http://www.zerohedge.com/news/2014-08-06/wall-street-isnt-fixed-tbtf-alive-and-more-dangerous-ever
Wall Street Isn't Fixed: TBTF Is Alive And More Dangerous Than Ever
Submitted by David Stockman via Contra Corner blog,
Practically since the day Lehman went down in September 2008 Washington has been conducting a monumental farce. It has been pretending to up-root the causes of the thundering financial crisis which struck that month and to enact measures insuring that it would never happen again. In fact, however, official policy has done just the opposite.
The Fed’s massive money printing campaign has perpetuated and drastically enlarged the Wall Street casino, making the pre-crisis gamblers in CDOs, CDS and other derivatives appear like pikers compared to the present momentum chasing madness. In a nutshell, the Fed’s prolonged regime of ZIRP and wealth effects based “puts” under risk assets has destroyed two-way markets.The market’s natural mechanism of risk containment and stabilization—-short sellers—has been driven from the casino. Accordingly, carry-trade speculators engorged with free money funding have taken the market to lunatic heights, while leaving it vulnerable to a violent collapse upon an unexpected drop because the market’s natural braking mechanism—short sellers taking profits—- has been eviscerated.
At the same time, the giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous. Indeed, JPM and BAC were taken to their present unmanageable size by regulators—ostensibly fighting the last outbreak of TBTF—who imposed or acquiesced to the shotgun mergers of late 2008.
So now these same regulators, who have spent four years stumbling around in the Dodd-Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their wards for not having sufficiently robust “living wills”. C’mon! This is just another Washington double-shuffle.
The very idea that $2 trillion global banking behemoths like JPMorgan or Bank of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.
Indeed, it is utterly amazing that adult legislators and regulators could even take the idea of a “living will” seriously—-let alone believe that they could possibly thwart the recurrence of another outbreak of so-called “financial contagion”. Yet so thick is the beltway cynicism and so complete is the K-Street domination of policy-making that a trite bureaucratic gimmick like the “living will” has become a major component of so-called macro-prudential policy.
So there is nothing to do except go back to the fundamentals.First and foremost, the September 2008 meltdown was not a main street banking problem; it was a crisis confined to the canyons of Wall Street, owing to the fact that the gambling houses domiciled there had massively bloated their balance sheets with toxic assets and risky derivatives trades, and then funded these balance sheets leveraged at 30:1 with huge amounts of “hot money” in the form of repo and unsecured wholesale loans.
As I demonstrated in the Great Deformation, the “bank run” was almost entirely in the Wall Street wholesale market. By contrast, there was never any danger of retail runs at the corner branch bank offices, and the overwhelming majority of the 7,000 main street banks did not own the kind of toxic securitized assets that were roiling Wall Street.
In fact, the wholesale market runs in the canyons of Wall Street were actually a positive, economically therapeutic event. They had already taken out three of the reckless gambling houses—- Bear Stearns, Lehman and Merrill Lynch—-and were fixing to finish off the remainder, that is, Goldman and Morgan Stanley.
Had the market been allowed to finish off the work of the economic gods in late September 2008, the TBTF problem would have been substantially alleviated. Today there might have existed a half dozen “sons of Goldman” in the form of M&A, trading, investment banking and asset management boutiques—run by chastened veterans who lost their lunch during the 2008 Wall Street cleansing.
The excuse for Washington’s massive intervention against the free market in the form of TARP and the Fed’s monumental flood of liquidity, of course, is that the US economy was about to be annihilated by something called financial “contagion”. But that is a specious urban legend invented by the crony capitalists who controlled the Treasury and the money-printers who had fueled the housing and credit bubble at the Fed.
As I have also shown, for example, AIG’s dozens of insurance subsidiaries were money good and would have been protected in bankruptcy by insurance regulators and capital maintenance rules, while settlement of the holding company’s fraudulent CDS insurance would have been parceled out pennies on the dollar by a Chapter 11 judge to the dozen giant global banks who had stupidly attempted to turn toxic CDOs into AAA credits. Likewise, FDIC could have liquidated Citigroup’s regulated bank, while allowing the gamblers who bought the stock, bonds and other obligations of the holding company to face their just deserts.
In short, TBTF became a “problem” to be ostensibly remedied with bureaucratic malarkey like living wills primarily because Washington made it a problem—- by means of its panicked bailouts of Wall Street in the fall of 2008. Indeed, the true solution to TBTF is always and everywhere to allow the free market to cleanse its own excesses and imbalances and to impose financial discipline and demise upon outbreaks of reckless gambling and leverage when they occur.
Unfortunately, even if Washington were to refrain from ad hoc bailouts, the free market cure would be perennially compromised by the giant moral hazard posed by deposit insurance and the Fed’s cheap money discount window. Owing to these policy institutions, which systematically encourage excessive gambling by their beneficiaries, US banks are inherent wards of the state—including the easily abused privilege of fractional reserve banking conferred by regulatory charters. The right thing to do would be to abolish these sources of moral hazard and tell the K-Street financial lobbies to fold up their plush tents because their employers are now all expected to sink or swim on the free market.
Needless to say, the chances that Washington would permit the Wall Street gambling houses to be returned to the unfettered free market that they profess to defend—are somewhere between slim and none. Accordingly, a second best solution is warranted, and it could readily be done. And it would be far more effective than the lunacy of living wills and all the other bureaucratic mumbo-jumbo that has come out of Dodd-Frank.
First, Washington should re-enact a strict version of Glass- Steagall. Only “narrow banks” which take deposits and make consumer and business loans would have access to the Fed’s discount window. By contrast, propriety trading, underwriting, merchant banking, asset management and all the rest of the financial services sectors would be banned at regulated banks and sent back to the free market where they belong.
Secondly, a ceiling on regulated bank size would be established—perhaps measured at 1% of GDP or $200 billion in terms of asset scale. There are no demonstrated economies of scale in deposit and loan banking above that size, anyway.
Stated differently, banks wishing to indulge in the moral hazard of deposit insurance and accessing the Fed’s discount window would not have to prove they were not “too big to fail” or that they had a viable “living will”. Instead, a TBTF law would do it for them in the form of a statutory cap on the size of regulated banks.
To be sure, Wall Street would scream that such a regime would interfere with the ability of small business and American consumers to get cheap loans. But in a national economy that has gone through a rolling 30-year LBO resulting in $60 trillion of credit market debt outstanding and which sports leverage ratios against income in all sectors that are off the historical charts—that complaint has no merit. Making debt more expensive and permitting it to be economically priced on the free market is, in fact, just what is needed to eventually cure the nation’s debt-ridden economic malaise.
http://www.nakedcapitalism.com/2014/08/bank-regulators-reject-living-wills-11-major-banks.html
Regulators Reject Living Wills of 11TBTF Banks, a 100% Fail Rate
Posted on August 5, 2014 by
Mirabile dictu, it looks like Elizabeth Warren’s grilling of Janet Yellen on the Fed’s failure to make progress on Dodd Frank resolutions, also known as living wills, has had some impact. From the Wall Street Journal:
In a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation’s biggest banks haven’t demonstrated they can collapse without causing broad, damaging economic repercussions and ordered them to show “significant” progress by July 2015.The Federal Reserve and the Federal Deposit Insurance Corp. said bankruptcy plans submitted by big banks make “unrealistic or inadequately supported” assumptions and “fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for” an orderly failure. The regulators raised the specter of slapping banks with tougher capital, leverage and other rules—and even eventually forcibly breaking them up—absent significant progress to address the shortcomings.The findings applied to 11 banks with assets greater than $250 billion, all of which will get letters detailing shortcomings in their so-called “living wills.” The firms have until July 1, 2015 to file significantly improved plans or face consequences such as higher capital requirements, borrowing limits, or potentially an order to restructure their firm.
Mind you, this is a 100% failure rate. Per the joint statement of the Fed and the FDIC, the regulators issued this verdict on the “second round” of resolution plans submitted by 11 banks in 2013, namely Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street Corp., and UBS.
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http://www.zerohedge.com/news/2014-08-05/fed-fears-taxpayers-still-hook-blasts-banks-resolution-plans-unrealistic-assumptions
Fed Finally Finds The 230 Trillion Number: Blasts Banks' "Living Wills", Says Taxpayers Still On The Hook
Having torched Janet Yellen over the weakness of the so-called "living wills" of the Too-Big-To-Fail banks, it appears Elizabeth Warren's tirade struck home. As WSJ reports, in a sweeping rebuke to Wall Street, U.S. regulators said 11 of the nation's biggest banks haven't demonstrated they can collapse without causing broad, damaging economic repercussions and ordered them to show "significant" progress by July 2015. Of course, the whole 'living will' concept is a self-referential joke, but we leave it to Thomas Hoenig to sum it up: "the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support." In other words, taxpayers are still on the hook.
In other words, the Fed finally figured out something that is so obvious, even five year olds were well aware: namely that banks fading into darkness, by way of living wills, is sheer idiocy.
The Federal Reserve and the Federal Deposit Insurance Corp. said bankruptcy plans submitted by big banks make "unrealistic or inadequately supported" assumptions and "fail to make, or even to identify, the kinds of changes in firm structure and practices that would be necessary to enhance the prospects for" an orderly failure. The regulators raised the specter of slapping banks with tougher capital, leverage and other rules—and even eventually forcibly breaking them up—absent significant progress to address the shortcomings.The findings applied to 11 banks with assets greater than $250 billion, all of which will get letters detailing shortcomings in their so-called "living wills." The firms have until July 1, 2015 to file significantly improved plans or face consequences such as higher capital requirements, borrowing limits, or potentially an order to restructure their firm."Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support," said Thomas Hoenig, the No. 2 official at the FDIC, in a statement.
So how did we know? Because as the charts below show, just the top 4 US banks hold $213 trillion in derivatives, 92% of the total $230 trillion, something which no living will in this world, or anything else for that matter, can possibly unwind.
Then again, we would have been delighted to watch the expression on people's faces when during the reading of JPM's will it was announced that the bank bequeathed its $68 trillion in derivatives to whatever banks remained solvent in its, shall we say, turbulent wake.
http://www.dailykos.com/story/2014/08/01/1318253/-Senate-Bombshell-Testimony-Citi-BofA-Stock-Worthless-In-2009-Without-Implied-Gov-t-Guarantees
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Senate Bombshell Testimony Today:
Citigroup and Bank of America Stock Worthless
Without Implied Government GuaranteesBy Pam Martens
Wall Street On Parade
A Citizen Guide to Wall Street
July 31, 2014Senator Sherrod Brown, Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, will take testimony at 2 p.m. today on market subsidies enjoyed by implied future government bailouts of the too-big-to-fail status of Wall Street’s bloated and serially malfeasant banks. The hearing is set to coincide with a new report from the Government Accountability Office (GAO).An early peek at written testimony by three separate professors set to testify guarantees a belated July 4 fireworks display — one that is not likely to enjoy a welcome reception within the Wall Street corridors of power. Expect the phone lines of lobbyists and congressional campaign managers to be lighting up all over the nation’s capitol this afternoon.
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