³ÉÈË¿ìÊÖ

But...Obama has instigated this from a false assumption if the actions he is suggesting are meant to achieve what he claims.

It was in the run up to the 2005 presidential election when the US construction industry was in the doldrums because the american housing market was saturated that George W Bush made the statement that he wanted all Americans to own their own home and he wanted to see an SUV in every driveway.

This was purely political in that he wanted both the construction industry to be working fully and for Motown to have full order books and demand for more so that he would get re-elected.

It was the White House that also then told the Fed that loans of 125 per cent should be offered to fulfil his aspiration for all Americans.

Fiscal policy and directives were adjusted to do just that and Freddie Mac and Fanny Mae together with an enlarged AIG grew like Topsy to accommodate the newly busy realty and new homes for all preoccupation.

CDS were invented and then huge demand meant that they were no longer configured with the three layers of risk that constituted them at the outset. Risk became greater and scrutiny of buyer beware became less in the frenzy to own these new products.

Obama therefore should be blaming the Republicans in the George W Bush administration for the Credit Crunch and for not ensuring that the appropriate checks and balances were in place for these risky transactions.

The three pronged assault of his proposed action on the banks will not address the issues that created the problem, and their political parents.

That said, Gordon Brown followed what George W had said and was encouraging people in the UK to take on what I would call 'hot air' mortgages, and get in on the home ownership roundabout too.

It is time for these politicians to step back and see how to address reform of all aspects of finance in its entirety, even if they do not want to accept any personal or party responsibility and look at where and why the banks came in so that suggestions as to how to address the causes of the devastating crunch and its aftershocks can be properly addressed.

Not to do so would be further hypocrisy.

there will be gnashing of teeth among the oligarchs who will now have to create real wealth to merely make an average profit. Or do illegal things to get the big profits like the somali pirates hijacking oil tankers and ships full of tanks whom i have read are being run by ex traders. An average fisherman isn't going to think that big or have the contacts to make it work.

it is the chase for super profit in the unregulated market that drove people into excess.

Maybe Obama has been given a reality check that his office is temporary and that if he is going to do one thing of choice that will be popular with the voters then its going to be defanging the banks?

darling has said he is not bothered about banks being too big to fail. which is astounding given the poverty that causes the rest of us. never mind the natural injustice of it. woolworths were not too big to fail.

it should not be the case that it is legal that a handful of people can put whole nation states at risk and whole generations into poverty just because of their betting.

Paul - I reckon I know what all the the hedge fund managers are thinking this morning - "Barrack, he's not the Messiah, he's just a very, very naughty boy!.

POWER - MONEY like ENERGY - MATTER

Man just can't resist pushing the boundaries until his world blows up in his face, with long term residual 'contamination'.

Man invented money, and the Bomb, he is not wise enough to handle either.

Incisive piece Paul!

However, George Osborne on Radio 4 this morning would not commit to agreeing to a full separation of the the investment banking activities from the the retail parts of banking (he was pushed on this several times this morning on live radio but still would not commit). I guess it just proves who pulls his strings.

He also tripped up (btw) to having made a mistake with his expenses which brought the obvious remark from the interviewer of 'how can we trust you with the nation's books then?'

Call me Mr. Cynical but I think Obama's move is more to do with losing the fifty year held Democratic Senate seat in the Boston/Mass Democratic heartland than anything else.

If you can lose Ted Kennedy's seat in the heartland of Kennedy America then you can lose much more - you can lose the Whitehouse. Democrats who did not vote for the Democratic candidate, or who even voted for the Republican, voiced that not enough had been done to curtail the banks... not enough done to punish the bankers.

The American left, if such a thing exists, wants real pain for Wall Street - and they want Obama to start delivering that.

Obama is talk, talk, talk at the moment. Let's see whether this talk actually manifests intself into law and reality.

#5 Ouch my head hurts

Bit of a hang over today after last Nights Glass Steagal celebrations at my house.

I rather suspect George O will want to hold out for a bit as the last bastion of irresponsible high finance to help balance the books before reluctantly being forced to toe the line at some point in the future.

The USA has more in the locker than we have to cope with the short term turmoil re-introduction of Glass Steagal will bring.

I do however remain a very happy person today and will be happy to add my pin prick of a contrbution to any sign of this proposal gaining any forward momentum.

Its a shame the general populus ( as measured by my collegues at work) have no idea about how big (and how good) this potentially is.

Lets start rewarding people for generating things of real value once more!!

Down with the Spivs and shysters.

Hurrah!!!

It is not just too big to fail because even modest events and failures can trigger a collapse. The 'cannot-be-allowed-to-fail' signals the end of the whole point of the market system in finance. Risk free is the normal state even for the senior executives and traders who can earn enough in just a few years not to need to work again. Direct intervention is the way forward and that means substantial public ownership, legally enforceable governance with jail for serious miscreants and supervision not regulation. Are we getting there?

#6 Mr Cynical...I think you maybe right!

It's intersting that Obama is taking primary counsel from retired chairman of the Fed Paul Volcker, who now chairs the President's Economic Recovery Advisory Board.

The man behind Obama's war on Wall Street


Obama seems not now to be guided by the likes of Emanuel, Geithner and Bernanke...I wonder why?

Obama has put his finger on the main political issue of this time: why is it that Wall Street caught a cold, recovered thanks to the taxpayer's care, whilst Main Street, where the taxpayer lives, has, as a consequence of this charity, gone down with pneumonia. Then, when Main Street asks Wall Street for a hand up in return, Wall Street just ignores Main Street as it can get bigger bonuses elsewhere.

The real economy in both the USA and the UK is suffering massive pain and will continue to do so until there is some investment in the domestic economy. The banks are too busy rebuilding their balance sheets to be bothered and public funds are all spoken for.

In other words the taxpayer has been crippled with debt so that the banks can socialise their losses. The banks, now debt free, are busy privatising what is left of the economy so they can return to their old pre-bust ways.

I find it quite amazing that so far the public authorities in both countries have been happy to allow this miserable, parasitical policy to be presented as a solution.

The next, inevitable bust will prove fatal for all as there is nothing left in the barrel.

In my view this country needs private sector investment so that we can both provide jobs and add value to the economy. For as long as the banks can get mega-profits for speculating elsewhere this is just not going to happen.

Either the public stand up to the banks and a political class that loves the banks more than the people, or we reinvent politics and do it our way. I hope Obama, by leading the charge, will begin to concentrate a few minds. I don't want a bland election in this country, I want a rough, tough debate that draws the politicians out into the harsh light of Main Street. The one question that needs to be asked all the time is: the economy is broken; so what are you going to do about it?

I'll believe it when I see it



It certainly does put Brown on the spot. And it goes so much against his inseparable economic belief and political backing that I'll bet you a banker's bonus it wont happen here with Brown

Or with Osborne

Obama's proposal is what is required in the UK. The transition will however be extremely painful. As I understand it, the easy profits being made by the investment arms of the main banks using the cheap money provided by the central banks has been used not only to pay undeserved bonuses but also to plug holes in balance sheets and cover losses in the retail banking dividions arising from credit card default, mortgage default, etc. I expect these losses will continue for quite some time going forward but, if Obama's proposals are implemented, the profits from investment banking will not be there to meet them.

The message is : we're not going to have globalisation used as an excuse to allow monopolistic superbanks hold sovereign states to ransom and use their privileged access to public deposits and central bank reserves to gorge their self-interest. Its a good one. I agree.

The living will debate on the G20 working groups was already bringing up size, break-up and segregation of trading risks. The agenda of the bafoonish regulator-class is no more than : the smaller and simpler banks are, the easier our job.

But what does the Volcker-world look like? How will it best serve global trade, investment and credit? Multitudes of small competitive well regulated local banks/mortgage companies funded by savers with loan limits and strict lending criteria?Speciality banks in different sectors?Interbank markets less liquid. Bad banks created to hold legacy assets no-one can buy? Global investment boutiques,SPVs, private equity and hedge funds doing the bigger/sexy stuff - unregulated? Better and bigger equity and bond markets for the big-boys but growing SMEs caught in a twilight risk-averse world?

I have two inter-related questions about this move:

Firstly, isn't it a bit like shutting the stable door after the horse has bolted? Undoubtedly we are in this mess because of the likes of Glass-Steagall repeal, but hasn't the damage already been done? For the last 20 years or so, the economies of the West have disguised a stagnant economic business model behind financial gerrymandering. This crisis is the ghost of misdemeanours past coming back to haunt us. The private banking system has already plundered the public purse (by dropping the interest rate to near 0%, the central bank is in effect enabling banks to exchange their highly dubious credit money for Gvt backed currency). Yes with low interest rates and QE, the banks have built up their capital cushions very well thank you very much Mr taxpayer. Maybe their backsides are nicely padded against the economic spanking that awaits us all !!

Secondly, even if the banks do get carved up, how will this be done in practice? This raises a multitude of further questions: Who gets to judge which aspects of each business get to put into the appropriate section? Will this be done correctly? Where will the highly toxic stuff really end up? How can we tell if the assets are indeed highly toxic in the first place? Will the taxpayer still get left holding a trillion pound bucket of lemons?

In theory this is a step in the right direction, but it's a travesty that this wasn't conducted at the height of the crisis in Sept 2008, when the politicians held the balance of power.

Now we have the uphill struggle of trying to re-instate "privatised profit (or losses) for privatised risk", rather than the current scandalous situation of "privatised profits with socialised risks (i.e. losses)".

Do we really think that Gordon and Obama are holding good enough hands to pull this off?

Capital Cushion?

Is that what enables the banks to argue that they should not lend to UK domestic SME's and enables the banks reserves to swell so that the bank's accountant can somehow describe that as 'profit for calculating bonuses'

Look's like the UK government screwed up again by putting too much emphasis on the UK banks recapitalising rtaher than just getting their houses in order with risk taking etc?

My initial reaction to this story was just like most other peoples - Well Done Obama, Its About Time For Some Real Regulation - But I wonder if its all as it seems at first glance? It could be read that Obama is just trying to put the fear of God into the American banking sector so that it loosens the purse strings and starts lending more money at cheaper rates to more people. That seems to be Obama's main bone of contention when you listen to what he actually said. I wonder what would happen if the banks suddenly started lending again, would all this talk of banking regulation melt away in the face of a 'new attitude' by the banks? Is it all an arm-twisting tactic that will come to nothing once the cheap credit starts flowing again?

From Kid Dynamite's Blog

First of all, I spent time on both sides of the business on Wall Street - on the "sell side," on a customer-related trading desk, and on the "buy side" at an internal hedge fund at the same firm - a large, generally commercial bank.

Unfortunately, it seems like this policy is more populist reaction from an Adminstration that screwed it up the first time. Take Goldman Sachs (And Morgan Stanley for that matter) - why on Earth are they allowed to borrow from the Fed under Bank Holding Company charters when (to the best of my knowledge) neither of them has any commercial banking deposits? In addition to trying to separate commercial banking and prop trading, wouldn't a good first step to be to actually separate the commercial banks from the non commercial banks? People aren't mad because GS is making money trading - they're mad because GS is making money trading with what they (the people) think is taxpayer money or taxpayer backstops. The decision to allow non-banks access to (near zero cost) Fed funds resulted in these non-banks making extreme amounts of money which angered the populace.

As I said, I fully understand the desire to implement a situation where commercial banks do not engage in proprietary trading. However, the real problem isn't proprietary trading - it's leverage - it's actual risk.

Hi Paul

I think that one of the issues here is that it has taken politicians so long to even propose getting a grip on the situation. At least Obama has some real proposals to offer. I read on notayesmanseconomics that Paul Volckers involvement is likely to be a good thing and smiled at his wondering what Gordon Brown must have thought of the phrase too big to fail after his role in merging Lloyds and HBOS!

#17 Tim - you put your finger on a point. Glass Steagall was a more elegant solution. Brit govt heavily briefing now plan is no good because does not address systemic risk. Thanks for your contrib. Will think abt this. Paul

Paul,

Hats off to ya!

John Cleese + Basel II Capital Requirements + Paddy Chayefsky = Best blog on the beeb!

Awesome.

Hope I'm on for that bet

#19 Paul Mason wrote:

"Brit govt heavily briefing now plan is no good because does not address systemic risk."

-----------------------------

Then they're either stupid, venal or incorrigible...though quite probably all three!

I'm not sure this is going to achieve Obama's declared aim, though what it will do in the short term almost certainly is impact on investment bank profits and hence bonuses. If it achieves that over the next two years, it helps Obama's re-election push.

But why does it not achieve his stated aims? If we look at the chronology of the whole crisis, it actually began in August 2007, when two mortgaged back secutiries SPVs failed, ie their losses exceeded their capital base, putting at risk loans made so as to leverage those Funds. The organisation behind them, Bear Stearns, took the SPVs back onto its own balance sheet and covered the losses in excess of the Funds' capital, thereby limiting losses to just investors in the Funds and protecting lenders. Fast forward to March 2008, and this exercise brought down Bear Stearns, which was taken over, ie it wiped out Bear Stearns' capital and its takeover in turn protected its lenders from loss. Keep in mind Bear Stearns was not a bank, ie not registered under the Bank Holding Companies Act. It was the equivalent of the "pure" investment banks Obama seems to want to recreate. It had no retail deposits. It could not have. It was not authorised to take them.

Fast forward to September 2008, and Lehman Bros was in a similar position to Bear Stearns, for the same reasons. Again, I do not think Lehman's was actually a bank. It had the same status as Bear Stearns, and had no retail deposits. Hence the then US Treasury Secretary thought it could be allowed to fail, as its connectivity with the rest of the financial system was limited. In particular, there was no "ma and pa" deposits to worry about. Only the grown up lenders (as well as all shareholders) on Wall Street would be stung, and they accepted that as part of the game.

However, what resulted from the Lehman's collapse was a global fear that lenders to organisations like Lehmans, and by implication Merrill Lynch (rescued by Bank of America), Morgan Stanley, and even the mighty Goldman Sachs, would not be protected from losses if any furthere such firms collapsed. Lenders to them included commercial banks. As a result, a game of "hunt the exposure" began, where every financial institution tried to guess what exposure each of their counterparties had to Lehmans, and whether it too would fail. Then it became a game of "well who is exposed to our counterparties' counterparties?" and so on. The result was a collective loss of confidence in the credit worthiness of every financial institution engaged in the provision of credit to anyone else. Note, though, at this point, no "commercial" banks as defined by Obama had actually failed. We quickly moved, however, to a fear that every bank could collapse because of their real or assumed exposures.

So it is not apparent to me how the breaking up of financial conglomerates will make any difference to the risk of a recurrence. The failures that triggered the crisis were of non-commercial banks, which then caused a general loss of confidence in the wider financial system. Obama's changes will not stop similar exposures in future. They will just prevent them from occurring within individual corporate groups.

Finally, the firm that can best be described as "too big to fail" in this crisis is AIG. It is not a bank of any sort. It is an insurance company, though it morphed into a de facto (very specialised and very concentrated) hedge fund in the years leading up to the crisis. Again, though, I don't see how preventing another AIG is covered in the Obama plan.

I don't disagree that the financial system needs structural reform. Far from it. However, I don't think we're going to achieve what we need from the plan announced.

#23

''I don't disagree that the financial system needs structural reform. Far from it. However, I don't think we're going to achieve what we need from the plan announced. ''

At least its a defining move in the right direction, let it gather some momentum first, there will be time for amending it later but the fundamental balance of power has to be addresed at its core. Get them on the defensive and keep them there, take away the perception of glitz and glamour that suurrounds them.

Spivs and shysters, self styled masters of the universe are parasites whom generate nothing of real value yet are rewarded beyond all reasonable proportion.

Our brightest and best should aspire to solving the great philosophical problems or creating cold fusion, not to waste it in generating algorythems to shave off 0.0005% off the currency market trading.


Sorry if I seem abit bolshy but I celebrtated obamas announcement earlier in the week now I am celebrating leeds United's fantastic 2-2 draw at white heart lane.

COME ON YOU WHITES...

and

DOWN WITH SPIVS AND SHYSTERS

Paul,

Thank you for this brilliant incisive amusing blog.

Just one point that I would add, though, from an ordinary Joe's point of view....

Basel II and the capital cushion that you are so eloquently criticising has another rather fundamental problem.

It is predicated on an elitist and undemocratic and .... well, I'd almost say....a fascist ideology. It is an algorithm worked out by the "banking uber-class" (that is to say bankers and banking regulators, who we all know are indeed the same thing) who wish to convince us (...the people) that if they tweak a few variables here and there as part of the calculations of this ratio and that ratio in the banking system they control, then this will make it all OK, and that we should carry on and....really..... we shouldn't worry our pretty little heads about it all.

This is inherently undemocratic and a load of *, of course.

This "black box" philosophy of government of "look guys, we are really intelligent bankers, just leave it up to us and we'll ensure we keep a big enough capital cushion... honest... and you'll be alright in the future", which seems to be the UK's line at the moment, will no longer wash. It treats ordinary people as a load of patsies, condemned forever to believe what one small self-interested, colluding section of our society is attempting to pull on us.

We, the ordinary people, will never understand Basel II, III or IV or however many that are introduced, and therefore we'll never believe it.

We'll only understand a restructuring of the whole system, whereby some organisations identifiably do one thing, and some do another, so that we, and everyone else, can make up our own mind about what risks we take with our money and the potential return we get.

You mention in 19 that the UK Govt supposedly does not believe the "Volcker Plan" addresses the issue of systemic risk.
Well, if it just adds to this existing plan a cap of around $80 to 100bn on any one financial institution, surely it would sort that one out?

Many thanks for your articles.




I'm somewhat of a refugee from Pesto's blog (Bob weedles some good hard facts out of various sources, but as for analysis and translation of these into patterns and trends that illuminate things for ordinary Joe's like me, this kicks things into a cocked hat) but that seems to have been cornered by about one or two crypto Marxists and fractional reserve banking obsessives, which is making it

#17 and 19

I think Obama has taken the point, he says " And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks."

Its not correct that we dont care whether we have huge global super non-banks as long as they are not using taxpayer privileges.That misses the point about ransom and power. Obama says "The same principle should apply to wider forms of funding employed by large financial institutions in today's economy. The American people will not be served by a financial system that comprises just a few massive firms. That's not good for consumers; it's not good for the economy."

He uses the phrase "financial institutions",not banks. He doesnt want overpowerful non-bank superpowers either interconnecting with banks.He wants to reduce size and risk generally. Neither do I. So, I think he's right. Go beyond Glass-Steagall in this globalised world.

#17 and 19

Goldman Sachs and Morgan Stanley applied to become bank holding companies in the Lehmans storm. The Federal Reserve approved conversion in September 2008 to offer them protection of bank-status in return for closer regulatory control of their business. It was an action to bring in the last two detached investment banks under some form of government control. Only with hindsight can you snipe at this decision. The system was collapsing and the authorities had limited room for manoeuvre.Perhaps the damage of letting GS and MS suffer outside the regulatory net at that point outweighed the perks offered to them by bringing them in. It wasnt Obama's Administration so I dont see how Tim Coldwell says it was their "screw up" if he emant that.

Nice piece Paul , is that a whiff of napalm coming from the direction of the city ? or is it just the sour odour of fear ?

Steve Keen has got the blade into Bernanke here :

Incidentaly Keen's deconstruction of neoclassical economics (Debunking Economics) is sharp too. If he ever manages to grasp the impossibility of Marx's "use value/ exchange value dichotomy" and the messianic promise that underpins money/capital ( see Derrida,esp John D Caputo's discussions) then he could be onto the next big thing.

OBAMA AND 'TAKING THE POINT' (#26)

Two things relevant here, about money, are: it has to come from somewhere, and it is 'expensive'. If Obama's campaign cost (minimum) $1 billion, he has indeed, 'taken the point'. I would venture he is 'shafted' well up the handle. Even if the diversion exercise that declared he got HALF his funding in 'twos and threes' is true, half of one billion is a lot of debt. Somebody owns a substantial piece of Obama's ass (and probably his ox as well). My guess is, the only points he now takes, come with INSTRUCTIONS from some very powerful people.

Barrie (#29),

You raise an interesting point. I remember looking at who was funding the Presidential candidates in late-2008, as well as where some key Congressmen got their campaign funding.

Senator John McCain's largest contributors were policial action committees ("PACs") associated with Goldman Sachs. President Obama's third largest contributors were, you guessed it, PACs associated with Goldman Sachs.

Senator Richard Dodds' (Chair of the Senate Banking Committee and hence responsible for oversight of bank regulation) top 20 contributors included 16 banks. At #5 on the list (I think) was Royal Bank of Scotland. Just to add to the interest, RBS' financial statements stated that it made no political contributions, with no clarification to suggest the statement only applied to the UK.

Obama's "war on banks" maybe has to be seen in context of the above.

WAR ON BANKS CAN ALSO BE A 'FALSE FLAG' OPERATION. (#30)

I am given to understand (from a point of 'informed credulity' based on my take on human behaviour) that 'Banking' has a long record of betting on opposing sides. I am in no doubt they always win.

The world of tobacco is symptomatic: supposedly under threat and being 'closed down' it is doing very nicely, and no one has gone to jail. EU states grow it - some, or all, subsidised. One bar in Westminster is a smoking bar. 'Film' is a fag-fest.

There is neither honour nor integrity while money is King. Just watch out political parties successfully buy the voters WITH THEIR OWN DEBT!

They say the Antichrist is already among us - be that as it may. The next man driven, by need, to rule the 'known world', having 'gone global', is also among us - BEYOND DOUBT. The two might just be synonymous. . .

Is Obama just bluffing? Is it just a co-incidence that, now Obama can no longer force through legislation, he’s brought up the issues to deal with the banks? With little chance of getting through, the little people that funded half of his election costs (with their dollar or two) will not feel so aggrieved and the big people who funded the other half will get what they paid for. And if (when?) it fails to become law – it can always be blamed on the nasty Republicans.

Paul,

Thank you for the link to the Haldane article, it is a very frank and perceptive piece. I did enjoy the comment that "in the 12th Century, King Baldwin II of Jerusalem secured a loan using his beard as collateral." I suspect that much of the current intake of collateral used to obtain loans is just as dubious, though.

Looking at Charts 1,3 & 4 in the article it is quite apparent that the sea-change in the structuring of the banking sector occurred in the early 1970s. First there is evidence of inter-stellar levels of asset creation (banks assets ramping up from half GDP for most the 20th Century up to 5 times GDP in recent years). Next we see that the banks gained a step change in profitability (return on Equity) during this period, and this is explained (justified) as a reward for higher risk taking. However, it is clear that the sterling liquid asset backing for these "assets", dropped from circa 20% in the late sixties to about 1% prior to the crisis.

Is this not a clear case of the banks having the remarkable ability of making money out of thin air? This can only further support the notion put forward by Steve Keen that banks create credit money first then scramble around to find the support for it afterwards (usually when things hit the fan). It also supports the view of many others (such as Michael Hudson) that fiat currency stability is at best a mirage and at worst a whopping great scam.

#33 Hawkeye_Pierce

This supports the view that the dollar unpegging from gold & the rise of fiat currencies has a lot to do with hiding the true fall in the rate of profit with fictitous capital.

From Hudson move on to Loren Goldner & his analysis of fictitious capital.

How come the media briefing covered by the attached FT alphaville article has not been discussed on the ³ÉÈË¿ìÊÖ's blogs?



This gives a much better insight into the Obama proposals and, as the FT implies, it is all about Goldmans.

#35 and Paul,#19

JayPee, thanks for the quote,:-

Senior Administration Official is quoted

"if you’re so large and interconnected and leveraged that you could threaten our basic economy, as we saw firms do in the past, you’re going to be subject to comprehensive supervision and regulation, whether or not you own a bank"

Paul, you need to look to where the battle is drawn if this is accurate. Glass Steagall is old hat. Obama is out for more. Too-big-to-fail. Why did USA grant Goldman and MS banking holding status when they did? They posed too much of a threat?Lesson learned maybe?

Agree with JayPeee - why arent you covering this......it aint about capital.

The capital cushion may well have evaporated but I think this is little more than a storm in a teacup. Banks and capitalism always seem to bounce back so there's little to worry about in that field, epessially in a rich country like the US. In the meantime Obama might as well literally get a comfortable cushion to sit on, maybe at somewhere like and possibly things won't seem that bad.

I do worry much more for the UK in this current financial crisis than the US. The Con/Lib government have a real job on their hands here.

#38 Matt

"Banks and capitalism always seem to bounce back so there's little to worry about in that field, epessially in a rich country like the US."

In 5 years time you may regret saying this.
Time will tell.