The crazed leverage and egregious risk stemming from sociopathic greedy Wall Street narcissists will not be solved by the new Brown-Vitter Senate Banking Committee proposal to increase net capital requirements. The goal is to ostensibly make banks better able to withstand losses by holding more cash, but this is a terribly naïve, and just plain dumb proposal. The only way to reduce the systemic bank risk is to separate banks from their investment side – which eliminates the risk for the U.S. Government to fund Wall Street Bank failures.
To understand how naïve requiring more capital is, read the Brown-Vitter New York Times Op-Ed and follow the dots:
Op–Ed Contributors. Make Wall Street Choose: Go Small or Go Home. By SHERROD BROWN and DAVID VITTER. Published: April 24, 2013. WASHINGTON …April 24, 2013 – By SHERROD BROWN and DAVID VITTER – Opinion – Article – Print Headline: “Make Wall Street Choose: Go Small or Go Home” …
“PROGRESSIVES and conservatives can debate the proper role of government, but this is one principle on which we can all agree: The government shouldn’t pick economic winners or losers.
In 2008, at the height of the financial crisis, the government stepped in and decided which Wall Street banks were so large and interconnected that they would receive extraordinary help from the government to enable them to survive. They were deemed, to use a now ubiquitous phrase, too big to fail. Meanwhile, smaller banks in communities across the country, including Cleveland and Covington, La., in the states we represent, were allowed to fail. They were, evidently, too small to save.
Today, the nation’s four largest banks — JPMorgan Chase, Bank of America, Citigroup and Wells Fargo — are nearly $2 trillion larger than they were before the crisis, with a greater market share than ever. And the federal help continues — not as direct bailouts, but in the form of an implicit government guarantee. The market knows that the government won’t allow these institutions to fail.
It’s the ultimate insurance policy — one with no coverage limits or premiums.
These institutions can then borrow and lend money at a lower rate than regional banks, Main Street savings and loan institutions, and credit unions. This implicit taxpayer subsidy has been confirmed by three independent studies in the last year; one of them estimated it at $83 billion per year. We have, in essence, a financial system that rewards banks for their size, not the quality of their operations. It’s a “heads the megabanks win, tails the taxpayers lose” scenario, one that discourages innovation and competition and is distinctly un-American. …
We want to reverse this dangerous trend with bipartisan action aimed at ending “too big to fail” in a practical, responsible fashion. On Wednesday, we will introduce legislation to ensure that all banks have proper capital reserves to back up their sometimes risky practices — so that taxpayers don’t have to. We would require the largest banks to have the most equity, as they should.
“Our bill aims to end the corporate welfare enjoyed by Wall Street banks, by setting reasonable capital standards that would vary depending on the size and complexity of the institution. Economic and financial experts on both the left and the right agree that capital is a vital element of financial stability. Adequate capital levels lower the likelihood that an institution will fail and lower the costs to the rest of the financial system and the economy if one does. …
And this is why their “nonpartisan” proposal is so naïve and poorly conceived:
The Banks being addressed in the Vitter-Brown proposal are in fact technically called – Bank Holding Companies (*BHCs).
- Vitter-Brown does not address the fact that BHCs should not have been allowed to exist in their present form. Refer to the 1956 Bank Holding Company Act.
- BHCs should not have included the investment banks like Goldman.
- In September of 2008 the Fed allowed the BHCs to include investment banks so “banks” like Goldman became a major recipient of TARP funds as well as FDIC funds from the Fed and direct Fed support.
- BHCs are a combination of investment banks (as Goldman was) and commercial banks that are supposed to make commercial and personal loans. This includes business lending, as well as mortgage loans for homes and commercial real estate.
- VITTER-BROWN IS CHARACTERISTICALLY SILENT ABOUT THE RANCID SUBSTANCE OF “BANKS,” AND THAT THE CURRENT STRUCTURE MUST NOT BE ALLOWED TO CONTINUE.
- More capital or more cash held by BHCs, does nothing to reduce the egregiously leveraged complex investments banks currently fabricate and make markets in to generate enormous fees.
- Backing up risky practices is not the same as eliminating the banks’ ability to engage in the H-Bomb sized risk inherent in having created $700 trillion to $1.2 quadrillion swap derivatives without foundational value.
- How does a marginal amount of additional capital deal with a worldwide swap implosion?
- If banks are separated from their investment side, as they were when Glass-Steagall was passed in 1933, only the investment institution would need to worry about failure. And if the investment company did not worry about too much leverage then it would fail like Lehman – and the U.S. Government would not have to bail it out. Then the only losers would be the sociopathically greedy partners in the investment firm and their investors – who would have to be more careful about investing in virtual numbers contrived to make huge profits from crazed leverage.
- Banks argue they will not be able to lend as much, really? Who are they lending to now? What they actually mean is that they will need to have marginally less leverage which will reduce profits as long as their mathematically contrived projected assumptions work.
- Capital standards are possible to manipulate and the regulators are clearly not so interested in regulating malfeasance or even enforcing existing regulations that make it unlawful to sell investments too complex to explain well enough to be understood.
- INDICT REGULATORS FOR MALFEASANCE: ELIZABETH WARREN KNOWS WHY! Posted in Politics by ehenry
- FED FAILS TO REGULATE! Posted in Regulators by ehenry
So here we are with a new bipartisan proposal that is totally unrealistic and will not materially change what remains fundamentally wrong with what the media and Congress now refer to as “Banks.”
The Vitter-Brown proposal does not make the distinction between Commercial Banks and Investment Banks that must be made to correct the potential for financial implosion stemming from way too much leverage and totally unmanageable unmitigated risk. Having a little more cash in the banks (*BHCs) is little better than smoke and mirrors.
The issue is not to reach a bipartisan conclusion, but to acknowledge that only by separating the banks from investment banks can the risk of financial explosion managed, because it would shift the risk of failure to the sociopathically greedy pigs who feed on all the leverage with our Government underwriting all the risk. And that means Americans are underwriting the profits of the sociopathic narcissists who have conducted a war against the middle class and devastated the poorest American. Let’s hope Elizabeth Warren can educate Vitter and Brown, who either don’t know enough or don’t want to.
This is what the Times should have reported.
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“This should be must-reading for every policy maker in Washington and every student of economics and finance.”