
How to cut megabanks down to size - sshumaker
http://www.nytimes.com/2013/01/20/business/a-fed-voice-asking-to-cut-megabanks-down-to-size.html
======
charonn0
The criminal actions[1] of Wachovia, Lloyds, Credit Suisse, Barclays, HSBC,
_et al_ have shown that the megabanks cannot be trusted to follow existing
laws.

The robo-signing debacle[2] has demonstrated amply that the financial sector
can't be bothered to verify their data before destroying the lives of
thousands of people.

The LIBOR manipulation scandal[3] proves that even the industry's own
measuring rods are bent and unreliable.

The last 5 years have revealed an industry rife with crime, deceit, and
unabashed greed which has severely damaged the global economy and the quality
of life for hundreds of millions of people. And the penalties for these
actions pale in proportionate comparison to those imposed on a street-level
drug dealer.

When a private enterprise becomes too essential to regulate effectively, it
endangers the society in which it operates. Breaking it up into manageable
chunks is the only viable option.

[1]: [https://www.nytimes.com/2013/01/03/opinion/how-bankers-
help-...](https://www.nytimes.com/2013/01/03/opinion/how-bankers-help-drug-
traffickers-and-terrorists.html)

[2]:
[https://en.wikipedia.org/wiki/2010_United_States_foreclosure...](https://en.wikipedia.org/wiki/2010_United_States_foreclosure_crisis)

[3]: <https://en.wikipedia.org/wiki/Libor_scandal>

~~~
snitko
I always remember what Milton Friedman used to say, he was amazed be people
who see failure of regulation and propose a fix by seeking to introduce even
more regulation.

"well this time it will surely work!" "if only we had the right kind of
regulation/people in charge!" they say.

That's never gonna happen. Breaking the system in chunks artificially will not
work, because it will consolidate again and buy up the regulators. The true
solution here is Bitcoin, precisely because it is not controlled by anyone.

~~~
lwat
I used to be an Austrian but it's been almost a century now and it's become
clear to me that the Keynesians are actually correct. Even after the GFC
things bounced back very quickly. The power to inflate away old debt is too
useful to sacrifice.

~~~
snitko
Hm, it's interesting, would you care to elaborate: what do you mean by "too
useful"? Too useful for whom?

~~~
lwat
Well let me put it this way:

If the USA kept the gold standard, I seriously doubt they'd be the number 1
economy in 2013.

~~~
snitko
But you're not explaining your claim. How can possibly printing money can make
society as a whole richer? It can make certain individuals better off, for
sure (the ones who receive the newly created money first while the prices are
low). But how does it make the economy as a whole better off? No additional
value gets created.

~~~
Bricejm
I think the point is inflation increases the money supply, while debt remains
the same. Individuals make more money with less buying power, but can pay off
debt easier.

~~~
snitko
Well that's good for people with debts. It's bad for people without debts and
those who loaned them money. Debtors are basically paying off their debts more
easily at the expense of all the others (even those who are not involved in
the deal of loaning).

~~~
rgbrenner
as long as the inflation rate is expected, the inflation rate is always
adjusted up/down to compensate for the inflation.

------
ataggart
>small institutions must submit to the rigors of the free market.

>market discipline has worked to keep smaller institutions on the straight and
narrow, it has been ineffective with megabanks

>market participants have proved [in]effective in monitoring risks at these
[huge banks].

>They know they will be protected by a taxpayer rescue should a large
institution teeter.

How is this not obvious to everyone involved?

~~~
cynicalkane
They _are_ obvious and breaking up the banks is a popular topic of speculation
in the finance industry. What's a mystery is why it is taking so long for
mainstream econ and op-ed writers to catch on.

Paul Krugman, for example, proposed that big banks like Citibank provide value
by having a huge service network, and therefore he's skeptical of breaking up
banks. Which is true--Citibank's size is the primary (and probably only)
reason I'm a Citibank customer. But the unstated assumption that there must
necessarily a 1:1 ratio of Too-Big-To-Fail bunches of assets to bank service
networks is baffling to me.

There seems to be a TBTF blind spot in the sphere of wide-area economic and
financial knowledge; that is just one example. The solution is always "more
regulation", or occasionally, "better regulation" with the implication that
everything is the government's fault.

~~~
anigbrowl
_What's a mystery is why it is taking so long for mainstream econ and op-ed
writers to catch on._

I think they're quite familiar with the idea and have caught onto it long ago;
they just don't want to be misrepresented as advocating a government takeover
of the finance industry or as communists or whatever. It's not so much that
they favor large institutions, as they're trying be moderate and consider both
sides of the argument.

By contrast, read the editorial pages or the comment sections of the Wall
Street Journal, in which Obama is regularly characterized as a Marxist
ideologue and worse, and any sort of regulation or disciplinary action against
the financial services sector is characterized a shakedown, at best. If the
government actually proposed carving up the banks there would be (even more)
howls for his impeachment. Much as only Nixon could go to China, a reset of
the financial sector could only come from some prominent Republican, and a
fiscally hawkish one at that.

------
rwmj
I'm confused by this. The large banks are (arguably) more efficient because of
economies of scale, eg. less duplicated management, purchasing power. So it's
probably not a good idea to limit the size of banks which is what this article
seems to propose, because that'll make banking more expensive.

But the flip side is: why don't we just let megabanks go bust? If they go
bust, the government steps in, briefly nationalizes them, sells off the parts
(the shareholders get nothing, of course), and life continues. As long as this
period is kept as short as possible why is there any danger of "meltdown"?

~~~
ataggart
Per the article, size is correlated with problems but not the cause of them.
It happens that large banks are the ones who are more likely to get bailed
out, thus they are incentivized to take more risk, so they do. It is the
potential for government bailouts/protections that is the root of the issue,
thus the proposal is basically to stop doing that.

~~~
aaronblohowiak
The problem is not the bailout, per se, the problem is that the bailout didn't
wipe-out shareholder value (and executive compensation) in the process.

~~~
dantheman
the problem is the bailout, just don't bail them out.

------
rumcajz
The proposal should be extended to all "too big" companies.

Big companies combine the worst characteristics of state-owned and privately-
owned enterprises.

On one hand, large amount of small shareholders makes them similar to state
owned companies (in which everyone is a shareholder) with all the associated
bureaucracy, parasitic management class, pathological incentives etc.

On the other hand, being private they lack even the weak control mechanisms
that democratic societies impose on state-owned companies.

------
ef4
An analogy:

Bank runs are like forest fires. If you prevent all the small ones, eventually
you get a giant one that's too big to stop.

------
dmm
Next time they blow up just let them all burn to the ground.

~~~
stephengillie
The people in charge are too afraid we'll go all "Lord of the Flies" on them
without the banking system to motivate us into productivity.

~~~
mdda
Suppose JPM/Chase had failed. The day after, there would be no cash in the
ATMs (unless the government stepped in). The USA would be in a Lord of the
Flies situation very rapidly. And we wouldn't be interested in the bank
bosses, we'd be interested in food.

------
druswick
Another interesting way to think about "too big to fail" is as a considerable
government subsidy. Banks operate in a risky environment. When there's a
meltdown, the government steps in to bail the largest banks out. These banks
are getting a free insurance policy from the government, a subsidy that's not
going to the smaller banks.

~~~
noibl
The word 'meltdown' is apt.

[Price–Anderson Nuclear Industries Indemnity Act]
[http://en.wikipedia.org/wiki/Price%E2%80%93Anderson_Nuclear_...](http://en.wikipedia.org/wiki/Price%E2%80%93Anderson_Nuclear_Industries_Indemnity_Act)

------
pdog
We already _know_ how. The political will just isn't there.

~~~
alexqgb
Bullshit. If you're talking about the American people, the political will is
there in spades. But thanks to gerrymandering and the filibuster, their voices
been successfully nullified. The GOP holds the House by a wide majority, even
though their members in it received fewer votes than the "minority" in
opposition. And while the GOP has a numerical minority in the Senate, they
still control the chamber since it (alone in the developed world) runs on a
self-imposed Supermajority rule, not a simple majority.

These two departures from basic democratic control have freed the legislative
body from proper accountability to the people, rendering the will of the
people increasingly irrelevant to the operations of the government. Saying
political will "is just not there" like this is some sad but immutable fact of
life ignores the reality of the situation: America has suffered an unofficial
coup. We are now suffering under an intrinsically illegitimate government that
preserves its power thanks to very clear, very precise structural problems
that have been magnified enough to effectively hinder the legitimate will of
the people.

These are facts, and they are neither debatable nor acceptable. The situation
must resolve itself and it must do so in favor of the people.

~~~
yummyfajitas
Vote totals for the bailout:

Aye: 171 D, 91 R. Nay: 63 D, 108 R.

<http://www.opencongress.org/bill/110-h1424/show>

Why are you complaining about the GOP holding the house? Based on their votes,
they seem to be the party of letting banks pay for their mistakes.

~~~
alexqgb
Why are you citing a vote from 2008 in reference to the Congress that was just
elected in 2012?

~~~
yummyfajitas
I cited it because I don't believe the Republican position has changed.

Do you disagree? Perhaps Republicans hate the Tea Party so much that they
decided to support bailouts just to spite them?

~~~
alexqgb
Um, the Bailout Bill was signed by George W. Bush - a Republican approving the
work of his own cabinet.

The bailout wasn't the issue, by the way. Faced with a catastrophic crisis,
propping up a criminal enterprise that we are utterly dependent upon is very
much a lesser of two evils choice. The real problem is with sparing these
bastards from even a hint of prosecution after the fact.

If you want a more accurate view of where the GOP stands today, consider Eric
Cantor (i.e. their leadership) who actively courted Wall Street during the
election, promising that the Republicans would provide "better service" and
getting a highly disproportionate of the bribes (ahem) contributions in
return.

And don't get me started on Elizabeth Warren. She was actively and
articulately opposed to the criminal class that's developed in banking. And
the agency she designed (the CPFB) was the target for the most vitriolic rage
that the House Republicans have managed to date, and that's saying something,
given who we're dealing with.

~~~
yummyfajitas
I didn't say opposition to bailouts was unanimous among Republicans, merely
that the majority opposed them.

As for "criminal enterprise" and "prosecution", could you remind me what crime
was committed, and by whom? Last I checked, taking a long position on housing
(the cause of the crisis) wasn't a crime. If it was, we need to jail every
homeowner.

Keeping Elizabeth Warren out of the public policy arena is a fantastic move.
She is driven primarily by ideology, and displays a remarkable ability to
state correct facts in a manner that misleads reporters and the public. See,
for example, her nonsensical claims that medical costs _cause_ millions of
bankruptcies, or her confusing presentation of data in the "Two Income Trap"
which obscures the fact that the primary cause of the two income trap is
taxes.

~~~
alexqgb
Oh for god's sake. Are you really that uninformed about the crash? Do you
honestly think it was simply banks "going long"? Tell you what, if it's an
education you're after, see "Inside Job". It's right here, free and legal, for
your convenience: <http://vimeo.com/54817244>.

For someone who knows as little about what actually happened as you appear to,
it's probably the best crash course available.

~~~
yummyfajitas
As I expected, you can't even articulate what crime you think was committed.

~~~
alexqgb
You are correct. The scale of your ignorance combined with the depth of your
obliviousness to it rendered me speechless. Should you actually have any
curiosity here (which I suspect you don't), you'll find that the resource I
provided offers a view vastly more comprehensive than any one person could
include in a single HN post.

And not being one to suffer fools gladly, referring you to a comprehensive
account of multiple, interlocking frauds spanning a variety of institutions
spares me the effort of engaging with someone displaying a Creationist's level
of epistemic closure. This particular discussion of rampant corruption and
outright criminal conduct (fraud, mostly) has the added benefit of being a
very high profile account. It has been widely circulated, closely examined,
and generally accepted as a fair and accurate assessment. This level of
exposure means you'll have an easy time verifying the claims, should you
choose to do so (which, ha).

In the meantime, I'm going to go back to being amazed that someone discussing
this in 2013 can do so without appearing to know what a derivative is, let
alone how one works.

~~~
barry-cotter
The guy you just said didn't know what a derivative is used to workas a quant.

~~~
alexqgb
Knowing the limits of my own knowledge, I was careful to say "appears".

But honestly, that only makes him even more dishonest. After all, he was
saying that there was no real difference between banks involved in the
subprime crisis and any homeowner "going long" with a bet on rising home
prices. Except that there's a world of difference between placing a bet on a
specific piece of tangible property in an open, regulated market, and placing
bets of derivations from that market so far removed that they have no clear
connection to reality. And he, of all people, should know it.

This refusal to see how cynically the inputs for financial models were being
manipulated supports my view that many of the quants who played a key role in
this mess had no idea who or what they were working with, that they were
oblivious to the fraud and corruption engulfing the firms that employed them,
and that they failed to register what would happen when things like fraudulent
AAA ratings on securities found their way into a system. Among a broader class
of market observers this blindness was attributed to a quasi-religious belief
in efficient market theory, rejected the possibility of fraud out of hand.

The basic problem can be summarized as mistaking the map for the territory. In
this case, the map was the Black-Scholes Equation. Or rather, the source of
the maps was this formula. People who learned to model various risks to
determine prices without properly understanding the equation's limits (there
were many of both) ended up with catastrophically misguided decisions to their
credit.

For a bit more background on all this, see here:
[http://www.guardian.co.uk/science/2012/feb/12/black-
scholes-...](http://www.guardian.co.uk/science/2012/feb/12/black-scholes-
equation-credit-crunch)

If there's one thing that 'Inside Job' makes clear, it's that the policy
framework that governs markets is absolutely critical to their stability and
value. In America, this framework was subverted by the rise of an ideological
(again, quasi-religious) form of market theory that say deregulation as both a
practical and moral virtue. This was deep tissue corruption, and as it found
its way into the laws that governed market players (or failed to govern, as
the case may be), it opened the door to a cascade of fraud - people
deliberately describing X as Y.

Like a ever-growing fog (toxic cloud, really) this continued until none of the
major players had any idea what positions their counterparties were in.
Knowing how fraudulent their own positions were, they had every reason to fear
the worst from others in the same game. And then, on one horrible day in
September, the music finally stopped.

To put it in very crude terms, a system built around bullshit eventually
choked on the stuff. I'm not surprised that a person who shared more
responsibility than most for the resulting catastrophe would respond by
entering a state of deep denial. But it's sad, nonetheless.

------
charonn0
My first reaction to hearing the term "too big to fail" was "then make them
smaller." I'm surprised that it's taken this long for such an idea to be
seriously considered.

------
hcarvalhoalves
Give me a break. The whole point of the banking system _is_ to concentrate
capital into a handful megacorps. When you have thousands of little
competitors, profit plummets and risk increases enough to make banking not a
viable business anymore.

Heck, that's how banking _started_. A handful Venetian traders got _so_ rich
they started lending money.

------
knodi
The banks will never let this happen. The banks have become too powerful.

------
ttar
Start the Bank of the United States, cancel FDIC insurance.

There problem solve.

~~~
ttar
FDIC is a form of privatizing the profit, while socializing the risks for the
banks.

~~~
raverbashing
Yes

BUT it's also a form of "insurance". If there's a suspect a bank won't be able
to honor deposits, bank run ensues, THEN the given bank can't honor deposits
obviously, because no bank works like that today, that is: self fulfilling
prophecy

It's a necessary evil (for the customer's sake)

~~~
amalag
Credit unions don't participate in FDIC insurance, they have arranged their
own private insurance. So it is not a necessary evil.

~~~
natrius
Credit unions participate in the NCUA, which is decidedly not private.

<http://www.ncua.gov/Pages/default.aspx>

~~~
amalag
Sorry, you are right, I didn't realize it was a federal agency, I thought it
was something they had arranged amongst themselves.

------
maeon3
If we call for BitCoin as the solution, The Federal Reserve will fight us,
using our money, to make it the villan in the narrative. If we call the
division of banks as the solution, the federal reserve will support it,
because gigantic entities have clout in resisting the parasitic nature of the
Federal Reserve, where minor banks would have to suffer what they must.

Whatever we do, the parasites who can print and dilute our currency through
systematic inflation must be appeased and satisfied, or else they will inject
poison into the entire system as a retaliation for trying to remove the blood
sucking parasite. The bitcoin angle won't work.

