A Living Will, But Still Too Big to Fail

The mythology of financial institutions of massive size being “too big to fail” died an ugly death in the collapse of Lehman Bros. and Bear Stearns in 2008. Even as not one single senior executive of any financial behemoth has served a nanosecond of jail time for what appears to be rather clear illegal financial manipulation and outright lying, even as credit agencies vying for business were willing to ignore facts to assign favorable ratings to their biggest clients’ bond/derivative issuings, and even as some our biggest and more “revered” financial institutions have paid billions of dollars in fines for their wrongdoings, the Wall Streeters continue to flaunt the laws and regulations designed to protect the public from their proclivity to misuse their financial power to the detriment of society. Their financial machinations had caused tens of trillions of dollars of economic damage worldwide. The system for failure had been built up over a long time.

When the provisions of Glass-Steagall, which separated banks from trading institutions, was repealed in 1993 during the Bill Clinton presidency, the feeding frenzy of mergers was staggering and rapid. Lots of banks and traders became one. The Securities and Exchange Commission even lifted the limitations of how much debt the biggest, baddest boyz could carry based on their equity. 30 units of debt to 1 unit of equity or worse was deemed acceptable.

Even after the 2008 financial collapse and resultant massive federal bailout, the surviving miscreants were not to be tamed. Watching a litany of fallen stock prices and other opportunities to acquire undervalued “distressed” assets, these financial institutions sucked the lending liquidity out of the marketplace, using their new access to cheap fed funds made available to banks for their own trading accounts. The wealthiest segment of our nation made more money than ever before as the rest of the nation paid for their sins in cold, hard cash.

While these financial institutions got fat on these investments, effectively using free money from the Federal Reserve which funds a huge part of available money that banks lend out, smaller businesses and individuals found little in the way of remaining available funds for them to borrow to grow their businesses. The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by a Democratic administration and a Democratic Congress in 2010 after last great recession was underway, was intended to curb many of these abuses. But this complex legislation, hard to understand among the most sophisticated voters, fell hard to a budget-slashing GOP-dominated Congress that took power shortly thereafter (in 2012). The regulatory agencies, charged with implementing Dodd-Frank, watched as severely pro-bank Republicans defunded their enforcement activities.

While the defunding worked significantly to slow down enforcement, it didn’t extinguish the statute’s sting. As much as the Republican-controlled congress watched in horror, underfunded governmental enforcement agencies (like the Securities and Exchange Commission, Federal Deposit Insurance Corp., etc.) began moving slowly anyway, and the provisions of Dodd-Frank were being enforced in phases.

The so-called “living will” aspects of Dodd-Frank law required each the “too big to fail” financial institutions to provide the government with sufficiently detailed plans for their dissolution and/or reorganization in the event of another financial catastrophe (such as the recent Great Recession). That real estate prices are soaring across the land, well beyond any aggregate growth in average American earning power and that the stock market is hitting highs even as the middle class continues to contract suggest that another bubble burst is not that far out of near-term expectations. Thus having a more orderly process to deal with such potentially damaging economics is a fairly minor burden, but one that might just keep the country from facing the same perils and bailout realities that we saw in 2008 and the immediately following years. We would have a plan.

But on April 13^th, the FDIC and the Federal Reserve found the submitted plans from five banks – Wells Fargo, Bank of New York Mellon, State Street, JP Morgan Chase and Bank of America – to be “deficient,” an epithet that also applied to such plans from additional financial institutions like Morgan Stanley (rejected by the FDIC alone) and Goldman Sachs (rejected by the Fed alone). They all have until October 1^st to submit “credible” bankruptcy plans.

“That suggests that if there were another crisis today, the government would need to prop up the largest banks if it wanted to avoid financial chaos.

“The announcement coincides with a presidential campaign that at times has been dominated by a debate over what danger the big banks still pose to the nation’s economic security. Senator Bernie Sanders of Vermont has called for the biggest banks to be broken up, a stand that his opponent, the front-runner for the Democratic presidential nomination, Hillary Clinton, has criticized.

“But Mr. Sanders’ position has drawn sympathy from some on the other side of the political spectrum, including the new president of the Federal Reserve Bank of Minneapolis, [Republican] Neel Kashkari, who was a Treasury official during the financial crisis.

“In long letters sent to the banks this week, the two regulatory agencies pointed to the dangers created by the global reach and complexity of the largest banks, which are bigger now than they were before the 2008 crisis.” Deal Book, New York Times, April 13^th.

A cornerstone of the GOP is much less governmental regulation and greater reliance on self-regulation in the financial sector. This, notwithstanding a continuing litany of financial missteps from these folks’ manipulating the LIBOR lending rates to issuing misleading information to buyers of their continuing financial instruments… leading to constant flow of governmentally imposed fines. In short, self-regulation is another myth that needs to die hard. Do you agree with Bernie Sanders that these institutions need to be broken down into smaller components now, Hillary Clinton that they need another whack at coming up with workable plans because an immediate break-up would be too disruptive, or any Republican candidate who thinks the sector is already over-regulated?

I’m Peter Dekom, and there are way too many signs that the underpinnings of our economy are beginning to show some serious signs of weakness… and we’ve been here before.