rather than the public? In either case, democracy is defeated and the same policies harming the public are allowed. TThat's what's happening.

We effectively do not have democracy now regarding the banking industry, and the result is how money has hugely been taking from the American people.

 

[pauldun170]

Bank meaning Investment bank or bank meaning Merchant\Commercial bank or banks that have combined roles?

What exactly are we "breaking up"
What would be the impact of forcing mixed role banks from separating out their Investment Bank units?

while I can see the benefit of telling some banks to cast off their investment douchebags to go be douchey somewhere else, what benefit is there to breaking up a large Merchant\Commercial bank or breaking up an Investment house?


I like catch phrases as much as the next guy but I would like a more information as to who are the targets and what exactly is meant by "breaking up"

If we do break up the banks, I hope the fed raises the crap out of rates to help bring some sanity back to the system.

 

[werepossum]

Bank meaning Investment bank or bank meaning Merchant\Commercial bank or banks that have combined roles?

What exactly are we "breaking up"
What would be the impact of forcing mixed role banks from separating out their Investment Bank units?

while I can see the benefit of telling some banks to cast off their investment douchebags to go be douchey somewhere else, what benefit is there to breaking up a large Merchant\Commercial bank or breaking up an Investment house?


I like catch phrases as much as the next guy but I would like a more information as to who are the targets and what exactly is meant by "breaking up"

If we do break up the banks, I hope the fed raises the crap out of rates to help bring some sanity back to the system.

For myself, I mean restoring the Glass-Steagall separation between Savings and Loans and investment banks, so that a crash in one sector does not automatically crash the other too. Beyond that, I'd like to see a hard definition established as to what size banks (or either sort) is deemed "too big to fail" and a predefined procedure established that if we have to bail you out, we're going to take you over, split you up, and spin off the pieces. Or at the very least, we're going to suspend your contractually obligated bonuses so that you need that much less taxpayer money, suspend your stock trading, and prohibit you from making any acquisitions over a defined time frame. You want protection, you sign up under those terms.

 

[shadow9d9]

For myself, I mean restoring the Glass-Steagall separation between Savings and Loans and investment banks, so that a crash in one sector does not automatically crash the other too. Beyond that, I'd like to see a hard definition established as to what size banks (or either sort) is deemed "too big to fail" and a predefined procedure established that if we have to bail you out, we're going to take you over, split you up, and spin off the pieces. Or at the very least, we're going to suspend your contractually obligated bonuses so that you need that much less taxpayer money, suspend your stock trading, and prohibit you from making any acquisitions over a defined time frame. You want protection, you sign up under those terms.

The Republicans worked hard for years to dismantle Glass Steagall... They currently fillibuster their own bills and won't even willingly fund healthcare for 9/11 first responders... how do you expect to ever get it passed?

 

[pauldun170]

For myself, I mean restoring the Glass-Steagall separation between Savings and Loans and investment banks, so that a crash in one sector does not automatically crash the other too. Beyond that, I'd like to see a hard definition established as to what size banks (or either sort) is deemed "too big to fail" and a predefined procedure established that if we have to bail you out, we're going to take you over, split you up, and spin off the pieces. Or at the very least, we're going to suspend your contractually obligated bonuses so that you need that much less taxpayer money, suspend your stock trading, and prohibit you from making any acquisitions over a defined time frame. You want protection, you sign up under those terms.

gotcha

Crap...now I have to read up on Banking act of 1933 and the damn revisions over time.

Its simple enough to say we "should break out" those pieces to comply with the spirit of the original law but I need to see what drove the changes to the law over the years that led up to it being chucked

 

[Craig234]

gotcha

Crap...now I have to read up on Banking act of 1933 and the damn revisions over time.

Its simple enough to say we "should break out" those pieces to comply with the spirit of the original law but I need to see what drove the changes to the law over the years that led up to it being chucked

Let me save you time. Banks lobbied for it. The campaign used was that the US needed to 'modernize', or it risked letting the world take over the banking industry.

In fact, the bill with a lot of the deregulation was the 'financial services modernization act'. There were horror stories told of European markets becoming the world leaders.

What good Congressman can stand by and let 'obsolete' banking regulations from the 1930's hold back our great US industry? Time to modernize.

Only a small number of members spoke out against the bill, including a Senator who was the grandson of the member who had led the fight for Glass-Steagal, Byron Dorgan.

You can read a Bill Moyers piece on his speech and watch the video here:

http://billmoyers.com/content/a-senators-prophetic-words-then-and-now/

But a taste of it:

“Too big to fail — remember that term!” That was the prophetic warning issued from the Senate floor by Sen. Byron Dorgan (D-ND) on November 4, 1999...

“I’ll bet one day somebody’s going to look back at this and say, ‘how on earth could we have thought it made sense to allow the banking industry to concentrate through merger and acquisition to become bigger and bigger and bigger,’” Dorgan said. “How did we think that was gonna help this country?”...

“I think we will in ten years time look back and say we should not have done that,” Dorgan said...

Now, Dorgan is sounding another warning.

“I tried to pass some legislation in Dodd-Frank that says if you are too big to fail you’re too damn big and you should be broken up,” says Dorgan. “Dodd-Frank passed with my vote because it does some good things and it moves in the right direction. But it is timid. If you were going to address the real causes here, you would decide that too big to fail cannot be tolerated.” We’ll see if his words turn out to be as prescient this time around.

Now, the person who led the fight FOR that deregulation bill was Senator Phil Gramm, who Paul Krugman called 'the king of deregulation' and named as one of the two people most responsible for the 2008 crash (behind Alan Greenspan, whose Ayn Rand ultra deregulation ideology led him to terrible policy).

Remember 'Credit Default Swaps', the Wall Street creation that was a totally unregulated mechanism that was nothing but a tool for Wall Street to evade regulations on insurance, by providing 'insurance' with massive leverage and profits, which played a key role in the industry having a massive mess of owing itself trillions of dollars it couldn't begin to repay?

Legislation to prevent the government from regulating CDS's was co-sponsored by Phil Gramm, the - wait for it - "Commodities Futures Modernization Act of 2000".

By 2002 Gramm left the Senate having worked hard for the banks... immediately becoming an employee of bank UBS, lobbying for them. He was McCain's 2008 economics advisor.

 

[Craig234]

The Republicans worked hard for years to dismantle Glass Steagall... They currently fillibuster their own bills and won't even willingly fund healthcare for 9/11 first responders... how do you expect to ever get it passed?

You're right, but don't let Democrats off the hook here. Nearly the opposition to deregulation was frmo Democrats - but it wasn't much.

The 'Financial Services dereglation bill of 1999' was passed by the Senate 90-8, and by the House 362-57, and signed by Clinton.

One Senator said later, 'the banks own this place'.

 

[Craig234]

I agree that too big to fail means too big to exist.

Which means anyone that agrees with that needs to start with breaking up the biggest thing that could fail, which is, the Fed Gov.

I love agreement on this issue. :thumbsup:

In other words, you hate the United States, and want its creation to be destroyed, returning to fifty states, you're an anti-federalist.

 

[ivwshane]

Let me save you time. Banks lobbied for it. The campaign used was that the US needed to 'modernize', or it risked letting the world take over the banking industry.

In fact, the bill with a lot of the deregulation was the 'financial services modernization act'. There were horror stories told of European markets becoming the world leaders.

What good Congressman can stand by and let 'obsolete' banking regulations from the 1930's hold back our great US industry? Time to modernize.

Only a small number of members spoke out against the bill, including a Senator who was the grandson of the member who had led the fight for Glass-Steagal, Byron Dorgan.

You can read a Bill Moyers piece on his speech and watch the video here:

http://billmoyers.com/content/a-senators-prophetic-words-then-and-now/

But a taste of it:



Now, the person who led the fight FOR that deregulation bill was Senator Phil Gramm, who Paul Krugman called 'the king of deregulation' and named as one of the two people most responsible for the 2008 crash (behind Alan Greenspan, whose Ayn Rand ultra deregulation ideology led him to terrible policy).

Remember 'Credit Default Swaps', the Wall Street creation that was a totally unregulated mechanism that was nothing but a tool for Wall Street to evade regulations on insurance, by providing 'insurance' with massive leverage and profits, which played a key role in the industry having a massive mess of owing itself trillions of dollars it couldn't begin to repay?

Legislation to prevent the government from regulating CDS's was co-sponsored by Phil Gramm, the - wait for it - "Commodities Futures Modernization Act of 2000".

By 2002 Gramm left the Senate having worked hard for the banks... immediately becoming an employee of bank UBS, lobbying for them. He was McCain's 2008 economics advisor.

Yep, the pos Phil gramm who also had a hand with the Enron fiasco.

http://www.nytimes.com/2008/11/17/business/17grammside.html?pagewanted=all&_r=0

 

[chucky2]

In other words, you hate the United States, and want its creation to be destroyed, returning to fifty states, you're an anti-federalist.

In other words, the Fed gov has become such a large beast, we need to follow your logic and break up the too big to fail entity.

Ideology is the enemy Craig, ideology is the enemy...

Chuck