Way Too Big to Save

Simon Johnson, Huffington Post

Listening to US officials, talking to legal experts, and waiting for an intense Senate debate on financial reform to begin, you can easily form the impression that “too big to fail” adequately describes our most serious future systemic banking problems. It does not.

In September 2008, the large banks and quasi-banks at the heart of our financial system faced failure — and they were saved in the most immediate sense through actions taken by the Federal Reserve, but TARP (passed by Congress and run Treasury) also played a significant supporting role.

The Bush administration threw a small fiscal stimulus into the mix in early 2008, hoping to stave off recession; the Obama administration committed a much larger package at the start of 2009, aiming to prevent anything like a Second Great Depression. This fiscal policy response was in direct reaction to problems caused by the overextension and near failure of the financial system

Do not make the mistake — for example of Secretary Geithner, talking to the New Yorker — of thinking (or implying) that “saving the financial system” did not involve spending a lot of taxpayer money to support the real economy. Remember that if the economy crashes, asset prices fall, and banks’ problems become even more severe.

And try to avoid three further mistakes that are currently common.

Read more hear: http://www.huffingtonpost.com/simon-johnson/way-too-big-to-save_b_491325.html

Smart Banks With Dumb Customers Don’t Exist

March 8 (Bloomberg) — Republicans and Democrats in Congress have been squabbling about whether the new financial consumer-protection agency should be housed within the Federal Reserve or as part of an independent body.

The new watchdog, wherever it goes, is the linchpin of the emerging financial-reform bill, and its premise is that greedy bankers exploiting dumb consumers essentially caused the credit crisis. Stop bankers from selling toxic mortgages and other harmful loans and we won’t have any more meltdowns.

Even though bankers were greedy, and many borrowers were naive, this is a simplistic way of viewing the financial crisis and one that misses its underlying cause. Since mortgage bankers make money from loans, it’s tempting to think of them as parasites that prey on customers. But there is no such thing as a smart bank with a dumb customer; if the loan turns sour, the banker was dumb, too. And in the mid-2000s, scads of them were.

Foreclosures by consumers heavily weighed on the economy, but what triggered the credit crunch was the failure (or near- failure) of the banks that issued (or acquired) the mortgages. In short, the root cause of the meltdown wasn’t that customers borrowed too much; it’s that banks lent too much.

This isn’t to deny that many subprime loans were exploitative, and that customers often didn’t understand repayment terms. Nor is it a bad idea to police banks, preventing them, for instance, from charging unreasonable fees.

Bank Self-Harm

Yet a sound economy needs healthy financial institutions. Rather than stop lenders from hurting consumers, the first priority should be to keep the banks from harming themselves. In the short run, solvency is often at odds with what consumers want (or with what they think they want). We should remember that for every mortgage customer that was hosed, others were willingly grabbing all the unsound mortgages they could get.

Before the bust, champions of the new consumer agency, such as Representative Barney Frank, were consistent advocates of more loans to subprime borrowers. That’s hardly surprising; it’s in the nature of folks to want more credit. As Warren Buffett once reminded a person in his employ, it’s the job of the banker to screen out loans with a low probability of repayment.

The aim of regulators should be to force banks to do what is in their own and society’s interests: to practice sound banking. No consumer watchdog can do this because systemic risk aggregates at the level of the lender. The surest solution is to limit the leverage of financial institutions. Regulators have already moved against dicey products such as no-documentation mortgages (“liar loans”), and ones in which borrowers get 100 percent financing. And well they should.

Read more here: http://www.bloomberg.com/apps/news?pid=20601039&sid=a2y1wcOYyFQc

Is JPMorgan Responsible for the Destruction of U.S. Financial System?

Someone forwarded this article to me from a UK website about JP Morgan-Chase being responsible for the destruction of the U.S. financial system.  The article is dated October 18, 2008 but it’s still an interesting read.

Jim Willie, Market Oracle

The tag team of JPMorgan as the monster and Goldman Sachs as its harlot represent a powerful pair that is more responsible for destroying the entire US financial system than 95% of the American public has any awareness. The colossus of JPMorgan is a monster, a predator, nurtured by pond scum. It has gobbled up Chase Manhattan, Manufacturers Hanover, Chemical Bank, Bank One, and more over the past two decades. Their profound presence in keeping the USTreasury Bond yields down can never be understated. They do so by managing 85% of the credit derivatives on the planet. They distorted usury prices, as in price of borrowed money, thus aggravating the LIBOR (London InterBank Offered Rate) market in a very visible manner.

The oblong usury prices have contributed mightily to the destruction of the US Economy itself, created bubbles, killed jobs, and wrecked savings. The ugliest hidden activity for the JPMorgan monster is to manage the Bank of Baghdad, where they manipulate the crude oil price, where drug trafficking money is funneled from Afghan sales, under management by the US Military aegis (guys with no uniform stripes or markings). Maybe such illicit money offsets Credit Default Swap losses, making America strong for freedom and liberty. Goldman Sachs is clearly the investment banking agent for the USGovt, given the privilege of insider trading in unspeakable proportions.

They manage the Plunge Protection Team efforts to intervene in financial markets, making America strong for freedom and liberty. The new kid on the block is the FDIC. The Federal Deposit Insurance Corp is steering fresh meat into the corralled JPMorgan stockyards for slaughterhouse feeding. The label of harlot might be too kind, especially from the perspective of senior bond holders. But JPMorgan requires fresh meat (capital) periodically, thus making America strong for freedom and liberty. Never mind the fires caused after its hearty meals and flatulence.

This article discusses the JPMorgan monster, its behaviour, and teeth revealed. Robb Kirby (see his website, click HERE ) often covers JPMorgan illicit behaviour This article discusses banking system realignments to destroy savings accounts owned by the people, and the Coup d’Etat just completed. The criminals on Wall Street have taken full control of the USGovt financial management, with blank check written by a thoroughly intimidated US Congress, deceived steadily and easily. Threats and intimidation are central to the successful coup. The Ponzi Scheme has been revealed, even as the frail and tattered Shadow Banking System has been revealed. The key to the bailouts is its continued Top Down approach, which favors the Ruling Elite and denies all but crumbs to the people, who have been subjected to a foreclosure revolving door on mortgage loan assistance.

Since nothing has been solved from this approach, a total systemic breakdown is assured, whose climax will be the current Administration and the Wall Street executives in charge of the criminal syndicate riding off into the sunset in retirement. Rome burns. Much more detail is provided in the upcoming October report due this weekend. The theme is this subset synopsis article is of criminality, deception, monster exploitation, market corruption, and the collapse of a failed system, whose crescendo represents the greatest financial crimes ever witnessed in modern history. Americans do it big! The proprietary Hat Trick Letter covers much more of recent events, interpretation, and analysis, but here, focus on impropriety.

The Monster, Its Broker & Harlot

JPMorgan will require fresh asset meat every several weeks in order to survive, but the process will result in a sequence of severely damaging CDSwap fires. Perversely, the FDIC is their investment banker agent. Two mergers of questionable nature highlight the altered role of the Federal Deposit Insurance Corp (FDIC), which no longer protects bank depositors or their investors, but rather serves JPMorgan Chase. When Bank of America merged with Merrill Lynch, a trend started, one that exposed private stock brokerage accounts. Officially they can be legally borrowed across subsidiary lines. The FDIC averted a failure of Merrill Lynch without the credit default implications.

The other event was more blatant, as the FDIC steered Washington Mutual out of bankruptcy failure and into the JPMorgan slaughterhouse. Inside its chambers, JPM gobbled up the WaMu deposits and benefited from ratio improvements. Senior bond holders were crushed, fully denied due process from bankruptcy. The FDIC has become an ugly investment banker lookalike, serving JPM and not the US public. The FDIC owns a pitifully small $45 billion in funds available for bank bailouts, at June count. When the dust clears a year or more from now, many multiples more will be necessary for many bank failures.

Read more here: http://www.marketoracle.co.uk/Article6826.html

Wall Street Had ‘No Idea’ What Subprime CDSs Were, Lewis Writes

James Pressley, Bloomberg

Michael Burry, the California hedge-fund manager who figured out how to bet against the subprime bubble, prodded seven Wall Street banks in early 2005 to create credit-default swaps for subprime-mortgage bonds, Michael Lewis writes in his book, “The Big Short.”

Five of them “had no idea what he was talking about,” Lewis says. Only Deutsche Bank AG and Goldman Sachs Group Inc. expressed any interest in the concept, he says.

“Inside of three years, credit-default swaps on subprime- mortgage bonds would become a trillion-dollar market and precipitate hundreds of billions of losses inside big Wall Street firms,” Lewis writes in an excerpt from the book on the Web site of Vanity Fair magazine.

“Yet, when Michael Burry pestered the firms in the beginning of 2005, only Deutsche Bank and Goldman Sachs had any real interest in continuing the conversation. No one on Wall Street, as far as he could tell, saw what he was seeing.”

The book is scheduled to be published later this month by W.W. Norton in the U.S. and by Allen Lane in the U.K.

Burry, the head of Cupertino, California-based Scion Capital Group LLC, had concluded that lending standards had hit bottom, Lewis writes. He had studied subprime mortgage bonds in detail, wading through hundreds of prospectuses, Lewis says, and had figured out that the way to bet against them would be with credit-default swaps, which allow investors to insure against — or bet on — the likelihood that the issuer will default.

At the time, there was no such thing for subprime mortgage bonds, writes Lewis, a Bloomberg News columnist. So Burry had to get Wall Street banks to create one.

http://www.bloomberg.com/apps/news?pid=20601088&sid=ahU3.EVqKSH8

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