Pres. Kansas City FED: TOO BIG TO SUCCEED

MEGABANKS POSE SYSTEMIC THREAT IF THEY SUCCEED

There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight.

These firms reached their present size through the subsidies they received because they were too big to fail. Therefore, diminishing their size and scope, thereby reducing or removing this subsidy and the competitive advantage it provides, would restore competitive balance to our economic system.

In a major break from the pack, THOMAS M. HOENIG, President of the Federal Reserve Bank in Kansas City, says that the current policies are wrong-headed and heading toward the wrong result.

see 2009-fed-created-bus-opp-for-top-5-while-everyone-else-went-down-the-drain

Too Big to Succeed

By THOMAS M. HOENIG

Kansas City, Mo.

THE world has experienced a severe financial crisis and economic recession. The Treasury and the Federal Reserve took actions that saved businesses and jobs and may very well have saved the economy itself from ruin. Still, the public seems ungrateful, expressing anger at these institutions that saved the day. Why?

Americans are angry in part because they sense that the government was as much a cause of the crisis as its cure. They realize that more must be done to address a threat that remains increasingly a part of our economy: financial institutions that are “too big to fail.”

During the 1990s, Congress, with encouragement from academics and regulators, repealed the Glass-Steagall Act, the Depression-era law that had barred commercial banks from undertaking the riskier activities of investment banks. Following this action, the regulatory authority significantly reduced capital requirements for the largest investment banks.

Less than a decade after these changes, the investment firm Bear Stearns failed. Bear was the smallest of the “big five” American investment banks. Yet to avoid the damage its failure might cause, billions of dollars in public assistance was provided to support its acquisition by JPMorgan Chase. Soon other large financial institutions were found to also be at risk. These firms were required to accept billions of dollars in capital from the Treasury and were provided hundreds of billions in loans from the Federal Reserve.

In spite of the public assistance required to sustain the industry, little has changed on Wall Street. Two years later, the largest firms are again operating with bonus and compensation schemes that reflect success, not the reality of recent failures. Contrast this with the hundreds of smaller banks and businesses that failed and the millions of people who lost their jobs during the Wall Street-fueled recession.

There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight.

Last summer, Congress passed a law to reform our financial system. It offers the promise that in the future there will be no taxpayer-financed bailouts of investors or creditors. However, after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.

How is it possible that post-crisis legislation leaves large financial institutions still in control of our country’s economic destiny? One answer is that they have even greater political influence than they had before the crisis. During the past decade, the four largest financial firms spent tens of millions of dollars on lobbying. A member of Congress from the Midwest reluctantly confirmed for me that any candidate who runs for national office must go to New York City, home of the big banks, to raise money.

What can be done to remedy the situation? After the Great Depression and the passage of Glass-Steagall, the largest banks had to spin off certain risky activities, and this created smaller, safer banks. Taking similar actions today to reduce the scope and size of banks, combined with legislatively mandated debt-to-equity requirements, would restore the integrity of the financial system and enhance equity of access to credit for consumers and businesses. Studies show that most operational efficiencies are captured when financial firms are substantially smaller than the largest ones are today.

These firms reached their present size through the subsidies they received because they were too big to fail. Therefore, diminishing their size and scope, thereby reducing or removing this subsidy and the competitive advantage it provides, would restore competitive balance to our economic system.

To do this will require real political will. Those who control the largest banks will argue that such action would undermine financial firms’ ability to compete globally.

I am not persuaded by this argument. History suggests that financial strength follows economic strength. A competitive, accountable and successful domestic economic system, supported by many innovative financial firms, would restore the United States’ economic strength.

More financial firms — with none too big to fail — would mean less concentrated financial power, less concentrated risk and better access and service for American businesses and the public. Even if they were substantially smaller, the largest firms could continue to meet any global financial demand either directly or through syndication.

Crises will always be a part of our capitalist system. But an absence of accountability and blatant inequities in treatment are why Americans remain angry. Without accountability, we cannot hope to build a national consensus around the sacrifices needed to eliminate our fiscal deficits and rebuild our economy.

Thomas M. Hoenig is the president of the Federal Reserve Bank of Kansas City.

11 Responses

  1. Deb wynn

    YES …..YES…..YES

  2. Eveyone bombard the us atty general

  3. San Jose Woman Reclaims Illegally Foreclosed Property

    A 75 year old San Jose resident has reclaimed her home through a court decision against Washington Mutual and Bank of America. Corazon Palma won the court decision, because her home was illegally foreclosed.
    The court documents state that Palma modified her mortgage with the thrift bank in 2008. Palma wanted to reduce her current mortgage payments of $3,900. She sought a modification due to her cancer diagnosis. Months later, a neighbor told Palma that a notice of trustee sale sign was seen on her property. Palma’s property was currently rented. When the trustee sale sign was placed, the loan was being serviced by Bank of America. Bank of America took over the mortgage modification due to the bankruptcy of WaMu, Inc in September 2008. Palma called the mortgage lender and was told that the sale would be canceled and appropriate loan modification documents would be sent.
    The property was sold months later, according to a broker from Coldwell Banker, at a trust sale. Court documents accuse Washington Mutual of illegal lending practices by misleading Palma from the start.
    The lawsuit was filed in the Northern California Superior Court due to allegations that Palma’s home was illegally foreclosed upon. The judge ruled in favor of Corazon Palma…

  4. John,

    Please explain the win you speak of…who v what?

  5. John, what is the win in California? Give us the name of the case.
    Thanks,
    http://www.challengingforeclosure.com
    Sirak@challengingforeclosure.com

  6. We just got a win in California!!!!!!!

  7. All smoke & mirrors , the financial system is corrupt to the core. Stay out the stock market , this all for show. Housing is tanking and yet the pr machine rages on great the Oct sales were. Ask who was buying these homes , doubtful was the 1st time buyer in most cases.

  8. I think the mega banks are about to run into the big wall. Over the past ten years, many banks have merged into ridiculously large, bloated, out-of-control mega entities. Move your accounts and business away from BofA, Citibank, JPMorgan Chase, WFB and Ally. Just boycott them. We need smaller, more controlled banks, and we need Glass-Steagall Act back or something equivalent. The mega banks are running America into the ground. http://www.challengingforeclosure.com Sirak@challengingforeclosure.com

  9. The market is easily gamed, they made it crash before, they will again. Since it is their tool and plaything, they use it for the appearance of fiscal responsibility and point everyone to its virtues. Rats get a bad name. The sewer was their home before amoeba upstairs realized how to sell it to a securitized trust. The Rats are squatters, but they haven’t been foreclosed or evicted? The Rats have more skin in the game than the amoeba.

  10. He’s right.

    Does TOO BIG TO FAIL equate to TOO BIG TO NAIL??

    That’s what is going on here. No accountability.
    Plus, taking no responsibility…blaming it on others.
    Stealing. Unjust enrichment. Identity theft. Fraud on the courts. It just goes on and on.

  11. The stock market continues to rise concealing serious issues with the economy. As this occurs, less focus will be on foreclosure fraud as administrators are falsely led to believe that “happy days are here again.”

    Borrower victims will continue to disregarded and scapegoats. Headlines – “housing strength and good retail numbers – push stock market higher and indicate economic recovery.”

    Again, if market continues to rise – foreclosure victims will be viewed as dispensable. Quantitative easing is artificially making economy look better than it is really is.

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