I haven't paid much attention to the vague assertion that Congress might break up big banks. But this is the first I've seen with hard numbers.
quote: The bill would place a cap on any financial institution, limiting its total assets to three percent of GDP (that would lower to two percent for banks, and three percent for non-bank institutions). Currently, the six largest banks have holdings that equal 63 percent of GDP.
So my question is: are we really any safer if big banks only have hundreds of billions of dollars in assests instead of a few trillion? I mean, we don't exactly have a few extra billion lying around.
And does any of this help us prevent some of the outright fraud Goldman Sachs seems to have committed? Will anything in the bill make banks lend more responsibly or limit the bonuses they give to their boards and CEOs while bleeding their companies dry and laying off regular workers?
I'm leaning towards "Too little, too late" as an opinion, but I'd love to know more about it before I make up my mind.
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quote:So my question is: are we really any safer if big banks only have hundreds of billions of dollars in assests instead of a few trillion?
Well, yes, quite possibly. A factor of ten is a rather large reduction in losses (if we take what seems to be the premise). And yes, we do have a few extra billion lying around when it comes to preventing crises -- even some large private sector firms can mobilize that much capital.
quote:And does any of this help us prevent some of the outright fraud Goldman Sachs seems to have committed?
We already have plenty of pretty fraud statutes. The extent of actual fraud on Goldman's part was small; the maximum amount it might have contributed to the situation is small. Legal correction is being pursued. Putting everyone in a straitjacket because some people occasionally shoplift is not a sane response.
quote:Will anything in the bill make banks lend more responsibly
I'm not sure what you mean by this. Banks generally made loans responsibly; it was mortgage brokers (not part of banks) that made by far more of the problematic mortgages. Now, during the crisis, banks became even more conservative with lending, and "lend more responsibly" was a political codeword for "make riskier loans" in order to generate economic activity; is that what you're referring to? If so, you might want to think that through a bit (it certainly wasn't a major contributor to the crisis, just a response to it . . . plus, the rhetoric is ridiculous). If not, I can't think what you might mean. Familiarity with the situation will illustrate that banks not lending responsibly was essentially a non-problem. The problems were fundamentally related to banks themselves holding securities as reserves that were not very secure.
quote:limit the bonuses they give to their boards and CEOs while bleeding their companies dry and laying off regular workers?
I'm a bit confused about this one, too. You're complaining about the banks laying off "regular workers", who are the people involved in trading the very securities that were problematic? What would you have such workers do now that the demand for financial instruments they worked on has dried up? As for bleeding their companies dry, several of the major banks did quite well, even ex ante the government's assistance (one reason I think the government going all-in for the major banks was a stupid idea). I see no reason to limit 1) firing workers who don't have anything to work on (though I'm all for making sure there's a social safety net to protect them). 2) rewarding CEOs who navigate their banks safely through tough times. If we remove the possibility of the first, we make economic recovery even harder in the long run, by a lot (are you familiar with how the job market works in Europe?). If we remove the possibility of the second, what reason do CEOs even have to try, when the market is going down? They won't be paid for it. Now, one could argue that the reasons the banks did well were not good reasons, but the logical response to that is to attempt to prevent those reasons from occurring.
Some of the things in the regulations are relatively reasonable, a few are kneejerk, and at least one is very, very stupid. I'm referring to the provisions that specifically limit how corporations can be governed. There's no evidence that changes in corporate governance would have changed anything about the situation, and a lot of evidence that restricting corporate governance makes it a lot less attractive to do business in a location. Additionally, several states otherwise lacking economic resources have managed considerable returns on creating more flexible corporate governance systems to attract companies, and this is a very good thing.
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One regulatory idea that's making the rounds, that I quite like, is to require the bonds issued by banks (and likely certain other financial institutions) be convertible, when a regulator approves, to common stock. That would, in a crisis, eliminate debt, equivalent to infusing capital (and thus likely keeping the institution afloat) while still penalizing shareholders who had invested in the problematic institution, plus giving the newfound shareholders incentives to resurrect the financial health of the institution.
Switzerland is already rolling the idea out, and the US should get on board. It is a brilliant way of arranging the economy so shareholder bailouts of critical financial institutions don't become necessary. I'm not sure who originally proposed it (or that anyone knows), but Mankiw's the big proponent. A lot of blogs on both sides of the political line are picking it up, because it is pretty much unobjectionable from either side's current rhetorical position.
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From a completely simplistic perspective, preventing banks from getting too big is a clearly a way of avoiding the problem of having banks that are "too big to fail".
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quote:Originally posted by fugu13: ... I'm not sure who originally proposed it (or that anyone knows), but Mankiw's the big proponent.
I haven't formed an opinion on it, but the idea has been pushed a lot here (April 9 onwards) as a way of avoiding a general G20 tax on banks
quote: Canada’s chief bank regulator, Julie Dickson, has questioned the effectiveness of a global bank tax and other new rules aimed at preventing another financial crisis, indicating she prefers a scheme whereby banks insure themselves against failure with debt that converts to equity.
Ms. Dickson, head of the Office of the Superintendent of Financial Institutions, spelled out her case in the Financial Times Friday. Her comments, along with those Friday from Royal Bank of Canada CEO Gordon Nixon, represent the latest attempts by officials to head off new global financial regulations that could be damaging to Canada.
In an opinion piece, Ms. Dickson noted proposals to impose a global bank tax or surcharges on “systemically important” banks have not been universally accepted, with Canada leading the way in opposition to a bank tax.
Instead she suggested a new scheme in which bank debt would be converted into equity in the event lenders run into trouble. This “embedded contingent capital” would apply to all subordinated securities and would be at least equivalent in value to the common equity.
quote:From a completely simplistic perspective, preventing banks from getting too big is a clearly a way of avoiding the problem of having banks that are "too big to fail".
Sometimes the cure is worse than the disease
Mucus: glad to hear it. The idea is one of the best ideas I've heard, on any financial topic.
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