TBTF Banks Bigger than Ever — How is that possible in a recession?


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Editor’s Comment: 

The pernicious effect of the banks and the difficulty of regulating them across transnational and state borders has led to a growing nightmare that history will repeat itself sooner than later.

This is to rocket science — it is recognition. We have median income still declining in what is still by most measures a recession that is about to get worse. Yet the largest banks are reporting record profits. What that means is that Wall Street is making more money “trading paper” than the rest of the country is making doing actual commerce — i.,e. the making and selling of goods of services.

This is another inversion of common sense. But it is explainable. 4 years ago I predicted that as the recession depressed the earnings of most companies the banks would nonetheless show increased profits. The reason was simply that using Bermuda, Bahamas, Cayman Islands the banks siphoned off most of the credit market liquidity through the tier 2 yield spread premium. The tier 2 YSP was really the money the banks made by selling crappy loans as good loans from aggregators to the investors — and then failed to document any part of the real transactions where money exchanged hands. In some case the YSP “trading profit” exceed the amount of the loan.

So now they are able to feed those “trading profits” back into their system a little at a time reporting ever increasing profits while the the real world goes to hell. So tell, me, what is it going to take to get you to to go to the streets, write the letters and demand that justice be done and allow, for the first time, investors and borrowers to get together and reach settlements in lieu of foreclosures? Don’t you see that whether you are rich or poor, renting or owning, that all of this is going to bring down your wealth and buying power. The Federal Reserve has already tripled the U.S. Currency money supply giving all the benefit to the TBTF banks. It seems to me that as group the American citizens are far more too big to fail than any industry or company.

Evil prospers when good people do nothing. 

Big Five Banks larger than before crisis, bailout


Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis.

Five banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to the Federal Reserve.

Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did during the 2008 crunch.

“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.

That specter is eroding faith in Obama’s pledge that taxpayer-funded bailouts are a thing of the past. It also is exposing him to criticism from Federal Reserve officials, Republicans and Occupy Wall Street supporters, who see the concentration of bank power as a threat to economic stability.

As weaker firms collapsed or were acquired, a handful of financial giants emerged from the crisis and have thrived. Since then, JPMorgan, Goldman Sachs and Wells Fargo have continued to swell, if less dramatically, thanks to internal growth and acquisitions from European banks shedding assets amid the euro crisis.

The industry’s evolution defies the president’s January 2010 call to “prevent the further consolidation of our financial system.” Embracing new limits on banks’ trading operations, Obama said then that taxpayers wouldn’t be well “served by a financial system that comprises just a few massive firms.”

Simon Johnson, a former chief economist of the International Monetary Fund, blames a “lack of leadership at Treasury and the White House” for the failure to fulfill that promise. “It’d be safer to break them up,” he said.

The Obama administration rejects the criticism, citing new safeguards to head off further turmoil in the banking system. Treasury Secretary Timothy Geithner says the U.S. “financial system is significantly stronger than it was before the crisis.” He credits a flurry of new regulations, including tougher capital and liquidity requirements that limit risk-taking by the biggest banks, authority to take over failing big institutions, and prohibitions on the largest banks acquiring competitors.

The government’s financial system rescue, beginning with the 2008 Troubled Asset Relief Program, angered millions of taxpayers and helped give rise to the tea-party movement. Banks and bailouts remain unpopular: By a margin of 52 to 39 percent, respondents in a February Pew Research Center poll called the bailouts “wrong” and 68 percent said banks have a mostly negative effect on the country.

The banks say they have increased their capital backstops in response to regulators’ demands, making them better able to ride out unexpected turbulence. JPMorgan, whose chief executive officer, Jamie Dimon, this month acknowledged public “hostility” toward bankers, boasts of a “fortress balance sheet.” Bank of America, which was about 50 percent larger at the end of 2011 than five years earlier, says it has boosted capital and liquidity while increasing to 29 months the amount of time the bank could operate without external funding.

“We’re a much stronger company than we were heading into the crisis,” said Jerry Dubrowski, a Bank of America spokesman. The bank, based in Charlotte, says it plans to shrink by year-end to $1.75 trillion in risk-weighted assets, a measure regulators use to calculate how much capital individual banks must hold.

Still, the banking industry has become increasingly concentrated since the 1980s. Today’s 6,291 commercial banks are less than half the number that existed in 1984, according to the Federal Deposit Insurance Corp. The trend intensified during the crisis as JPMorgan acquired Bear Stearns and Washington Mutual; Bank of America bought Merrill Lynch; and Wells Fargo took over Wachovia in deals encouraged by the government.

“One of the bad outcomes, the adverse outcomes of the crisis, was the mergers that were of necessity undertaken when large banks were at-risk,” said Donald Kohn, vice chairman of the Federal Reserve from 2006-2010. “Some of the biggest banks got a lot bigger, and the market got more concentrated.”

In recent weeks, at least four current Fed presidents — Esther George of Kansas City, Charles Plosser of Philadelphia, Jeffrey Lacker of Richmond and Richard Fisher of Dallas — have voiced similar worries about the risk of a renewed crisis.

The annual report of the Federal Reserve Bank of Dallas was devoted to an essay by Harvey Rosenblum, head of the bank’s research department, “Why We Must End Too Big to Fail — Now.”

A 40-year Fed veteran, Rosenblum wrote in the report released last month: “TBTF institutions were at the center of the financial crisis and the sluggish recovery that followed. If allowed to remain unchecked, these entities will continue posing a clear and present danger to the U.S. economy.”

The alarms come almost two years after Obama signed into law the Dodd-Frank financial-regulation act. The law required the largest banks to draft contingency plans or “living wills” detailing how they would be unwound in a crisis. It also created a financial-stability council headed by the Treasury secretary, charged with monitoring the system for excessive risk-taking.

The new protections represent an effort to avoid a repeat of the crisis and subsequent recession in which almost 9 million workers lost their jobs and the U.S. government committed $245 billion to save the financial system from collapse.

The goal of policy makers is to ensure that if one of the largest financial institutions fails in the next crisis, shareholders and creditors will pay the tab, not taxpayers.

“Two or three years from now, Goldman Sachs should be like MF Global,” said Dennis Kelleher, president of the nonprofit group Better Markets, who doubts the government would allow a company such as Goldman to repeat MF Global’s Oct. 31 collapse.

Dodd-Frank, the most comprehensive rewriting of financial regulation since the 1930s, subjected the largest banks to higher capital requirements and closer scrutiny. The law also barred federal officials from providing specific types of assistance that were used to prevent such firms from failing in 2008. Instead, the Fed will work with the FDIC to put major banks and other large institutions through the equivalent of bankruptcy.

“If a large financial institution should ever fail, this reform gives us the ability to wind it down without endangering the broader economy,” Obama said before signing the act on July 21, 2010. “And there will be new rules to make clear that no firm is somehow protected because it is too big to fail.”

Officials at the Treasury Department, the Fed and other agencies have spent the past two years drafting detailed regulations to make that vision a reality.

Yet the big banks stayed big or, in some cases, grew larger. JPMorgan, which held $2 trillion in total assets when Dodd-Frank was signed, reached $2.3 trillion by the end of 2011, according to Federal Reserve data.

For Lacker, the banks’ living wills are the key to placing the financial system on sounder footing. Done right, they may require institutions to restructure to make their orderly resolution during a crisis easier to accomplish, he said.

Neil Barofsky, Treasury’s former special inspector general for the Troubled Asset Relief Program, calls the idea of winding down institutions with more than $2 trillion in assets “completely unrealistic.”

It’s likely that more than one bank would face potential failure during any crisis, he said, which would further complicate efforts to gracefully collapse a giant bank. “We’ve made almost no progress on ending too big to fail,” he said.

13 Responses

  1. @John,

    Yep. And why the hell is he leaving? If everything is so honkey dorey, you have to wonder. And he really doesn’t look ill at all on the video. What else can it be…?

  2. It’s all part of the record. Banks “TBTF” now make more off of manipulating the stock market than making loans.

  3. PS: before anyone posts anything about that Blankfein video, know that my comment is completely “tongue and cheek”. What transpires (of course) is “Everything is working out for the best in the best of worlds.” Still wondering why he is leaving, though…

  4. Goldman’s Blankfein on the need to break up the banks.


  5. OK , Here’s a better article …


    The states that HRB still owns $430M in loans it swapped/replaced out of trusts…

  6. Sorry , out of place but here’s some H&R Block (Option One) news

    H&R Block to pay $28 mln to settle SEC charges

    By Ronald D. Orol HRB

    WASHINGTON (MarketWatch) – H&R Block Inc. /quotes/zigman/219890/quotes/nls/hrb HRB -16.37% on Tuesday agreed to pay $28 million to settle Securities and Exchange Commission charges that the firm was allegedly misleading investors by failing to disclose that mortgage-backed securities its mortgage subsidiary issued had a significantly deteriorating financial condition. “Option One’s financial condition deteriorated significantly as its large subprime mortgage lending business suffered from the collapse of the U.S. housing market,” said Robert Khuzami, director of the SEC’s Division of Enforcement.

  7. @Nancy

    Wow. That is crazy!

    Sometimes I wonder if banks really need depositors and shareholders at all; perhaps the public banking activities are merely a front and nuisance for banks to shield their backdoor trades. Like having two sets of books. Shareholders are stool pigeons.

    By processing foreclosures, banks make money as clearinghouses that turnover discount mortgages.
    Not much different than these furniture stores we see that are always liquidating their inventory, going out of business, and under new management. Many times it’s just a big show to get you in the door to spend money.

    Ask yourself…if banks are so darn underwater, why did Wells Fargo recently open up many new wealth management centers ? (don’t have link, sorry) JP Morgan doing the same according to my local branch.

    Essentially the same thing banks do to you and I, they do to their corporate persons– Foreclose on themselves– only they are able to start up again stronger than ever because that is their built-in strategy for economic growth. You and I just lose everything. We don’t think like that. Why should we?? It’s crooked.

  8. Yes, the banks are stealing our homes, and we all need to do something before they take over this country. But, attending a bank’s shareholders meeting is an ineffective way at accomplishing this objective. There are more efficient ways to accomplish our goals.

    First of all, the forefront of this fight must be in the courts. Everyone that is being foreclosed on, by the big banks, must resist. The more defendants that contest the foreclosure and argue the facts in front of the courts the quicker we can get the courts to see the scope of the bank’s fraud. In court we can demonstrate the fraudulent foreclosure tactics being implimented by the banks and persuade the court to get past thier ancient “you didn’t make your payments, so get out”, mentality.

    Even if someone can’t afford an attorney they must put up a pro-se defense to the foreclosure. I run into pro-se foreclosure litigants all the time who are delighted in helping the uninitiated on exactly how to fight back. There are attorneys out there such as George Gingo, who also make it easier for pro-se litigants to fight foreclosure. There are attorneys out there who, for a nominal sum, will ascertain if the promissory note is genuine or not.

    We need a web site where we can hook-up those who have gone through the foreclosure scene and those aforementioned attorneys with those that are just entering the world of big bank foreclosure.

    Then, we have to STOP DOING BUSINESS with the likes of BOA, Wells Fargo, Bank of New York, Mellon etc, and place our savings and checking accounts with the banks that conduct themselves with integrity. There are a few of those left out there.


  9. Yesterday, Wells Fargo showed its true colors.

    With about 1,500 people outside its annual shareholder meeting in San Francisco, Wells Fargo denied entrance to almost every 99%er who had purchased shares in the mega-bank and hoped to be a part of the conversation about Wells Fargo’s corporate policies around foreclosures, private prisons, payday lending, and other abusive practices.1

    You read that correctly: Wells Fargo blockaded its own shareholders from entering its corporate headquarters for a meeting which they had every right to attend.

    Big Banks may think they can keep abusing us and ignoring us. But we have the power to get their attention. Building on yesterday’s incredible action, student, labor, religious, and environmental groups have joined with The New Bottom Line to call for May to be Move Our Money Month.

    Click here to learn more about how you can take action in this Move Our Money Month — even if you’ve already closed or you don’t have a big bank account!

    Yesterday, a photographer from National People’s Action caught Wells Fargo CEO John Stumpf sneaking in through the back door into the meeting. Meanwhile, the few 99%er shareholders who were able to make it into the meeting were immediately seized by police and escorted out upon making any statement. Some shareholders were even arrested.

    If big banks won’t hear our demands, we’ll take away their business until they have no choice but to stop abusive investments and practices. It’s time for every one of us to take a stand against big Wall Street banks like Wells Fargo and take action with our checkbooks, our credit cards, our savings accounts.

    http : //www.newbottomline.com/in_pictures_wells_fargo_shareholder_meeting_action?utm_campaign=post_wellsmom_s&recruiter_id=21443&utm_medium=email&utm_source=bac

  10. Know why that happens? because people allow it. They’re not in enough pain yet to get their butt off the couch and start taking action. That will come…

  11. Stop doing business with the mega banks. Take your money out of them and put your money and your business in small banks.

  12. I’ll say this again. The banks took our bailout monies and invested them all over the place. That’s on top of gains from selling our homes, which they got for nothing. And, taking the insurance monies, blah, blah, blah… Add to that the upcoming global economic reset and the banks are smelling their sweetest hour.

    Banks are laundering the world with their “terrorist” activities. But you or I take just 10k out of a bank that makes us guilty of a suspicious activity.

    Defaulted homeowners have been used by the banks as scapegoats.

    I would not keep any large deposits in banks for any length of time.

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