Re: The Financial Stability Oversight Council Defers To Big Banks

> Why/how Goldman Sachs hasn't been declared an enemy of the state, and
> treated as
> such, is mind boggling.  Tim Geitner is a piece of shit.

Agree 100%.  When they were making threats of riots and tanks in the
street to congressmen unless they passed TARP.  Well I see that as a
terrorist threat and they should be treated as such.

Thing is, that AIG deal is only the tip of the iceberg of the fraud that
is going on, still going on today.  And it isn't just Goldman.  I
recommend the book "13 Bankers" if you are really interested in it.

This whole fraudclosure scandal may be the final straw that crashes the
system.  It is unbelievable what they have done with the MERS system and
the transferring, pooling and selling of these mortgages.  I have zero
trust in the property system right now.  I'd have trouble bringing myself
to buy a house with cash, much less a mortgage.  The title assignments and
so forth are so screwed up, they may never clear this mess up.  Like a
tangled fishing line, they may have to just cut it all and start over.

regards,
-Lance

> Sent: Thu, January 20, 2011 8:20:11 AM
> Subject: [DADL-OT] The Financial Stability Oversight Council Defers To Big
> Banks
>
>
> The Baseline Scenario
> January 20, 2011 6:56 AM
> by Simon Johnson
> The Financial Stability Oversight Council Defers To Big Banks
> By Simon Johnson
> As required by Section 123 of the Dodd-Frank financial reform legislation,
> Treasury Secretary Tim Geithner, as chair of the Financial Stability
> Oversight
> Council (FSOC), has released an assessment on the costs and benefits of
> potentially limiting the size of banks and other financial institutions. 
> This
> report, four-and-a-half pages in a longer “Study of the Effects of Size
> and
> Complexity of Financial Institutions on Capital Market Efficiency and
> Economic
> Growth”, is represented as a survey of the relevant evidence that should
> guide
> policy thinking on this issue. 
> Mr. Geithner’s team conclude rather vaguely “there are both costs and
> benefits
> to limiting bank size”, and consequently “This study will not make
> recommendations regarding limits on the maximum size of banks, bank
> holding
> companies, and other large financial institutions.”
> This is an analytically weak report that presents a skewed and incomplete
> assessment of the evidence.  Given that the paper was prepared by some of
> the
> country’s top experts, who are well aware of the facts, the only
> reasonable
> inference is that our leading relevant officials prefer not to take the
> Dodd-Frank Act seriously with regard to reducing systemic risk.  Instead,
> on all
> major points, the Financial Stability Oversight Council is allowing the
> big
> banks to prevail – and to pursue whatever global expansion plans they
> see fit.
> Given Treasury’s attitude during the financial reform debate of 2009-10,
> this is
> not entirely surprising.  Still there are three major issues with the
> substance
> report that should be considered particularly embarrassing to Mr. Geithner
> and
> his colleagues.
> First, on whether large banks benefit the broader economy, the authors
> neglect
> to mention even the most basic facts regarding the increase in the size of
> our
> largest banks in recent years.  As a result, the entire discussion of
> bank size
> in this report reads as it is completely divorced from current economic
> and
> political realities.
> The largest six bank holding companies in the US had assets valued at 64
> percent
> of GDP at the end of the third quarter of 2010 (the latest available
> comprehensive data).  The same banks accounted for just less than 55
> percent of
> GDP at the end of 2006 and a mere 17.1 percent of GDP in 1995.  (All the
> numbers
> in this column are updates from what we presented in 13 Bankers, using the
> latest revised official sources.)
> The assets of Chase Manhattan in 1995 amounted to 4.1 percent of GDP. 
> The
> assets of JP Morgan Chase, as measured officially, were 14.5 percent of
> GDP in
> 2010; if we included their off-balance sheet assets (including
> derivatives),
> this total would be substantially higher.  There has been a similar
> increase in
> all the Big Six Banks.
> The balance sheet of Goldman Sachs, for example, increased from 1.3
> percent of
> GDP in 1995 to around 6.2 percent of GDP at the end of last year (based on
> this
> week’s report); by the firm’s measure, assets expanded 7 percent from
> the end of
> 2009 to the end of 2010.
> The central issue with regard to size that should be before the FSOC is
> not the
> presence or absence of economies of scale in banking generally, i.e.,
> whether a
> bank becomes more efficient as it increases from, say, $100m to $100bn in
> total
> assets.  The pressing policy priority is how to assess what has happened
> to
> efficiency within our very largest banks – and the precise way that has
> benefited the broader economy (or not). 
> Second, the report’s survey of the empirical literature is highly
> selective to
> say the least, ignoring – for example – almost all of the research we
> cite in 13
> Bankers.  It also fails to mention the 2007 Geneva Report,
> “International
> Financial Stability,” co-authored by former Federal Reserve vice chair
> Roger
> Ferguson, which found that banking consolidation had not led to efficiency
> gains, economies of scale (at least above a low threshold), or economies
> of
> scope.
> The report places a great deal of weight instead on a single unpublished
> working
> paper from the St. Louis Fed, by David Wheelock and Paul Wilson.  This is
> an
> interesting paper by serious researchers, and one that we placed in the
> context
> of the literature on p.212 of 13 Bankers (see also footnote 69 on p.272;
> all
> page numbers refer to the hard cover edition.)  But this paper is based
> on a
> very particular econometric specification, i.e., a way of writing down the
> equations that put structure on the data that is far from convincing.  In
> particular, it is hard – perhaps impossible – in their framework to
> determine
> the “true” efficiency of banks, compared with the effects of various
> kinds of
> government subsidies implicit in being “too big to fail” and therefore
> having
> cheaper access to funding.
> In addition, the report fails to note that while the Wheelock and Wilson
> paper
> was last revised in October 2010, it uses data only through 2006.  A
> similar
> data limitation or worse holds for all the other papers that FSOC cites
> approvingly (e.g., by Gouhua Feng and Apostolos Serletis, who use data
> over
> 2000-05.)
> Basing banking policy on data from just part of any credit cycle is
> unwise, to
> say the least (and not at all what the authors of these underlying papers
> are
> recommending).  And it is very strange that responsible officials would
> think we
> should draw any relevant inference for our current situation by cutting
> off the
> information in the mid-2000s, i.e., before the crisis and without the
> ability to
> reassess who made and who lost what kind of money (and how government
> bailouts
> affect the relevant statistics).
> This is akin to saying, “let’s pretend there was no financial crisis
> in
> 2008-09.”  It makes no sense, unless you wish to view today’s
> megabanks in the
> most favorable possible light.
> Third, the FSOC is completely ignoring the important work done at the Bank
> of
> England on bank size, “too big to fail,” and closely related issues. 
> For
> example, nowhere in the longer report do they cite the work of Andrew
> Haldane
> and his colleagues who have financial stability responsibilities in the
> UK.  The
> October speech by Mervyn King, governor of the Bank of England, is also a
> glaring omission – see my NYT Economix column last week for the details.
> And it is simply shocking that the longer report nowhere cites the
> definitive
> work of Anat Admati, Peter M. DeMarzo, Martin R. Hellwig, and Paul
> Pfleiderer on
> the need to greatly increase equity in the banking system, i.e., reduce
> leverage
> (debt relative to equity) through much higher capital requirements,
> because this
> is an essentially zero cost way to make financial intermediation safer. 
> This is
> central to the broader discussion of size and complexity, because it
> speaks
> directly to the issue of whether banks’ buffers against losses are
> likely to
> prove adequate as we move forward.
> There is a pattern of official behavior here.  Central banks in other
> industrialized countries are at least beginning to confront the ideology
> that
> supports the unfettered and undercapitalized growth big banks.
> In contrast, the Treasury, the Federal Reserve, and now the FSOC are
> distorting
> the evidence to accommodate the views of Jamie Dimon, Bill Daley, and
> other
> executives who want to build bigger, increasingly global, highly
> leveraged, and
> much more dangerous banks.
> An edited version of this post appeared this morning on the NYT.com’s
> Economix
> blog; it is used here with permission.  If you would like to republish
> the
> entire column, please contact the New York Times.
>
> Commentary
>
>
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regards,
-Lance


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