Mandatory Reading re: Too Big To Fail/Systemically Important Financial Institutions
Government subsidies EVERYWHERE -
If we phased-out these omni-present subsidies (almost every industry/product gets SOME KIND of tax-break, incentive or loophole) - would we be better of?
I mean if the risk of everything WAS it risk and its pay-off WAS its pay-off - and no artificial boost or exemption was intrinsic to its appeal to investors - would we be better off?
If we had never started this gov't-sourced/ financed/ backed/insured Subsidize-Everything program - would the size and cost of "governing/regulating" be higher or lower? if so, would revenue-needs of gov't be lower and therefore would taxation levels be lower?
Excerpted
Shareholders of Wall Street banks who agree with former Citigroup Inc. (C) Chief Executive Officer Sanford “Sandy” Weill (read pre-Citi & post-Citi bits) that the companies (ed.-Wall Street Banks) should be broken up face an obstacle: bondholders.
That’s because trading on Wall Street relies on borrowed money, or leverage, that can be obtained cheaply as long as the traders belong to a conglomerate such as Bank of America Corp., JPMorgan Chase & Co. (JPM) or Citigroup that gets federally insured deposits. Jefferies Group Inc. (JEF), a securities firm that isn’t part of a bank and can’t turn to the Federal Reserve for help, currently is charged more to borrow in the credit markets.
“If you divorce them from the mother ship, you’d also be divorcing them from the government at the same time, and that’s where the subsidy is,” Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, said in a telephone interview. “The funding advantage is the key.”
......
Breaking up today’s banking conglomerates would mean restoring the old model of financing securities firms in the bond markets, which failed in 2008. Without Bank of America’s $1.04 trillion of deposits -- about 80 percent of them federally insured, according to Jerry Dubrowski, a company spokesman -- Merrill Lynch would have to depend again on capital markets to fund trading and back up derivatives contracts.
“They are the GSEs of today with big downside guarantees and distorted incentives,” Johnson said. “We should restore the free market and cut off the subsidies.”
....
Weill, 79, who arranged the 1998 merger of Travelers Group Inc. and Citicorp that ushered in the era of so-called universal banks in the U.S., said in a July 25 interview on CNBC that investment banks and commercial banks should be separated.
“Have banks do something that’s not going to risk taxpayer dollars, that’s not going to be too big to fail,” Weill said.
Advocates of the universal-bank model say the 1999 Gramm- Leach-Bliley Act, which overturned Glass-Steagall, didn’t make the federally insured units any riskier because regulations bar capital transfers between entities within the holding companies.
....
“For a lot of the activities that these companies engage in, the confidence of their counterparties is really confidence not in them, but confidence in the government bailing out their affiliated bank,” Boston University’s Hurley said.
....
“When I look at companies, I think, ‘What can kill the company?’ And right off the bat I say the exact opposite of what the government says. I say, ‘That’s a company that’s too big to fail,’” he said of Bank of America. “So that protects me.”
...
“A bank which is thought to be too big to fail gets an artificial subsidy in the interest rate that it can borrow at,” Bernanke said. “And by having additional capital requirements, that tends to equalize the cost of funding to different banks, and reduces the incentives of banks to get large just to create the impression of being too big to fail.”
...
from last few paragraphs
Stock investors such as Michael F. Price, president of MFP Investors LLC in New York, and analysts including JMP Securities LLC’s David Trone have said stock prices show that the biggest banks will struggle to make money because of new capital requirements, regulation and complex business models.
“They worked well together in the old world,” Price, a money manager who in 1995 helped spur the merger of Chase Manhattan Corp. and Chemical Banking Corp., said in June. “That was the analog world. This is the digital world.”
The biggest securities firms, if they tried to untether themselves from regulated banks, might not escape the capital requirements and Dodd-Frank regulations that apply to systemically important firms. Jefferies, with $35.7 billion of assets at the end of May, probably isn’t too big to fail. Merrill Lynch, with about $600 billion in assets at the end of June, might be.
Bond markets, and some stock investors, may be unwilling to support a large, multinational securities firm that doesn’t have diversified funding, including federally insured deposits and so-called wholesale funding from bond investors.
“The financial crisis has shown us that the independent investment-banking model doesn’t really work that well,” Kush Goel, a senior vice president and research analyst in the financial-services group at Neuberger Berman Group LLC, said in a telephone interview. Goel joined Neuberger in 2006, when it was still part of Lehman Brothers.
“Some people might say, ‘I don’t want to buy that, I don’t care what returns they promise, I don’t care what it is, I won’t touch something which is entirely wholesale funded,’” he said.
If we phased-out these omni-present subsidies (almost every industry/product gets SOME KIND of tax-break, incentive or loophole) - would we be better of?
I mean if the risk of everything WAS it risk and its pay-off WAS its pay-off - and no artificial boost or exemption was intrinsic to its appeal to investors - would we be better off?
If we had never started this gov't-sourced/ financed/ backed/insured Subsidize-Everything program - would the size and cost of "governing/regulating" be higher or lower? if so, would revenue-needs of gov't be lower and therefore would taxation levels be lower?
There is no shame in turning back, when you discover you're on the wrong path. rce 2006
By Christine Harper and Hugh Son - Sep 4, 2012 7:24 AM ET
Excerpted
Shareholders of Wall Street banks who agree with former Citigroup Inc. (C) Chief Executive Officer Sanford “Sandy” Weill (read pre-Citi & post-Citi bits) that the companies (ed.-Wall Street Banks) should be broken up face an obstacle: bondholders.
That’s because trading on Wall Street relies on borrowed money, or leverage, that can be obtained cheaply as long as the traders belong to a conglomerate such as Bank of America Corp., JPMorgan Chase & Co. (JPM) or Citigroup that gets federally insured deposits. Jefferies Group Inc. (JEF), a securities firm that isn’t part of a bank and can’t turn to the Federal Reserve for help, currently is charged more to borrow in the credit markets.
“If you divorce them from the mother ship, you’d also be divorcing them from the government at the same time, and that’s where the subsidy is,” Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, said in a telephone interview. “The funding advantage is the key.”
......
Failed Model
The 2008 collapse of Bear Stearns Cos. and Lehman Brothers Holdings Inc., as well as last year’s bankruptcy of MF Global Holdings Ltd., taught investors that securities firms not attached to banks are riskier than they once acknowledged. Merrill Lynch & Co. agreed to sell itself to Bank of America the same day Lehman declared bankruptcy. A week later Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) converted to bank holding companies that are regulated by the Fed.Breaking up today’s banking conglomerates would mean restoring the old model of financing securities firms in the bond markets, which failed in 2008. Without Bank of America’s $1.04 trillion of deposits -- about 80 percent of them federally insured, according to Jerry Dubrowski, a company spokesman -- Merrill Lynch would have to depend again on capital markets to fund trading and back up derivatives contracts.
‘Distorted Incentives’
The big Wall Street banks are today what government- sponsored enterprises such as Fannie Mae and Freddie Mac used to be, producing profits for employees and shareholders even as taxpayers bear the ultimate risk, according to Simon Johnson, a former chief economist for the International Monetary Fund who’s now a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a contributor to Bloomberg View.“They are the GSEs of today with big downside guarantees and distorted incentives,” Johnson said. “We should restore the free market and cut off the subsidies.”
....
Weill, 79, who arranged the 1998 merger of Travelers Group Inc. and Citicorp that ushered in the era of so-called universal banks in the U.S., said in a July 25 interview on CNBC that investment banks and commercial banks should be separated.
“Have banks do something that’s not going to risk taxpayer dollars, that’s not going to be too big to fail,” Weill said.
Glass-Steagall
While some regulators, economists and other banking- industry veterans have made similar statements, the view was a surprise coming from Weill. His deal creating Citigroup required repeal of the Depression-era Glass-Steagall Act, which forced deposit-taking companies backed by government insurance to be separate from investment banks. A decade later, Citigroup needed a $45 billion taxpayer bailout to avoid collapse.Advocates of the universal-bank model say the 1999 Gramm- Leach-Bliley Act, which overturned Glass-Steagall, didn’t make the federally insured units any riskier because regulations bar capital transfers between entities within the holding companies.
....
“For a lot of the activities that these companies engage in, the confidence of their counterparties is really confidence not in them, but confidence in the government bailing out their affiliated bank,” Boston University’s Hurley said.
....
“When I look at companies, I think, ‘What can kill the company?’ And right off the bat I say the exact opposite of what the government says. I say, ‘That’s a company that’s too big to fail,’” he said of Bank of America. “So that protects me.”
...
“A bank which is thought to be too big to fail gets an artificial subsidy in the interest rate that it can borrow at,” Bernanke said. “And by having additional capital requirements, that tends to equalize the cost of funding to different banks, and reduces the incentives of banks to get large just to create the impression of being too big to fail.”
...
from last few paragraphs
Stock investors such as Michael F. Price, president of MFP Investors LLC in New York, and analysts including JMP Securities LLC’s David Trone have said stock prices show that the biggest banks will struggle to make money because of new capital requirements, regulation and complex business models.
“They worked well together in the old world,” Price, a money manager who in 1995 helped spur the merger of Chase Manhattan Corp. and Chemical Banking Corp., said in June. “That was the analog world. This is the digital world.”
The biggest securities firms, if they tried to untether themselves from regulated banks, might not escape the capital requirements and Dodd-Frank regulations that apply to systemically important firms. Jefferies, with $35.7 billion of assets at the end of May, probably isn’t too big to fail. Merrill Lynch, with about $600 billion in assets at the end of June, might be.
Bond markets, and some stock investors, may be unwilling to support a large, multinational securities firm that doesn’t have diversified funding, including federally insured deposits and so-called wholesale funding from bond investors.
“The financial crisis has shown us that the independent investment-banking model doesn’t really work that well,” Kush Goel, a senior vice president and research analyst in the financial-services group at Neuberger Berman Group LLC, said in a telephone interview. Goel joined Neuberger in 2006, when it was still part of Lehman Brothers.
“Some people might say, ‘I don’t want to buy that, I don’t care what returns they promise, I don’t care what it is, I won’t touch something which is entirely wholesale funded,’” he said.
posted by Walk a Kb or Two in my cassins | 8:17 am
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