I will say right at the outset that I am not the most financially astute person in the world; so I might be completely wrong in how I read these stories. Most of the stuff that I can follow on the issue are opinion pieces. But, as I understand it, the Administration’s plan for financial-regulation reform is set to go about offically declaring that some financial institutions “Tier 1 financial holding companies.” The administration denies it, but I keep reading that this will be the “too big to fail” list.
Supposedly, the idea is that the list of who is on the list will remain secret. But does anyone really believe that will remain the case for long? With billions at stake, and given that most of the top government fiancial people are usually once-and-future Wall Street types?
Can one of the more fincially astute Dopes tell me why we can’t just
Break up all the superbig firms
Put regulation in place so that nobody ever gets “too big to fail” again.
Step the fuck back and let the market take care of the rest, and if some banks fail, so be it. Pour encourager les autres.
My assumption is that pols of both parties are more-or-less bought off by said superbig firms. But maybe I’m wrong. Anyone?
There have been over 100 bank failures this year. That on course aids consolidation. When the huge bank failures occurred we allowed Bank of America and other enormous banks to buy them up with TARP money. Our policies have made bigger and more dangerous banks. The banks are in charge.
Why is it bad for a company to be too big to fail? Big companies (on average) can accomplish more, with less overhead, and are more stable. So long as there is competition, big companies are good.
Fixing them or helping them collapse in a controlled manner is just something that will happen periodically. Fewer companies to fix is easier to deal with. Having one company collapse is no different than having 100 companies collapse if they both own, cumulatively, the same market share, except that it’s easier to deal with a single company. The market had to shrink by X% because everyone pulled their money from the market. X% of all companies, hence, had to close their doors. Losing that X% is too much to allow regardless of whether it’s a single company or a hundred.
It’s bad because you have to bail them out. It also allows them to take on as much risk as they want because they know they’re backstopped by the government, obviously something we don’t want. You can save the financial system easily and the bankrupt banks just go through the FDIC process. The Bush/Obama method is to save the financial system but also save the big banks. There are currently about two honest brokers on the Obama team dealing with the meltdown, Paul Volcker and Elizabeth Warren. Both are in favor of putting firms like Citi and BOA through a sort of FDIC process, wipe out bond and shareholders, convert debt to equity and sell the cleaned-up bank to new investors type thing. With firms like Citi also split off their brokerage operations from the basic commercial banking operation too. But this isn’t going to be done, these firms are now bigger than they were before the meltdown. Add the fact that they’re now seen as guaranteed any bailout and look like they’re going to avoid any effective re-regulation and you have disasters waiting to happen. Volcker and Warren are the only ones calling for this, the rest of the people dealing with this are all members of the Wall Street/Fed/Treasury revolving door club.
It’s not simply a matter of preventing banks from becoming “too big to fail”. If thousands of small banks fail because of the same crappy business practices, it’s just as bad.
Reinstating the Glass-Steagall act might be a good place to start. The intent of the act was to prevent banks from becomming “too big to fail” by restricting what businesses they could enter into and preventing conflicts of interest.
The problem isn’t so much that banks are too big to fail. The problem is that they engaged in shady business practices that caused them to fail.
Average gots nothing to do with it. Failing companies by definition are NOT accomplishing anything or being stable. But the danger is that it can be so big that it poses risk to everyone else. Sort of like having that huge tree limb hanging over your house. It’s totally fine – until it crashes through your roof. Sometimes it’s best to prune in advance. Better for the house, and often even better for the tree.
I have no problem with helping them collapse in a controlled manner. That has not been the approach of the last three administrations (at least, probably more).
100 companies are unlikely to all collapse at once. One or two will, in fact, be collapsing all the time, and new ones taking their place. As an aggregate, they will be quicker to react to changing conditions, whether good or bad. You won’t to “deal with” at all. They die, and someone else rises up.
No, we still need things like FDIC to keep banks open for the public. But they can fail for stockholders, in the sense that they must be bought or restructured at their expense and not the depositors’.
No market has ever controlled itself.
My own take on it is that the biggest problem is the wheeler dealer gambler, as opposed to the investor. They both are gambling, but the former is reckless, gambling more than he can spare. Lehman Bros had overextended “leveraged” by 80 times their net worth. So a 1% sneeze would topple them.
We recognize speed in our tax structure already, giving leeway to long term gains.
What we need is more tax on super-short gains. And also losses. Buy at $20 and sell the next day at $19 or $21, that means you didn’t buy as a long term investment, so the tax should be imposed right on the spot, a sales tax. Keep the stock a bit longer and the tax goes away until your normal income tax return.
That’s an excellent idea, since it seemed to work for decades - and things fell apart fairly soon after it was repealed.
No, the scary thing is that the crash happened because of perfectly understandable non-shady practices. The excesses happened because anyone who didn’t do them would get clobbered by investors for not making the profits the banks taking the risks did. That’s why regulation is needed, because the market will encourage the bad practices, since it works in the short run.
That was the theory behind the rise of the conglomerates in the '70s. It turns out that growth usually involves expanding into new sectors, which the CEO does not know about and which divides the time of the top managers. Companies that are too big in too many areas are unstable. Companies too big in one area become monopolies, which as you say are bad.
Really big corporations have many layers of management. They become slower to react and are less efficient. That is why ,for instance, IBM went outside to get a home computer made. They saw a new market coming and knew if they did the development inside they would miss the market. It just costs more and takes longer.
Big business seeks to eliminate competition. In Maine 71 percent of health insurance is sold by one company, Well-point. They can do what they want. They will buy up every company they can.
By swallowing up competitors they can set prices and downgrade innovation. We all have cable by huge conglomerates. Our cable is far slower than most industrialized countries. The cable companies have the power to say take it or leave it. In Dearborn Hgts. we can get 3 different providers. When you check them out, there is no reason to change. They offer the same packages at almost exactly the same price. It is not worth the trouble to change. They all go up every year. That is the American business model.
The Financial companies have gotten their way with the destruction of regulation. It allowed them to invent risky new financial instruments. They were crazy enough to risk the banks themselves as they went along their greedy ways. They lost . We paid. They got incredibly wealthy.
Banks are back to their old habits. The brokers are gambling away with wild investments. Now, they know we will fix the mess and they will walk away rich. If we don’t prosecute a few of them we are screwed. They are back to big time bonuses and salaries.
We should have nationalized a bank or 2 and cleaned them out. Then took care of the mortgages. Banks don’t want to deal with them. They are becoming solvent by jacking up credit card rates, refusing credit to people with any troubles and jacking up banking costs. They are allowing us to save them and make them rich. They are laughing at us all the way to the tax shelter.
Our system is kind of contrived. I wish there was a National Bank that’ll completely bypass the whole banking quagmire without bailouts. Let the government handle it.
You knew Paulson would not do it, but,when Obama came in he should have nationalized a failing bank or two. Instead the Wall Streeters got their way and the failing banks were given to other banks making them bigger and more powerful. It is difficult for politicians to face down big bankers. The bankers learned one lesson. If they did something to imperil the economy and made a ton of money doing it, we would not prosecute them but instead make them whole again. They laugh at us .
We have not reformed. It is time to do it. It will be tough because the bankers own congress and the senate. Some pols know that we have to prevent another disaster from happening. They will battle their conscience and the practical fact of money driving the politics. It will take guts and that is sorely lacking.
Actually, there have been 98 bank failures this year. Almost all of them have been acquired by very small banks. I can’t think of any off the top of my head that were acquired by large banks. The closest I can think of was BBVA Compass acquiring Guaranty Bank. BBVA Compass was, of course, not a TARP receipient. Any more untruths you want to throw out there?
Money Morning - We Make Investing Profitable TARP has allowed banks to buy other failing banks and financial institutions. They also allowed non banking financial institutions to buy up a bank and qualify for TARP funds. It was grand theft by the wealthy and powerful.