In a weak nod to “too big to fail” concerns, House Financial Services Committee chairman Barney Frank announced that larger banks and hedge funds would pay a fee as a way of pre-funding resolution costs. From the Financial Times:
The proposed levy emerged as an unwelcome surprise for the industry deep into a late-evening congressional session to finalise landmark Wall Street reform legislation. Banks with more than $50bn in assets and hedge funds with more than $10bn will be required to pay into the fund as a proportion of their assets….
One of the long technical arguments during the reform debate has been over whether to impose an upfront fee on large financial institutions to cover the costs associated by the government seizing and winding down a failing firm using new powers.
Lawmakers had resolved to recoup the costs after any use of the so-called “resolution” powers but aides said that the vagaries of congressional budgeting meant there had to be an upfront fee of some sort.
Congressional aides said that the independent Congressional Budget Office – which estimates the costs and revenue associated with all legislation – had calculated that the chances of the resolution authority being used and the government not being paid back equated to a $19bn hole that had to be filled with revenue.
The Federal Deposit Insurance Corporation would levy the fee over a number of years and hold the money.
Yves here. First, keep in mind the bill is still in play, so this language may not survive final horse-trading. Second, even though the big banks will throw hissy fits over this fee, they are still getting away with murder. As Anthony Haldane of the Bank of England pointed out, explicit bailout costs are only a fraction of the true cost of economy-wrecking financial crises:
….these losses are multiples of the static costs, lying anywhere between one and
five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
So major financial firms enjoy state backstopping, have perilously few constraints on their behavior, and destroy value, yet industry leaders and employee are better paid than average workers. That, sports fans, is a prima facie evidence of both looting and the need to rein in financial firm risk taking radically.
Another proof: the banking industry beat back one of the proposed Basel III reforms, that of having certain types of capital buffers to reduce the odds of another monster crisis. One of the two main causes of the global meltdown is that banks all over the world are running with far too little equity given their risk exposures (the second is that the major international capital markets firms are too tightly interconnected, meaning the failure of one is well nigh certain to imperil the others).
Now building higher equity levels is understandably a long term process. But rather than extending the time frame for implementing the measure in question (a “net stable funding ratio” to better balance the maturity of their assets and liabilities, the power that be traded the point in return for what the Financial Times called “alternative system of oversight.” Um, that doesn’t sound very convincing to me.
It appears the Basel III committee climbed down because the industry argued that the reforms would be too costly. Again from the Financial Times:
Analysts had also calculated that the Basel III reforms, were they implemented in conjunction with new taxes around the world – such as the liability tax announced by the UK government this week – could have cut a typical bank’s return on equity from 20 per cent to 5 per cent.
Yves here. Per Haldane’s analysis, the industry as now constituted is a threat to the public. If it turned out that a peculiar shared defect meant that all cars manufactured would burst into flames every seven years, it would not be acceptable for car makers to argue, “Well, if you made us fix that problem, our ROE would stink.” That would be seen as a completely bizarre counterargument. Yet the same logic from the financial services industry gets a free pass.
And given that capital markets operations, which is where the real risk taking occurs, historically has set aside 50% of revenues for compensation, it would seem the best way to deal with the problem of the need to put up reserves is to reduce compensation across all the capital-consuming businesses, ideally proportionate to their risk exposures. But no one yet has the guts to take on the looting by the major firms frontally.
25 comments
Comments are closed.
There may be something else going on here, if this $19B fund shows as an *asset* of FDIC (i.e. if they are not administering the funds for Treasury).
…and that is: the Deposit Insurance Fund had a balance of -$20B as of March.
Yay! FDIC will no longer *appear* to be insolvent. Nothing on the horizon to force a reserve against the $19B fund, so, happy days on the asset side of the ledger!
And on this topic: if FDIC is now in practice insuring all deposits above the insurance limit, shouldn’t the insurance assessments on banks be raised to cover the full potential liability? Oh, no! We can’t do that!
In the case of FDIC’s bank insurance, and of this new fund, the “industry-funded insurance” is a fabrication.
I think you’re grasping at straws here. This isn’t any kind of TBTF matter, but just trying to deploy the House’s marginally less offensive version of the “resolution authority” scam.
1. But we already know that if possible the kleptocracy will never “resolve” a TBTFer instead of bailing it out. The PCA law already required them to do so and they simply disregarded it. Why would they be any more reverent toward the rule of law here? They’ll still go for the bailout every time.
2. The Senate version was an obvious fraud in pretending they’d recoup taxpayer resolution expenditures after the “resolution”. I didn’t see a single commenter outside the MSM even pretending to take that seriously.
This on the other hand would collect enough ahead of time to fill a small piggy bank. Of course, they’d collect it from banks way below the TBTF threshhold, whatever that is. (The CIT affair seems to indicate that c. $100 billion isn’t “TBTF” in itself, although I don’t know if they also had crappy political connections.)
So even if one takes this provision seriously, it’s still yet another monoploy-seeking measure since like everything else it requires smaller banks to subsidize the big ones. No $50 billion entity was ever going to be considered TBTF.
(Not that I’m trying to play a violin for the poor little smaller rackets. But we should always maintain focus on the big picture, and that means focusing on how each and every measure is intended to further concentrate the oligopoly and furtther entrench TBTF.)
3. In a blog post last fall I referred to this as a “Financial Superfund”. But as I said there, the history of the real Superfund demonstrates my general assertion that even if the system really did start out sincerely trying to enforce a policy in the public interest, attrition will inevitably grind down this resolve, and the policy will be hijacked or destroyed. Sure enough, since the 90s the Superfund has ceased being funded by industry the way it was conceived, and although the Feds still undertake cleanups under the auspices of the “Superfund”, by now it’s 100% taxpayer funded. They may make a show now and then of trying to recoup some of the expenses, but given how it was like pulling teeth to get Obama (very, very much against his will) to try to force BP to pay anything, you can imagine the government’s level of resolve in vastly more obscure pollution cases.
So it would inevitably be with this, if anything were actually “resolved” in the first place, which we can be pretty sure it would not be.
So all this fund would be is money extracted from smaller banks to be used in the bailouts of bigger ones. It would be absurdly meager for any purpose, bailout or resolution, so in either event the taxpayers would end up being mugged yet again.
Entrenched gangster rackets can never be regulated. They have to be completely destroyed.
Please re-read my opening sentence. “Weak nod to TBTF concerns” says that this is window dressing. Please also see the material added on the Basel III negotiations.
Sorry. I guess I misunderstood “weak nod” as still allowing for it to have some possible validity, and “mirabile dictu” as not being completely sarcastic. Just nitpicking. :)
I guess I look for straight out rejection of the “resolution authority” scam, which even in principle doesn’t touch size but just falsely pretends to set up a better way of cleaning up the inevitable disaster.
The Basel III nonsense is revealing. These banks are supposed to be shoring up their balance sheets; everyone says in principle that’s the goal. But then each specific proposal is rejected as constraining their extractions.
So there again we see what a criminal charade it all is.
I agree the resolution authority and the “living wills” provisions are unadulterated tripe. I’m overdue for a post on that, haven’t seen quite the right news hook, although I can always do that as a “here is what reform failed to do” when the bill is finally settled.
The best way to attack the “living wills” would be to compare them to the Disaster Plans that BP had prepared prior to the spill in accordance with the law. The living wills will likely be just as effective as those plans were when the next crisis hits.
News hook – How about comparing it to how well regulatory precautions worked with deepwater drilling, and how much good the measly $20 billion is likely to do compared to the magnitude of the damage. Not much chance of resolution there. Monumental socialization of costs, ahoy!
And no justice for the victims or the criminals.
BTW, since you quoted Adam Levitin in yesterday’s strategic default piece, I thought I’d remind everyone of this excellent piece on “resolution” from last fall.
http://www.creditslips.org/creditslips/2009/10/toobigtofail-resolution-why-one-size-cant-fit-all.html
” could have cut a typical bank’s return on equity from 20 per cent to 5 per cent.”
Isn’t that what we want? For the economy to function better we need banks’ profits to go down, as a percentage of total profits.
Yes, but you also need profits as a way to build equity levels, that is the conundrum. But the authorities should be bullying the banks privately over comp, and threatening to raise the profile of all the backdoor subsidies. If they think the public is angry, if the Fed or the Treasury were ever to grow a set (yes I know, only in another universe), all they’d need to do is start educating the public as to how much all the subsidies really cost them. There would be serious risk of public tarrings and featherings.
“Yes, but you also need profits as a way to build equity levels”
Yes, the Fed clearly engaged in the engineering of a steeper yield curve in order to help recapitalize the banks. The flaw with that idea, however, is that it assumes profits will be retained rather than paid out as bonuses.
And that means the Feds must have a level of control sufficient to prevent that, ie, to make the policy effective, rather than a waste.
Outright control? or vetoes over bonuses?
Or some kind of (necessarily harsh , to be effective)
“after-the-fact” penalty for mis-behavior with the Government lifeline?
The industry as now constituted IS a threat to the public. Said financial industry is in the main rent seeking on an epic scale, and in the exception arbitrage on the basis of information hidden from others. There is nothing productive done. No value is created. And that is before the deleterious effects of the periodic mass failures of the finanzcapitalists are factored in which have been an invariant, regular feature of western capital since its inception a millennia since.
The actual levels of financial concerns of some use, where credit worthiness is actually assessed and re-insurance of risk is appropriately dispersed, are far lower. When such useful levels function at all—presently they do not because of the distortionns inflicted by the parasitic behemoths.
Will the legislators hand culled by the financial industry and lulled swooning by the scent of checkbook ink prune back these zombies busy eating _everyone else’s_ lunch? I can’t imagine why. Low-intensity debt slavery and the criminalization of dissent by the securocracy coming soon to a country near you: your own. Other peoples start insurgencies when faced by an oligarchic occupation such as this. Here, most simply channel surf in search of fresher pablum to suck on in their hovels.
“Other peoples start insurgencies when faced by an oligarchic occupation such as this. Here, most simply channel surf in search of fresher pablum to suck on in their hovels.” [Or blog …]
Why is that the case? I would be interested in hearing what Richard, Yves, or anyone else has to say on this score. We can’t blame “false consciousness” or lack of any consciousness for everything…
And people used to worry about the cost of fixing global warming! What small-time thinking that was!
There’s no way to compete with Haldane’s numbers, but an outfit called the Centre for Media and Democracy estimates the cost of the bailouts in the US:
“Today, the Real Economy Project of the Center for Media and Democracy (CMD) released an assessment of the total cost to taxpayers of the Wall Street bailout. CMD concludes that multiple federal agencies have disbursed $4.6 trillion dollars in supporting the financial sector since the meltdown in 2007-2008. Of that, $2 trillion is still outstanding. Our tally shows that the Federal Reserve is the real source of the bailout funds.
“CMD’s assessment demonstrates that while the press has focused its attention on the $700 billion TARP bill passed by Congress, the Federal Reserve has provided by far the bulk of the funding for the bailout in the form of loans amounting to $3.8 trillion. Little information has been disclosed about what collateral taxpayers have received in return for these loans, sparking the Bloomberg News lawsuit covered earlier. CMD also concludes that the bailout is far from over, as the government has active programs authorized to cost up to $2.9 trillion and still has $2 trillion in outstanding investments and loans…”.
http://www.prwatch.org/node/8987
There are links to tables in support of their numbers.
More zeros! Lots more zeros!!!
(Ack. to Angry Bear
http://www.angrybearblog.com/2010/06/wall-street-bailout-comparison.html)
Yves,
This past week I read the transaction tax on financial firms would be almost fully offset by a cut in the financial institutions corporate tax rate in 2011-12. Sorry, I can’t find the link…
This is going to end worst than 2007 crash. They are basically pumping massively more money into the Casino. (with no change in law, the casino will play with derivative, swap, bond, with even more money)
The commodity/food price spike in 2006-7 will look like minor hick up compared to what’s coming. They plan to print $5T of fake money and shove it into the broken banking system. (wow, BP junk shoot looks like a genius move compare to this.)
http://www.businessinsider.com/is-bernanke-secretly-preparing-a-new-liquidity-blitz-to-save-the-faltering-recovery-2010-6
Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.
However you are right to bring the two pieces of information
together, what we are witnessing from the side of the Atlantic reported by the FT article, is just the response
of the industry’s lobbyists ( effort started well before )
to the forthcoming European bank stress tests and buy them
time to “recapitalize”. Having a Basel II or Basel III set of rules is a fine idea, the only problem is that Europe does not have a European regulation and resolution authority, so en route to another ‘doom loop’, unless the FSB comes up with asignificant proposal
Mickey Marzick you ask a great question. “Other people start insurgencies when faced by an oligarchic occupation– Why isn’t this happening here?”
Part of the answer might be found in the various positions and prescriptions being articulated, thus far, on this blog.
For the purpose of this post I am only going to focus on the liberal to left commentary on the blog and I apologize in advance for any simplifications or misunderstandings.
The liberal community, Yves herself and many others, appear to have endorsed a type of “enlightened” state modernization, represented in part by the MMT perspective, as the way forward.
More “radical” parts of the commentariat (I on the ball and perhaps, you Mickey, as well as many others) seen to endorse an analysis which tries to illuminate class differences and a more traditional form of class struggle as the way forward.
My questions for these perpectives are the following:
For all of the MMT advocates and the liberal community in general. Is our state political structure so corrupt that any alternative economic framework that does not demand a prior change in that structure itself, not end up being ensnared in the very oligarchy, plutocracy or kleptocracy which it is supposedly attempting to modify?
If the answer to this first question is yes, what then in your alternative theory of the state?
For the more radical class struggle perspective, what is your alternative political theory of the state which would guide you in your potential insurgency against the oligarchy?
I think there are different levels and degrees of corruption. They are different but self-reinforcing.
Level 1: a culture that prizes material things and favors a selfish and narcissistic outlook.
Level 2: crony capitalism. Organize and use contacts to compete unfairly.
Level3: power politics. Using the state against the people (eliminating privacy, etc.) to ensure that the power structure of which your group is at the top will not change.
My sense is that the ruling class (oligarchs and politicians) are not willing to entertain reform that increases the power of other groups. It is difficult to imagine campaign finance reform that significantly eliminates money from politics or electoral reform that works against the two-party system in any real way.
For the oligarchs, power and money seem to only go one way. Any setbacks – and republicans are especially good at this – are taken as an opportunity to advance in other ways:
terrorism? –> attack Iraq;
financial crisis? –> make TBTF explicit policy;
economic downturn? –> cutback on entitlement programs.
It seems like there is a cycle here (“doom loop?”): oligarchs collect power (they never have enough) until the excesses and collusion is evident to ordinary people but by then ordinary people have very little power. Then something occurs that is so outrageous that people risk their lives to change things. Then, over time, people forget, new oligarchs develop and start to amass power . . .
The vicious and so far one-way class war in this kleptocracy is so obvious that acknowledging it and saying we should organize all our actions according to it isn’t “radical” at all, but simple reason and common sense.
It’s only the Status Quo Lie, itself the weapon of corporatist radicalism, which has flipped the truth of reason and human decency vs. radical crime upside down so that real extremism passes as “normality” and the non-ideological baseline.
One example was how we kept being told that forcing the radically anti-democratic Fed, the practicioner of an extreme ideology of looting on behalf of the big banks, into the sunshine of democratic transparency and accountability would actuallly be illegitimately “politicizing” it when the truth was the exact opposite: Auditing the Fed, or better yet abolishing it completely, would constitute a return to the natural baseline of democracy, while both existentially and in practice the Fed constitutes artificial political extremism.
As for the basic concept of the state, it’s a terminal kleptocracy and cannot be reformed. Nor can it be directly assailed while still intact. But all actions of economic relocalization, everything from Move Your Money to growing as much of our own food as possible, are inherently subversive of the system.
They’re also imperatives, since Peak Oil signals the end of the fossil fuel age and the debt economy which was a growth upon it.
So the mission, should we the people choose to accept it, is to organize economic and political relocalization as a physical necessity (the food production and distribution systems are unsustainable) and as a mode of (at first) passive resistance to the corporate tyranny. I also see it as the only possible vehicle of spiritual renewal amid the wreckage of the oil civilization and the fascism this system is increasingly resorting to in order to zombify itself.
Jim asks a good question, and I don’t want to derail discussion. But it reminds me of Prof. Krugman’s column (June 17) in which he dismisses economic arguments for austerity without really talking about what the real reasons might be. I wish he had done so.
http://www.nytimes.com/2010/06/18/opinion/18krugman.html?partner=rssnyt&emc=rss
If Prof. K. is right, and there aren’t any good economic reasons for austerity, then a discussion of what is driving policymakers towards austerity would be revealing about lots of things, not least the power structure which Jim wants to talk about.
I recently wrote a blog post on exactly that – why in opposing a partcular piece of rapacity Krugman still refuses to call class war what it is (indeed why he glibly dismisses it from his account).
http://attempter.wordpress.com/2010/06/11/schizoid-krugman/
I’m also going to have a post up in a few days on austerity itself, the real reason for it.
A plan: Invoice the FED for services rendered (happy fun times going into debt to save this nations ass) by every citizen that has not profited from TBTF cartel hand out.
Skippy…from there is just a business transaction and recompence BBPs….whats good for the…