http://www.bloomberg.com/apps/news?pid=20601087&sid=aYdgQkXu9eBg
Quote from: Bloomberg News
Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman
By Mark Deen and David Tweed
Sept. 13 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."
Stiglitz's views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing "excessively."
A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.'s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.
While Obama wants to name some banks as "systemically important" and subject them to stricter oversight, his plan wouldn't force them to shrink or simplify their structure.
Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.
"We aren't doing anything significant so far, and the banks are pushing back," he said. "The leaders of the G-20 will make some small steps forward, given the power of the banks" and "any step forward is a move in the right direction."
G-20 leaders gather next week in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers last week reached a preliminary accord that included proposals to claw-back cash awards and linking compensation more closely to long-term performance.
"It's an outrage," especially "in the U.S. where we poured so much money into the banks," Stiglitz said. "The administration seems very reluctant to do what is necessary. Yes they'll do something, the question is: Will they do as much as required?"
Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is "far from being out of the woods" even if it has pulled back from the precipice it teetered on after the collapse of Lehman.
"We're going into an extended period of weak economy, of economic malaise," Stiglitz said. The U.S. will "grow but not enough to offset the increase in the population," he said, adding that "if workers do not have income, it's very hard to see how the U.S. will generate the demand that the world economy needs."
The Federal Reserve faces a "quandary" in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.
"The question then is who is going to finance the U.S. government," Stiglitz said.
I guess the point that the "too big to fail" banks are now even bigger than before is kind of an obvious criticism. Are they "too big NOT to fail" now? Should we pull out the trustbusting stick and crack them into smaller chunks?
Is Joseph Stiglitz related to Hugo Stiglitz?
Is he related to the Sniglets guy? My favorite sniglet was "pediddel". Good times. *wipes away tear*
This is my worst fear, that we learned nothing from this crisis. Obama spoke all the right words, but as with other issues, proved to be rather impotent in practice.
Quote from: DGuller on September 15, 2009, 02:28:38 PM
This is my worst fear, that we learned nothing from this crisis. Obama spoke all the right words, but as with other issues, proved to be rather impotent in practice.
Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.
In hindsight our government took a lot of industry heat for not letting them grown bigger but that saved us from the same bank failures the US encountered.
Quote from: Caliga on September 15, 2009, 01:36:38 PM
Is he related to the Sniglets guy? My favorite sniglet was "pediddel". Good times. *wipes away tear*
Rich Hall? He's still floating around out there.
Quote from: crazy canuck on September 15, 2009, 02:43:19 PM
Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.
He can do a lot, or at least lead the effort. He can put a lot of emphasis on financial regulation reform, which might automatically lead to disassembly of financial behemoths. AFAIK, he hasn't done that so far, and with each passing day the memory of the clusterfuck would be further behind us.
I still have hope that Bernanke would come through with something. It seems clear that at least now he understands how dangerously unstable the current setup is, and how it needs changing. However, he may also be the guy knowing what words to say, without knowing how to actually accomplish what he's talking about.
Why Pittsburgh?
It seems to be a fair bet that HBOS and Lloyds will be broken back up should the Tories win the next election over here. Judging by the non-activity of Lloyds management in extracting savings from the merger, I suspect Lloyds management believe this to be the case.
Quote from: DGuller on September 15, 2009, 02:48:27 PM
Quote from: crazy canuck on September 15, 2009, 02:43:19 PM
Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.
He can do a lot, or at least lead the effort. He can put a lot of emphasis on financial regulation reform, which might automatically lead to disassembly of financial behemoths. AFAIK, he hasn't done that so far, and with each passing day the memory of the clusterfuck would be further behind us.
I still have hope that Bernanke would come through with something. It seems clear that at least now he understands how dangerously unstable the current setup is, and how it needs changing. However, he may also be the guy knowing what words to say, without knowing how to actually accomplish what he's talking about.
But the President cant really do anything on his own. If the rest of congress isnt with him he is nothing but a figurehead. Not saying that is a bad thing. Its just that you cant expect a figure head to do much in the way of substantive reform without a lot of help.
Quote from: crazy canuck on September 15, 2009, 03:47:38 PM
Quote from: DGuller on September 15, 2009, 02:48:27 PM
Quote from: crazy canuck on September 15, 2009, 02:43:19 PM
Not sure what the President can do to reduce the size of your financial institutions given how big the concentration became before he stepped foot in office.
He can do a lot, or at least lead the effort. He can put a lot of emphasis on financial regulation reform, which might automatically lead to disassembly of financial behemoths. AFAIK, he hasn't done that so far, and with each passing day the memory of the clusterfuck would be further behind us.
I still have hope that Bernanke would come through with something. It seems clear that at least now he understands how dangerously unstable the current setup is, and how it needs changing. However, he may also be the guy knowing what words to say, without knowing how to actually accomplish what he's talking about.
But the President cant really do anything on his own. If the rest of congress isnt with him he is nothing but a figurehead. Not saying that is a bad thing. Its just that you cant expect a figure head to do much in the way of substantive reform without a lot of help.
There are a lot of regulatory reforms that can go through without congressional approval. But to the extent he needs congress, he can't really blame their unwillingness to go along when he hasn't pushed for much of anything.
Quote from: crazy canuck on September 15, 2009, 03:47:38 PM
But the President cant really do anything on his own. If the rest of congress isnt with him he is nothing but a figurehead. Not saying that is a bad thing. Its just that you cant expect a figure head to do much in the way of substantive reform without a lot of help.
Likewise if the President if not with Congress, they are nothing but a debating society...unless they can get 2/3rds of their members to agree.
There seems to be a certain amount of circularity to this argument (also advanced by the former chief economist of the Fund, who's name I forget).
We must reduce the size of banks that are too big to fail.
Why?
Because they have too much lobbying power.
How do they use this power?
To block legislation.
What kind of legislation?
Legislation that would reduce the size of banks that are too big to fail.
It's important to keep in mind that the Fed decided to *force* the largest US banks to take TARP money whether they wanted it or not.
It's also important to keep in mind that the biggest sink hole of TARP money--AIG--is in the process of shrinking itself out of business. It wasn't too big to fail; it was too complicated to seize and flip in a quick and easy process.
Quote from: Admiral Yi on September 15, 2009, 06:15:52 PM
There seems to be a certain amount of circularity to this argument (also advanced by the former chief economist of the Fund, who's name I forget).
We must reduce the size of banks that are too big to fail.
Why?
Because they have too much lobbying power.
How do they use this power?
To block legislation.
What kind of legislation?
Legislation that would reduce the size of banks that are too big to fail.
It's important to keep in mind that the Fed decided to *force* the largest US banks to take TARP money whether they wanted it or not.
It's also important to keep in mind that the biggest sink hole of TARP money--AIG--is in the process of shrinking itself out of business. It wasn't too big to fail; it was too complicated to seize and flip in a quick and easy process.
I can't speak for the former chief economist you are referring to, but I haven't heard anyone cite "too big to fail" as a problem because of excessive lobbying power. Bigger problems are the socialization of losses, the competitive advantage the "too big to fail" banks get from implicit government guarantees of debt, and the incentive the companies have to speculate in ways that would otherwise put their existence in jeopardy.
"Too big to fail" is a bit of a red herring. The government doesn't choose to step in based on size but based on danger of systemic risk. A bunch of small, interrelated banks can pose as much if not more systemic risk then one or two large banks. America in the late 20s had lots of small banks and they were absolutely annihilated by runs in the Great Depression, to much more damaging effect than in the most recent crisis.
the real problem is that the entire financial system consists of a complex web of mutual dependencies and institutions, and that will always be the case regardless of industry structure in terms of number and size of firms. When a very large bubble bursts suddenly, all the participants call in their mutual obligations and scramble for cash. In this setting, there can be an advantage to size from a regulatory point of view. It is arguably easier to monitor and keep track of a few dozen very large institutions as opposed to hundreds of smaller ones. Larger institutions often have multiple operations and even in a crisis, some operations can serve as a "source of strength" to others -- indeed, one of the reasons AIG has not been a total loss is that its insurance subs continued to retain significant value and throw of cash.
IMO any regulatory prescription that focuses on size of individual institutions and antitrust remedies is focusing on the wrong thing. The focus needs to be on the systemic weakness of financial systems in modern capitalist market economies, and the remedies focusing on strenghtening the system as a whole and rendering it more robust to shock.
Quote from: Admiral Yi on September 15, 2009, 06:15:52 PM
It's important to keep in mind that the Fed decided to *force* the largest US banks to take TARP money whether they wanted it or not.
This is also a bit of a red herring. Or more accurately some questionable spin.
Some banks (*cough* Goldman *cough*) have liked to play up the claim that they were "forced" to take TARP money and didn't really want it. But Goldman wasn't really forced to take the money, they took at as a de facto quid quo pro for being permitted to register as a bank holding company. And they did that because the implicit fed guarantee that came with that banking license stauchned the hemorrhaging of their stock.
The cruel fact is that EVERY signficant financial institution in America ran for the cover of mother Bernanke when the Fuld hit the Fan. And if the Fed put some conditions on that protection, so be it.
Quote from: Ed Anger on September 15, 2009, 02:44:31 PM
Quote from: Caliga on September 15, 2009, 01:36:38 PM
Is he related to the Sniglets guy? My favorite sniglet was "pediddel". Good times. *wipes away tear*
Rich Hall? He's still floating around out there.
:w00t:
Found this earlier. Now I am hoping there are new regulations on banks.
http://news.yahoo.com/s/ap/us_meltdown_same_old_wall_street (http://news.yahoo.com/s/ap/us_meltdown_same_old_wall_street)
Quote
NEW YORK – A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for risk.
Goldman Sachs, JPMorgan Chase and others — which have received tens of billions of dollars in federal aid — are once more betting big on bonds, commodities and exotic financial products, trading that nearly stopped during the financial crisis.
That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say.
• There have been no significant changes to the federal rules governing their behavior. Proposals that have been made to better monitor the financial system and to police the products banks sell to consumers have been held up by lobbyists, lawmakers and turf-protecting regulators.
• Through mergers and the failure of Lehman Brothers, the mammoth banks whose near-collapse prompted government rescues have gotten even bigger, increasing the risk they pose to the financial system. And they still make bets that, in the aggregate, are worth far more than the capital they have on hand to cover against potential losses.
• The government's response to last year's meltdown was to spend whatever it takes to protect the financial system from collapse — a precedent that could encourage even greater risk-taking from the private sector.
Lawrence Summers, director of the White House National Economic Council, says an overhaul of financial regulations is needed as soon as possible to keep the financial system safe over the long haul.
"You cannot rely on the scars of past crises to ensure against practices that will lead to future crises," Summers says.
No one is predicting another meltdown from risky trading in the near term. Rather, the concern is what happens over time as banks' confidence grows and the memory of the financial crisis of 2008 fades.
Will they pile on bets to the point that a new asset bubble forms and — as happened with mortgage-backed securities — its undoing endangers banks and the broader economy?
"We're seeing the same kind of behavior from the banks, and that could lead to some huge and scary parallels," says Simon Johnson, former chief economist with the International Monetary Fund.
Some risk-taking is good. When banks are willing to invest in companies or lend to home-buyers, that nurtures economic growth by generating employment and consumer spending, feeding a cycle of expansion.
The problem is when banks' quest for profits leads them to take on too much risk. In the case of the housing bubble, which burst last year, banks lent too freely to consumers with weak credit and wagered too much on complex financial instruments tied to mortgages. As real-estate prices turned south, so did the financial industry's health.
Because the largest banks' trading divisions make their bets with each other, their fortunes are intertwined. The collapse of one can threaten another — and another — if it is unable to pay off its debts.
This so-called counterparty risk is a major reason the Obama administration's regulatory overhaul plan calls for the creation of a "systemic risk regulator."
The administration is also seeking tougher capital requirements for banks, arguing that banks' buying of exotic financial products without keeping enough cash on reserve was a key cause of the crisis. Treasury Secretary Timothy Geithner has urged the Group of 20 nations — which meets this month in Pittsburgh — to agree on new capital levels by the end of 2010 and put them in place two years later. Geithner hasn't said how much extra capital banks should be required to keep on hand.
Data from the April-June quarter show that the banks are leaning heavily again on their trading desks for revenue.
• During the fourth quarter of 2008, when the financial crisis made even the shrewdest bankers risk-averse, Goldman's trading of risky assets nearly stopped. But in the second quarter of 2009, trading revenue had climbed to nearly 50 percent of total revenue, closer to where it was two years ago before the recession began. JP Morgan's reliance on trading revenue has exhibited a similar pattern.
• Also in the second quarter, the five biggest banks' average potential losses from a single day of trading topped $1 billion, up 76 percent from two years ago, according to regulatory filings.
The government hasn't just watched banks resume their freewheeling ways and prosper. It has been an enabler in the process. The Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corp. — during both the Bush and Obama administrations — have made trillions of dollars available to the biggest banks through bailouts, low-cost loans and loss guarantees designed to stabilize the financial system.
The failure of Lehman Brothers — the biggest bankruptcy in U.S. history — and the panicky sales of Bear Stearns to JPMorgan and Merrill Lynch to Bank of America, also have transformed Wall Street. The surviving investment banks have fewer competitors and more market share.
Five of the biggest banks — Goldman, JPMorgan, Wells Fargo, Citigroup and Bank of America — posted second-quarter profits totaling $13 billion. That's more than double what they made in the second quarter of 2008 and nearly two-thirds as much as the $20.7 billion they earned in the second quarter of 2007 — when the economy was strong.
Meanwhile, Bank of America and Wells Fargo today originate 41 percent of all home loans that are backed by Fannie Mae and Freddie Mac, according to Inside Mortgage Finance. The banks made $284 billion in such loans in the first half of this year, up from $124 billion during the same period last year.
"The big banks now are more powerful than before," said Johnson, now a professor at the Massachusetts Institute of Technology's Sloan School of Management. "Their market share has grown and they have a lot of clout in Washington."
Wall Street's recovery is also being aided by a stock-market rally that has driven the S&P 500 index up nearly 54 percent since March 9, when it hit a 12-year low.
Despite the return to profitability, these aren't the high-octane days from before the crisis. To qualify for government backing, the biggest Wall Street firms are no longer allowed to supercharge their returns by borrowing up to 30 times the value of their assets to place bets on stocks, bonds and other investments.
Businesses supported by Wall Street bankers and traders say they've also noticed changes. Namely, their customers aren't spending as much on food, drinks and entertainment as they did during the boom years.
At Fraunces Tavern, a high-end bar just around the corner from the New York Stock Exchange, the Wall Street workers who used to drink $25 glasses of port are scarce these days.
"Now we're doing happy hours," says Damon Testaverde, one of the owners of Fraunces Tavern. "We never did that. There's just less bodies around."
But one thing fundamental to Wall Street hasn't changed: Big banks and their traders are still finding creative — some say speculative — ways to profit.
They're still packaging risky mortgages into securities and selling them to investors, who can earn higher returns by purchasing the securities tied to the riskiest mortgages. That was the practice that helped inflate the real estate bubble and eventually spread financial pain around the globe.
In a way, the government has emboldened banks to keep selling risky securities: Since the crisis erupted, federal emergency programs have helped keep the banks from failing. But now, as the financial system recovers, the government plans to phase out these backstops — leaving banks more vulnerable to big bets that go bad.
One investment gaining popularity is a direct descendant of the mortgage-backed securities that devastated many banks last year. To get some lesser performing assets off their books, banks are taking slices of bonds made up of high-risk mortgage securities and pooling them with slices of bonds comprised of low-risk mortgage securities. With the blessing of debt ratings agencies, banks are then selling this class of bonds as a low-risk investment. The market for these products has hit $30 billion, according to Morgan Stanley.
"It may be unpleasant to hear that the traders are riding high," said Walter Bailey, chief executive of boutique merchant banking firm EpiGroup. "But, hey, it's a pay-for-performance thing, and they're performing like mad."
And that means the return of another Wall Street mainstay: Lavish compensation.
After 10 of the largest banks received a $250 billion lifeline from the government last fall, some lawmakers were outraged that employees were being paid seven-figure salaries even though their companies nearly collapsed. A handful of top executives, including Citigroup CEO Vikram Pandit, have agreed to accept pay of just $1 this year. But the compensation of most high-performing traders hasn't changed.
Goldman spent $6.6 billion in the second quarter on pay and benefits, 34 percent more than two years ago. And Citigroup, now one-third owned by the government after taking $45 billion in federal money, owes a star energy trader $100 million.
The CEO of Goldman, Lloyd Blankfein, said at a banking conference in Germany last week that excessive banker pay works "against the public interest." He said bonuses are important to attract and retain top talent, but "misapplied, they can also encourage excess."
The Obama administration has proposed measures to diminish the risk posed by large banks. They include forcing banks to hold more capital to cover losses and trying to increase the transparency of markets in which banks trade the most complex — and potentially risky — financial products.
One major component of the Obama plan — creating an agency to oversee the marketing of financial products to consumers — will be difficult to pass in Congress. Industry lobbying against it and other proposed financial rules has been fierce.
Lobbyists for hedge funds, the large investment pools that cater to the rich, have been able to fend off proposals that would require them to register with the SEC and regularly disclose their holdings.
And they, too, are profitable again after a dismal 2008. The 1,000 largest hedge funds in Morningstar's database posted average returns of 11.9 percent through July. In 2008, those same funds lost 22 percent on average.
"Have there been changes around the edges?" says Timothy Brog, portfolio manager of New York-based hedge fund Locksmith Capital. "Absolutely. Have their been systematic changes? Absolutely not."
Quote from: The Minsky Moment on September 15, 2009, 07:49:59 PM
"Too big to fail" is a bit of a red herring. The government doesn't choose to step in based on size but based on danger of systemic risk. A bunch of small, interrelated banks can pose as much if not more systemic risk then one or two large banks. America in the late 20s had lots of small banks and they were absolutely annihilated by runs in the Great Depression, to much more damaging effect than in the most recent crisis.
the real problem is that the entire financial system consists of a complex web of mutual dependencies and institutions, and that will always be the case regardless of industry structure in terms of number and size of firms. When a very large bubble bursts suddenly, all the participants call in their mutual obligations and scramble for cash. In this setting, there can be an advantage to size from a regulatory point of view. It is arguably easier to monitor and keep track of a few dozen very large institutions as opposed to hundreds of smaller ones. Larger institutions often have multiple operations and even in a crisis, some operations can serve as a "source of strength" to others -- indeed, one of the reasons AIG has not been a total loss is that its insurance subs continued to retain significant value and throw of cash.
IMO any regulatory prescription that focuses on size of individual institutions and antitrust remedies is focusing on the wrong thing. The focus needs to be on the systemic weakness of financial systems in modern capitalist market economies, and the remedies focusing on strenghtening the system as a whole and rendering it more robust to shock.
That is a good point, but size matters too--a company like AIG large enough to pose some systematic risk on its own has an implicit guarantee that can keep down its borrowing costs even if it is impressively reckless. On the other hand, Joe Blow Bank, Inc. is going to have a hard time getting financing for a risky scheme when lenders know that if things go bad Uncle Sugar may not step in.