Re: The Financial Stability Oversight Council Defers To Big Banks

FBI is busting 100+ mafia criminals today.  Those guys are pikers compared
to what is happening on wall street, the Fed and treasury.

regards,
-Lance



> Mike Findlay
> I'm taking my time with Taibbi's book, but I'm in the chapter about the
> AIG
> bailout and Goldman Sachs involvement in that.  Unfriggenbelievable, what
> Goldman Sachs did to hold this country hostage to insure it got 100 cents
> on the
> dollar for all their crappy, scumbag, fraudulent, deals.  And
> unfortunately the
> country, (the Fed and everyone else), blinked. 
>
>
> 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.
>
> Mike F. 
>
>
>
>
> ________________________________
> From: Lance McLain <lance-X3DuywwxauBWk0Htik3J/[email protected]>
> To: DADL-OT (Mailing List) <[email protected]>
> 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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