Why ‘Too Big to Fail’ Is a Bigger Problem Than Ever _Rob Garver_ (http://www.thefiscaltimes.com/Authors/G/Rob-Garver) The Fiscal Times January 9, 2014 Just how big are the largest banks in the U.S.? Here’s a little perspective: In the past few months, JPMorgan Chase has agreed to pay, depending on how you do the math, somewhere between $22 billion and $25 billion in fines and penalties for various illegal activities, from hiding its suspicions about Ponzi schemer Bernie Madoff to misleading investors about the notorious London Whale. Meanwhile, as of the third quarter of 2013, 99.1 percent of banks chartered in the U.S. had less than $20 billion in total assets on their books. Think about that for a moment. In the space of less than 90 days, JPMorgan Chase has agreed to fines greater than the total value of all the assets held by almost every bank in the country. And not only is it still in business, it’s generating revenues roughly equal to all those fines every quarter. And its stock price is _soaring_ (http://finance.yahoo.com/echarts?s=JPM+Interactive#symbol=JPM;range=3m) . The bank’s share price rose again yesterday despite The Wall Street Journal’s _revelation_ (http://online.wsj.com/article/SB10001424052702303848104579308543399871248.html?mod=WSJ_hp_LEFTWhatsNew sCollection) of yet more potential illegal activity – JPM is one of several banks being investigated for deliberately mispricing volatile residential mortgage-backed securities during the financial crisis. The point here is not to pick on JPMorgan alone. The very largest banks in the U.S. are _posting_ (http://blogs.barrons.com/stockstowatchtoday/2014/01/08/citigroup-bank-of-america-jpmorgan-chase-pick-a-bank-any-bank/?mod=BOLBlo g) almost uniformly spectacular financial results that have seemingly inured them to the regulatory and legal penalties they are made to pay. A hearing held Wednesday by the Senate Committee on Banking, Housing and Urban Development addressed one of the reasons why the banks are doing so well even as they face continued legal actions: They enjoy a massive subsidy rooted in the market’s belief that, should they ever get in trouble, the government will bail them out. That enables those banks to borrow more cheaply than their smaller competitors and leads shareholders to believe that they are protected from downside risk should the bank get in trouble. In the hearing Wednesday, Lawrance L. Evans, Jr., Director of Financial Markets and Community Investment for the Government Accountability Office, testified that during the financial crisis, the more than $1 trillion in support given to the financial markets by the federal government went largely to the biggest banks. Evans said that a follow-up report, due out sometime this year, will quantify the financial benefits that large banks receive as a result of the public ’s expectation that the government will not allow them to fail. Advocates of breaking up the biggest banks said that they hope the GAO’s findings will convince the public of their case. Professor Cornelius Hurley, who directs the Boston University Center for Finance, Law & Policy, said that he expects public support for shrinking the biggest banks to coalesce “once the public realizes that bailouts are not just something that happened in 2008 but something that’s going on today.” Big banks, he said, “are using the full faith and credit of the United States as a lever to get a better rate for themselves in the market. The big banks have free insurance they don’t pay a premium for.” During the hearing, Senator Elizabeth Warren (D-MA) was one of a number of lawmakers who raised the question of whether the largest financial institutions should be forced to downsize. “The four largest banks are nearly 40 percent bigger today than they were just five years ago. The six largest banks now control two thirds of the banking assets in this country, a 37 percent increase over where they were just in the last five years,” Warren said. “These banks, in other words, are a whole lot bigger now than they were when we bailed them out in 2008 because they were too big too fail.” Warren has introduced legislation that would effectively break up the biggest banks by separating the traditional business of deposit-taking and lending from more risky activities in the securities markets, a position that was supported by witnesses at Wednesday’s hearing. In his testimony, Simon Johnson, Ronald Kurtz Professor of Entrepreneurship at MIT Sloan School of Management pointed out that even the Federal Reserve Board has begun to consider limiting the size of the largest banks, citing Governor Daniel K. Tarullo’s suggestion that bank size might be limited to a specific percentage of the gross domestic product. “The implication is that we should not allow the size of our largest bank holding companies to increase further,” Johnson said. But under questioning from Sen. Warren, Johnson went further, saying, “The Federal Reserve should take remedial actions…including breaking up the banks” along the lines of Warren’s legislative proposal. ==================================== 5 Years After the Crisis: What Banks Haven’t Learned _Suzanne McGee_ (http://www.thefiscaltimes.com/Authors/M/Suzanne%20McGee) The Fiscal Times September 10, 2013 This week brings with it two rather bleak anniversaries. It’s been 12 years since the September 11 terrorist attacks and five years since Lehman Brothers filed for bankruptcy as part of the 2008 crisis that nearly brought the global financial system to its knees. Along with remembrance, these milestones should bring with them a sense that we have learned enough to ensure that history doesn’t repeat itself – or at least, a sense that the pain and misery is receding in the rear view mirror. In the case of the financial crisis at least, I’m not sure that we can say so. For proof, look no further than JPMorgan Chase (NYSE: JPM), which emerged from the crisis a big winner. The bank had sailed in to buy Bear Stearns and prevent its collapse in March 2008. That was hardly a public service (it gave JPMorgan a big boost in Wall Street league tables, and Dimon picked up the assets for a song, with government help), but it may also have sent the wrong message to the rest of Wall Street: that their own institutions would be too big to fail. Be that as it may, JPMorgan Chase came through the crisis relatively stronger than it had been. But take a look at some of the comments and disclosures it made only yesterday, during a presentation to the Barclays Global Financial Services Conference in New York, and it becomes clear that five years after the crisis, we have yet to put many problems behind us. And even the winners still have a lot to learn. Wall Street Remains Full of Supersize Institutions JPMorgan Chase is the biggest of these, and critics including Sheila Bair, former head of the FDIC, aren’t at all confident that any of them have a good strategy for addressing the “too big to fail” conundrum. That means that if a future risk management snafu or business misjudgment triggers the collapse of a big financial institution, we could be right back at square one. While JPMorgan Chase CFO Marianne Lake bragged about the bank’s giant market share and capital position at the Barclays conference, Bair’s broader point is that that kind of market share brings systemic risk with it, and unless and until there’s a workable “resolution” structure in place, the size of some of these institutions today is still worrying. Nor do many of Wall Street’s critics draw much comfort from the Federal Reserve’s annual stress tests – especially after the last one showed Citigroup (NYSE: C) as being more resilient than JPMorgan. “That’s just downright odd,” one analyst told me back in the spring, when those results were released. Risk Management Remains Imperfect The financial crisis was a reminder of how often Wall Street failed to ask itself the most basic kind of question – what might go wrong here? – and failed to put in place systems that would increase the odds of identifying the biggest sources of risk before they morphed into large losses and writedowns. Risk management – which, after all, isn’t a profit center but instead eats into returns on equity – still isn’t embedded in Wall Street DNA. JPMorgan Chase is a great example of that, as the London Whale trading losses reminded everyone last year. The bank’s own reports on the problematic trades displayed myriad gaps in risk management – including evidence that some of the bank’s managers manipulated internal risk models. Two of the directors who served on the bank’s risk committee stepped down in July. JPMorgan Chase just yesterday announced their replacements, both of whom have solid track records in finance and one of whom, Linda Bammann, is a banking exec with risk management expertise. But why wait five years to do this? Mistakes Continue, and Continue to Cost Money Government agencies have been busy filing suits of all kinds against Wall Street institutions, many of them related to the way mortgage securities were originated, packaged, priced and sold before the crisis. At JPMorgan Chase, the federal government and its agencies alone are conducting criminal investigations into the mortgage-backed securities operations as well as its energy-trading activities; other investigations target the London Whale losses, the bank’s credit card collections policies and activities and the way it handles mortgage foreclosures and guards against money laundering. Not all of these problems are historic in nature – the energy trading kerfuffle has surfaced only in the last year. New or old, the cost of defending against these allegations, paying fines to settle regulatory claims and providing against other penalties, is climbing. Lake, the chief financial officer, told her conference audience yesterday that an increase to the bank’s litigation reserve to address a “crescendo” of these actual and potential lawsuits will “more than offset” the $1.5 billion of consumer loan loss reserves that will be released as credit quality on the bank’s loan portfolio has improved. “We are still finalizing the number,” she said. Some Problems Never Disappear; They Just Metamorphose Back in 2008, banks were stuck with big portfolios of mortgages, and especially poor-quality “subprime” ones. They had been lending foolishly, assuming that they could always repackage those loans in such a way as to make them look appealing to someone out there. Fast forward five years and the mortgage arena once more is a problem area for banks like JPMorgan Chase. This time it isn’t a question of losses, but of revenue – or rather, a steep decline in revenues from the home lending business that the bank is likely to see as interest rates rise. Lake said yesterday that mortgage refinancing demand has fallen 60 percent from its peak in May, sooner and more rapidly than the bank had expected. Add that to competitive pressures and the time it takes to complete “taking expenses out of the system” (translation: eliminating some jobs in this part of the business) and profit margins here will be negative. At least this time, the mortgage business is likely to be only a drag on profits rather than a big question mark hanging over the future of the industry. None of these are reasons to panic or to expect a re-run of the events of 2008. What is disconcerting, however, is the limited extent to which big financial institutions have changed the way they function in the wake of their near-death experience. New regulations have been slow to emerge and have had unintended consequences; others haven’t even materialized. On the part of the banks themselves, a new mindset may be even further away today than it was in the autumn of 2008, when CEOs and CFOs were still scared silly by the narrowness of their escape from complete disaster. -- -- Centroids: The Center of the Radical Centrist Community <[email protected]> Google Group: http://groups.google.com/group/RadicalCentrism Radical Centrism website and blog: http://RadicalCentrism.org --- You received this message because you are subscribed to the Google Groups "Centroids: The Center of the Radical Centrist Community" group. To unsubscribe from this group and stop receiving emails from it, send an email to [email protected]. For more options, visit https://groups.google.com/groups/opt_out.
