The Fourteenth Banker Blog

September 3, 2010

Trending: Too Big To Fail

Filed under: Running Commentary — thefourteenthbanker @ 1:29 AM

As this post points out, the trend of the regulatory regime has been to nudge or auction weak institutions to bigger, purportedly stronger institutions.  Wachovia to Wells Fargo, Merrill and Countrywide to Bank of America, Bear Stearns and Washington Mutual to JP Morgan.  As FDIC points out, more banks are becoming troubled. As Naked Capitalism points out, surviving banks with share prices possibly bolstered by weak accounting rules will roll into consolidations with larger banks, continuing the concentrations of deposits, clients, and risk into fewer hands. No wonder Bernanke says it will be hard to shrink the Megabanks.  We are going backwards.

From Naked Capitalism:

The “lax” [regulation] is clearly a tad inflammatory, but tweaks in Basel III rules to allow dubious quality items like mortgage servicing rights as Tier I capital speak volumes. In addition, the various noises from policy makers makes clear that they aren’t willing to make banks raise capital level by much due to fears of the impact of lower loan availability on economic growth (more equity behind lending means higher lending costs, since equity is more expensive than debt). And with that not-very-strong starting point, the banks have pushed for even weaker rules.

Should this come to pass, Credit Suisse, via a Wall Street Journal story, is already predicting the outcome: more bank mergers.

So to echo my recent refrain, we need new banks that are capable of adding market forces to shrink TBTF institutions that will not be forced smaller by regulation.



  1. As a matter of state policy, I should think that megabank shrinkage is the last resort on the political elite survival agenda. First, the political elites do not know how to shrink megabanks without the whole economy going ass over tip. Second, political elites are terrified of doing anything that will make matters worse. Fear precludes creative thinking and action. Thirdly, US political elites understand that “Empire” persists or else, for their political class. ( They are unable to craft alternates.) Thirdly, even though irrational to the two first understandings, political elites are even more terrified of the electorate. They do not know how to reconcile irreconcilable differences because of their dominating fears. They must overcome their own personal irreconcilable differences.

    It looks increasingly probable that both the Senate and House will go solidly Republican. The electoral result is that electorate decisions will not be brought into place until after the Obama presidency. The next Congress will only be able to stifle Obama and Obama will stifle them. Americans are politically ignorant as their incessantly shouted personal moralities make very clear. Consequently, political dissolution will continue to grow.

    The confused capitalist oligarchy is in it’s death throes. What the citizen is generally unable to absorb is that actually doing something positive for the whole polity occurs only rarely in a totally local based political system. Generally agreed positive political results require a far higher state of commonwealth than the US has been able to achieve for a very long time. We have had, rightly or wrongly, 50 years of tyranny of the minorities. That tyranny is breeding terrible consequences in it’s effects on the majority. All this is masked by the ever present PC. Whatever decent solutions that eventually emerge, the tyranny of the majority will be tried. If the forgoing is not a reality, a worse reality rears it’s ugly head….. political dissolution . Right now , there are so many irreconcilable political differences that one side or another must prevail or it all fly’s apart. The minority side simply does not have the numbers to prevail once the majority decides irrevocably to have their way. The majority gets tyrannical when a relatively small number of fence straddlers finally are forced to choose sides.

    In my view, the irrevocable point of choice arrives when state and local debt collapses and the Federal government does little or nothing that is effective in aiding the states and collapsed retirement savings systems of the middle class. Oddly, doing nothing will be arrived at by present majority diffused political views. Then the majority looks for solidarity and scapegoats.

    To do something about megabanks.. a long political term consenus must be reached by both Congress and the Executive that is sustainable by the Supreme Court. A consensus that lasts decades. How probable is that?

    Comment by Jerry J — September 3, 2010 @ 12:29 PM | Reply

  2. 14,

    You know that this isn’t going to have a happy ending.


    Comment by Gonzalo Lira — September 3, 2010 @ 4:27 PM | Reply

  3. The New York Times is running a piece today about Blackwater using multitudinous shells and subsidiaries to secure surrepticious work for the CIA. The Congress is all up in arms publically about the CIA using Blackwater after their gunsels did in 17 civilians in 2007. What hypocrisy or utter stupidity on the part of Congress. Blackwater was hired specifically because the American Procounsul in Iraq wanted off the government payroll gunsels. Congress did not understand the down and dirty as the legislature of occupiers? They funded the damn Iraqi episode in stupidity from the get go. Here they use public deceit. Here is a perfect example of where all aspects of governance involved use deceit among themselves. Carl Levin wants the Justice Department to look into the question of Xe/ Blackwater having criminally deceived the government. In this case, they are actually marketing the idea that the CIA was deceived. Uhh, the CIA exists so that the government is not deceived. If Xe/ Blackwater actually deceived the CIA, would there not be a case for dissolution of the CIA ? All of the activities were secret budget items. The sole discretion was to the CIA and it’s oversight organization. The CIA deceived Congress? How could they do that when Congress does not want to know the details?

    How is it possible for a government so fractional to govern? If not that, then the Congressional marketing deceit is so vast that the Congress has vacated just about all self credibility. A state whose organization is no longer capable of ruling.

    How is it even possible for a fractured Federal Union and it’s component states to address rectification of the long term failures of ideas and efforts that led to the present financial mess?

    Comment by Jerry J — September 4, 2010 @ 12:19 PM | Reply

  4. Here is some counterpoint from Joe Bageant.

    Comment by Jerry J — September 7, 2010 @ 5:21 PM | Reply

  5. Corrected link.

    Comment by Jerry J — September 7, 2010 @ 5:24 PM | Reply

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