FedUpUSA

Archive for October, 2009

As a companion to the Oct 2nd Problem Bank List (unofficial), below is a list of failed banks since Jan 2007.

From the FDIC FAQs: (ht JB)

11. When is the DIF expected to go negative?

FDIC estimates that the DIF balance as of September 30, 2009 will be negative.

However the DIF reserves against future losses, and the DIF still has cash to pay for bank closures – but I show the DIF balance as zero on the following graph:

Click on graph for larger image in new window.

The graph shows the cumulative estimated losses to the FDIC Deposit Insurance Fund (DIF) and the quarterly assets of the DIF (as reported by the FDIC). Note that the FDIC takes reserves against future losses in the DIF, and collects fees and special assessments – so you can’t just subtract estimated losses from assets to determine the assets remaining in the DIF.

The cumulative estimated losses for the DIF, since early 2007, is now over $44.5 billion.

Regulators closed three more banks on Friday, and that brings the total FDIC insured bank failures to 98 in 2009. Although regulators have slowed down in recent weeks, they are still on pace to close over 130 banks this year – the most since 1992.

Failed Bank List

Deposits, assets and estimated losses are all in thousands of dollars.

Losses for failed banks in 2009 are the initial FDIC estimates. The percent losses are as a percent of assets. Note that losses for the Irwin banks were combined by the FDIC, so one of the banks shows up as zero percent in the table.

See description below table for Class and Cert (and a link to FDIC ID system).

The table is wide – use scroll bars to see all information!

Click here for a full screen version.

NOTE: Columns are sortable – click on column header (Assets, State, Bank Name, Date, etc.)

Class: from FDIC

The FDIC assigns classification codes indicating an institution’s charter type (commercial bank, savings bank, or savings association), its chartering agent (state or federal government), its Federal Reserve membership status (member or nonmember), and its primary federal regulator (state-chartered institutions are subject to both federal and state supervision). These codes are:

N National chartered commercial bank supervised by the Office of the Comptroller of the Currency

SM State charter Fed member commercial bank supervised by the Federal Reserve

NM State charter Fed nonmember commercial bank supervised by the FDIC

SA State or federal charter savings association supervised by the Office of Thrift Supervision

SB State charter savings bank supervised by the FDIC

Cert: This is the certificate number assigned by the FDIC used to identify institutions and for the issuance of insurance certificates. You can click on the number and see “the last demographic and financial data filed by the selected institution”.

FedUpUSA is your one-stop source for all the latest news regarding the global financial crisis.  We are committed to bringing you the truth about what is really happening, as opposed to the half-truths and outright lies shown in the mainstream media.  For more about our history and who we are click About Us.  To see our data sources and contributors click Links.  Our goal is to:

STOP THE LOOTING AND START PROSECUTING!

? Washington’s Blog.

A 2005 letter in premier scientific journal Nature reviews the research on trust and economics:

Trust … plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down.
In the absence of trust in a country’s institutions and leaders,
political legitimacy breaks down. Much recent evidence indicates that
trust contributes to economic, political and social success.

Forbes wrote an article in 2006 entitled “The Economics of Trust”. The article summarizes the importance of trust in creating a healthy economy:

Imagine
going to the corner store to buy a carton of milk, only to find that
the refrigerator is locked. When you’ve persuaded the shopkeeper to
retrieve the milk, you then end up arguing over whether you’re going to
hand the money over first, or whether he is going to hand over the
milk. Finally you manage to arrange an elaborate simultaneous exchange.
A little taste of life in a world without trust–now imagine trying to
arrange a mortgage.

 

Being able to trust people might seem like a pleasant luxury, but
economists are starting to believe that it’s rather more important than
that. Trust is about more than whether you can leave your house
unlocked; it is responsible for the difference between the richest
countries and the poorest.

 

“If you take a broad enough definition of trust, then it would
explain basically all the difference between the per capita income of
the United States and Somalia,” ventures Steve Knack, a senior
economist at the World Bank who has been studying the economics of
trust for over a decade. That suggests that trust is worth $12.4
trillion dollars a year to the U.S., which, in case you are wondering,
is 99.5% of this country’s income. ***

 

Above all, trust enables people to do business with each other. Doing business is what creates wealth. ***

 

Economists distinguish between the personal, informal trust that
comes from being friendly with your neighbors and the impersonal,
institutionalized trust that lets you give your credit card number out
over the Internet.

Similarly, market psychologists Richard L. Peterson M.D. and Frank Murtha, Ph.D. wrote in October:

Trust is the oil in the engine of capitalism, without it, the engine seizes up.

Confidence is like the gasoline, without it the machine won’t move.

Trust is gone: there is no longer trust between counterparties in the
financial system. Furthermore, confidence is at a low. Investors have
lost their confidence in the ability of shares to provide decent
returns (since they haven’t).

And two professors of finance write:

The
drop in trust, we believe, is a major factor behind the deteriorating
economic conditions. To demonstrate its importance, we launched the
Chicago Booth/Kellogg School Financial Trust Index. Our first set of
data—based on interviews conducted at the end of December 2008—shows
that between September and December, 52 percent of Americans lost trust
in the banks. Similarly, 65 percent lost trust in the stock market. A
BBB/Gallup poll that surveyed a similar sample of Americans last April
confirms this dramatic drop. At that time, 42 percent of Americans
trusted financial institutions, versus 34 percent in our survey today,
while 53 percent said they trusted U.S. companies, versus just 12
percent today.

 

As trust declines, so does Americans’ willingness to invest their
money in the financial system. Our data show that trust in the stock
market affects people’s intention to buy stocks, even after accounting
for expectations of future stock-market performance. Similarly, a
person’s trust in banks predicts the likelihood that he will make a run
on his bank in a moment of crisis: 25 percent of those who don’t trust
banks withdrew their deposits and stored them as cash last fall,
compared with only 3 percent of those who said they still trusted the
banks. Thus, trust in financial institutions is a key factor for the
smooth functioning of capital markets and, by extension, the economy.
Changes in trust matter.

They quote a Nobel laureate economist on the subject:

“Virtually
every commercial transaction has within itself an element of trust,”
writes economist Kenneth Arrow, a Nobel laureate. When we deposit money
in a bank, we trust that it’s safe. When a company orders goods, it
trusts its counterpart to deliver them in good faith. Trust facilitates
transactions because it saves the costs of monitoring and screening; it
is an essential lubricant that greases the wheels of the economic
system.

Americans clearly don’t trust the big banks and financial companies.

Indeed, as leading economists have pointed out, the big financial institutions don’t even trust each other,
because they know that all of the other companies might have hidden
toxic assets in SIVs, overvalued their assets, gamed their books, or
otherwise tried to bury their problems.

For example, Anna Schwartz – co-author with Milton Friedman of the leading monetarist book on the Great Depression – told the Wall Street Journal:

We
now hear almost every day that banks will not lend to each other, or
will do so only at punitive interest rates…This is not due to a lack
of money available to lend, Ms. Schwartz says, but to a lack of faith
in the ability of borrowers to repay their debts. “The Fed,” she
argues, “has gone about as if the problem is a shortage of liquidity.
That is not the basic problem. The basic problem for the markets is
that [uncertainty] that the balance sheets of financial firms are
credible.” 

So even though the Fed has flooded the credit markets with cash,
spreads haven’t budged because banks don’t know who is still solvent
and who is not. This uncertainty, says Ms. Schwartz, is “the basic
problem in the credit market. Lending freezes up when lenders are
uncertain that would-be borrowers have the resources to repay them. So
to assume that the whole problem is inadequate liquidity bypasses the
real issue”…

 

In the 1930s, as Ms. Schwartz and Mr. Friedman argued in “A Monetary History,” the country and the Federal Reserve were faced with a liquidity crisis in the banking sector…

 

But “that’s not what’s going on in the market now,” Ms. Schwartz
says. Today, the banks have a problem on the asset side of their
ledgers — “all these exotic securities that the market does not know
how to value.”

 

“Why are they ‘toxic’?” Ms. Schwartz asks. “They’re toxic because
you cannot sell them, you don’t know what they’re worth, your balance
sheet is not credible and the whole market freezes up. We don’t know
whom to lend to because we don’t know who is sound.”

As financial writer Will Hutton says:

“Such
was the break down in trust and sense of panic that some of the most
familiar names in British high street banking would not lend to each
other at all or, at best, just overnight. Instead, the Bank of England
had to supply tens of billions to banks who found the normal sources of
funds blocked.

***

Unless there is a radical and government-led change in ownership,
structure, regulation and incentives so that the principles of fairness
are put at the heart of the Anglo American financial system -
proportionality of reward and fair distribution of risk – there is no
chance of the return of trust and integrity upon which long-term
recovery depends.”

Economist and former Secretary of Labor Robert Reich agrees that Wall Street’s biggest problem right now is the collapse of trust:

The
problem is, government bailouts, subsidies, and insurance aren’t really
helping Wall Street. The Street’s fundamental problem isn’t lack of
capital. It’s lack of trust. And without trust, Wall Street might as
well fold up its fancy tents.

Reich also writes:

Despite
all the money going directly to the big banks, despite all the
government guarantees and loans and special tax breaks, despite the
shot-gun weddings and bank mergers, despite the willingness of the
Treasury and the Fed to do almost whatever the banks have asked, the
reality is that credit is not flowing.

 

Why? Because the underlying problem isn’t a liquidity problem. As I’ve noted elsewhere, the
problem is that lenders and investors don’t trust they’ll get their
money back because no one trusts that the numbers that purport to value
securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years — the derivatives, credit default swaps, collateralized debt instruments, and so on — has undermined all notion of true value.

 

Many of these fancy instruments became popular over recent years
precisely because they circumvented financial regulations, especially
rules on banks’ capital adequacy. Big banks created all these
off-balance-sheet vehicles because they allowed the big banks to carry
less capital.

In other words, I would argue that our economy is not
fundamentally stabilizing (notwithstanding a couple of temporary “green
shoots”) because the government and the financial giants are taking
actions and releasing data which encourage more distortion and less trust.

The
crisis will deepen unless honest and transparent accounting is used,
investments become transparent and understandable again, and the
government stops gaming the system for the benefit of the big boys.

As structured finance and derivatives expert Janet Tavakoli says, lack
of transparency, lying and fraud which “we’ve seen massively in the
financial system” has undermined trust, so no one wants to buy our
financial products.

As John Carney writes:

“We’re probably making things worse. Allowing insolvent
institutions to fail and requiring worthless and worth less assets to
be fully written down would provide transparency to the market.
Instead, we’re dedicated to the post-Lehman proposition of “Never
Again.” The various programs of our government continue to obscure
asset pricing and conceal insolvency. This means that you can’t trust
the market to tell you which firms are failing.

 

Twisting the arms of bankers to lend to institutions that may be
insolvent is a recipe for deepening the crisis. We’ve just been through
a period of malinvestment–we spent too much borrowed money on junk.
Borrowing more to spend on junk only digs us in deeper.

 

Bank lending won’t get going again until trust in the markets can
be restored. Fighting a Great Depression era problem probably won’t
help. More transparency, which means more write-downs and failures, is
probably necessary if we’re going to get through this. Unfortunately,
we’re still sailing in the opposite direction.”

Happy Talk: Then and Now

It
is true that consumers and small investors drive a large portion of the
economy. And it is true that consumers and small investors, in turn,
are largely driven by their perception of what is happening.

But
I would also argue that all of the happy talk in the world won’t turn
the economy around when the fundamentals of the economy are lousy, or
there has been a giant bubble and vast overleveraging, or there has
been massive fraud, or the government has gone so far into debt that it
has formed a black hole.

Happy talk did not work during the first couple of years of the Great Depression, once the speculative bubble and leverage of the Roaring 20′s burst, leading to the inevitable crash.

As economist Irving Fisher pointed out (as recounted by economist Steve Keen):

Hobbled
by this naive belief in equilibrium, the economics profession was as
unprepared for today’s crisis as it had been for the Great Depression.
Now that the crisis is well and truly with us, all
conventional “neoclassical” economists can offer is the hope that the
crisis can be overcome by a good, strong dose of confidence.

From [Irving] Fisher’s point of
view, such a belief is futile. In an economy with an excessive level of
debt and low inflation, he argued that confidence was irrelevant–and in
fact dangerously misleading, as he knew from painful personal experience.

University of Maryland professor economics professor and former Chief
Economist at the U.S. International Trade Commission Peter Morici wrote in 2006:

The
speculative frenzy of recent years is causing a major adjustment, and
the happy talk of realtors is prolonging the process. The absence of
realistic analysis about the extent of overvaluation is characteristic
in an industry that sees nothing but an upward progression for values,
but houses like any other asset can be overpriced.

Things are likely to get worse before they get better.

Morici was pointing out that there was a bubble in housing, and happy talk would not keep the bubble from bursting.

As Washington Post business writer Steven Pearlstein predicted in August 2007:

Despite
the happy talk from Washington and Wall Street investment houses –
eerily reminiscent, by the way, of the early days of the
savings-and-loan crisis of the late ’80s — these shocks [the subprime
and credit crises] will have serious consequences …

And economist James Galbraith is saying now (just as his father economist John Kenneth Galbraith said 50 years ago) – that “happy talk” won’t solve the crisis.

Indeed, the chair of the congressional oversight committee of the bailouts (Elizabeth Warren) and the senior regulator
during the S & L crisis (William Black) both say that hiding the
true state of affairs and trying to put a happy face on an economic
crisis just prolongs the length and severity of the crash

Donald
W. Riegle Jr. – former chair of the Senate Banking Committee from 1989
to 1994 – wrote (along with the former CEO of AT&T Broadband and
the international president of the United Steelworkers union) wrote recently:

It’s
almost as if the [Obama] administration is opting for a
rose-colored-glasses PR strategy rather than taking a hard-nose look at
actual consumer and employment figures and their trends, and modifying
its economic policies accordingly.

In short, happy talk and fake confidence-building exercises (like the stress tests, which Time Magazine called a con game) don’t work.

Indeed, I believe that trying to instill false confidence will actually backfire on Summers, Geithner, Bernanke and the boys and make the crisis worse.

Why?

Well, initially, as Yves Smith points out:

Team Obama has made it clear that it sees restoring confidence as paramount, when anyone
with consumer marketing experience will tell you that advertising
campaigns that make exaggerated claims about the product often don’t
simply fail (as in customers see through the hype) but often backfire
(buyers discount future ad messages about the product). The
press has had a manipulated feel, with readers on sending news stories
that have misleadingly positive stories with Panglossian headlines and
upbeat initial paragraphs that are often undercut by other material in
the same article.

So in our new branding, “the economy is no longer in a freefall” has
become “recovery.” The self-congratulatory tone among US financial
regulators (who should instead be engaging in serious
self-recrimination for failing to foresee and prevent this crisis) is
premature.

In addition, psychologists say that – until
government and business leaders prove they can behave responsibly, and
until the perpetrators of financial fraud are held accountable – real
trust will not be restored and the economy will not recover

For example, one of the leading business schools in America – the Wharton School of Business – has written an essay
on the psychological causes and solutions to the economic crisis.
Wharton points out that restoring trust is the key to recovery, and
that trust cannot be restored until wrongdoers are held accountable:

According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the
crisis today is not one of confidence, but one of trust. “Abusive
financial practices were unchecked by personal moral controls that
prohibit individual criminal behavior, as in the case of [Bernard]
Madoff, and by complex financial manipulations, as in the case of AIG.”
The public, expecting to be protected from such abuse, has suffered a
trauma of loss similar to that after 9/11. “Normal expectations of what
is safe and dependable were abruptly shattered,” Sachs noted. “As is
typical of post-traumatic states, planning for the future could not be
based on old assumptions about what is safe and what is dangerous. A
radical reversal of how to be gratified occurred.”

 

People now feel more gratified saving
money than spending it, Sachs suggested. They have trouble trusting
promises from the government because they feel the government has let
them down.

 

He framed his argument with a fictional patient named Betty Q.
Public, a librarian with two teenage children and a husband, John, who
had recently lost his job. “She felt betrayed because she and her
husband had invested conservatively and were double-crossed by
dishonest, greedy businessmen, and now she distrusted the government
that had failed to protect them from corporate dishonesty. Not only
that, but she had little trust in things turning around soon enough to
enable her and her husband to accomplish their previous goals.

 

“By no means a sophisticated economist, she knew … that some
people had become fantastically wealthy by misusing other people’s
money — hers included,” Sachs said. “In short, John and Betty had done
everything right and were being punished, while the dishonest people
were going unpunished.”

 

Helping an individual recover from a traumatic experience provides
a useful analogy for understanding how to help the economy recover from
its own traumatic experience, Sachs pointed out. The public will need to “hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again.” In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.

Note that Sachs urges “hold[ing] the perpetrators of the economic disaster responsible.” In other words, just “looking forward” and promising to do things differently isn’t enough.

Are the “perpetrators of the economic disaster” being held accountable?

So
far, Obama, Summers, Geithner, Bernanke and the crew have tried to
paper over the cause and severity of the financial crisis, instead of
honestly addressing them. They haven’t lifted a finger to hold anyone
accountable (other than a Madoff or two), but have actually thrown
billions of dollars at the perpetrators (or else appointed them to
government posts).

Indeed, William Black says that “the [government's] entire strategy is to keep people from getting the facts”.

Economist Dean Baker made a similar point, lambasting
the Federal Reserve for blowing the bubble, and pointing out that those
who caused the disaster are trying to shift the focus as fast as they
can:

The current craze in DC policy circles
is to create a “systematic risk regulator” to make sure that the
country never experiences another economic crisis like the current one.
This push is part of a cover-up of what really went wrong and does
absolutely nothing to address the underlying problem that led to this
financial and economic collapse.

 

The key fact that everyone must always remember is that the story
of the collapse was not complex. We did not need great minds sifting
through endless reams of data and running incredibly complex computer
simulations to discover the underlying problem in the economy. We just
needed some people who understood the sort of arithmetic that most of
us learned in 3rd grade.

 

If the people at the Fed, the Treasury, and in other key positions
had mastered arithmetic, and were prepared to act on their knowledge,
they would have taken steps to stem the growth of the housing bubble.
They would have prevented the bubble from growing to the point where
its inevitable collapse would bring down both the U.S. economy and the
world economy…

 

We didn’t need some super-genius to solve the mystery. We just
needed an economist who could breath and do arithmetic. But the DC
policy crowd tells us that if only we had a systematic risk regulator
this disaster could have been prevented.

 

Okay, let’s do a thought experiment. Suppose we had our systematic
risk regulator in 2002. Would this person have stood up to Alan
Greenspan and said that the country is facing a huge housing bubble the
collapse of which will sink the economy?…

 

Alan Greenspan said that there was no housing bubble; everything
was just fine. Would our systematic risk regulator have said that
Greenspan was nuts and that the whole economy was a house of cards
waiting to collapse?

 

Anyone who believes that a risk regulator would have challenged
the great Greenspan knows nothing about the way Washington works. The
government is run by people who first and foremost want to advance
their careers.

 

And, the best way to advance your career in Washington is to go
along with what everyone else is saying. If that was not completely
obvious before the collapse of the housing bubble, it certainly should
be obvious now.

 

How many people in government have lost their jobs because they
failed to see the bubble? How many people even missed a promotion? In
fact, the top financial officials in the Obama administration, without
exception, completely missed the housing bubble. One might think it was
a job requirement.

This lack of accountability among economists and economic analysts is the core problem that must be tackled.
Unless these people are held accountable for their failures in the same
way as custodians and dishwashers, there will never be any incentive to
buck the crowd and point out looming disasters like the housing bubble.

The reality is that we have a systematic risk regulator. It is called the Federal Reserve Board. They blew it completely. We
will do far more to prevent the next crisis by holding our current risk
regulator accountable for its failure (fire people) than by pretending
that we somehow had a gap in our regulatory structure and creating
another worthless bureaucracy.

Remember also that the Wharton study pointed out that
“the public, expecting to be protected from such abuse, has suffered a
trauma of loss similar to that after 9/11.”

Trying to put a happy
face on a grim situation, continuing to do things which are transparent
attempts to instill false confidence, and leaving in power the people
who caused the crisis reinforces the market’s convictions that (1)
government and business leaders are behaving irresponsibly instead of
addressing the fundamental problems and (2) there is no accountability.

Keeping
quiet about how bad things are won’t help. As numerous leading
independent economists and financial experts agree, the three things
that will help are:

1. Honestly addressing the causes of the crisis;
2. Honestly addressing the necessary – if bitter – medicine needed to get out of the crisis; and
3. Holding responsible those who caused the crisis.

Postscript: Time Magazine notes:

Traditionally, gold has been a store of value when citizens do not trust their government politically or economically.

In other words, the government’s political actions affect investments, such as gold.

It is interesting to note that Americans no longer trust their politicians, the justice system, their ability to obtain liberty, or the media. Americans know that the boys launched the war in Iraq (which will end up costing $3-5 trillion dollars) based upon justifications which turned out to be untrue. Many Americans have read that the government imported communist Soviet Union torture techniques and then said “we don’t torture”. Many Americans also know that the government spied on American citizen (even before 9/11 … confirmed here and here) while saying “we don’t spy”, and that the government apparently planned both the Afghanistan war (see this and this) and the Iraq war before 9/11.

This
is an economic, not a political, essay. But I think the lack of trust
in government concerning political issues poses an interesting
question. Specifically, is it possible that the American people’s
distrust of the government concerning the above-described issues also
bleeds over into a lack of trust in the government’s economic actions
and statements? In other words, if people discover that a government is
lying about political issues, do people trust the government’s
pronouncements about economic issues less?

I
don’t know the answer, but analyzing the possibility could provide a
researcher with an interesting project (or a PhD candidate with a
potential doctoral thesis).

Proposals:

Extend “first-time” homebuyer tax credit (very inefficient).If this is just a safety net extension, then the “first-time” homebuyer tax credit doesn’t qualify. And if this is the “Next Stimulus Package”, providing more aid to the unemployed (13 weeks won’t last long), or aid to the states, would be a far more effective use of money than the homebuyer tax credit …

A couple of stories, first from the WSJ: Democrats Weigh Extending Key Parts of Stimulus

Obama administration economists said they would like the enhanced unemployment-insurance program to extend beyond its Dec. 31 expiration date. They also want to maintain a program that offers tax credits to pay 65% of the cost of health insurance policies under the COBRA program, which allows laid-off workers to purchase the health plans they had through their previous employer.

White House officials said they also are examining whether to extend a soon-to-expire tax credit for first-time homebuyers, but that provision faces a stiffer headwind.

From the NY Times: After More Job Losses, Democrats Move to Extend Benefits

The House on Friday approved legislation that would provide 13 more weeks of benefits to states with unemployment rates of 8.5 percent or higher. Democratic leaders in the Senate are pushing a measure that would also provide aid to states that do not meet the threshold.

Senator Harry Reid of Nevada, the majority leader, is promoting legislation that would provide four more weeks of unemployment coverage to all states, while states over the 8.5 percent threshold would get 12 more weeks.

Lawrence H. Summers, director of the National Economic Council, said in an interview with The Atlantic online that the administration should “continue to support people who are in need, whether it’s unemployment insurance, or the Cobra program,” which provides health insurance for the unemployed.

For the first time since March, the stock market actually
showed a little reaction to reality based information. As it turns out, even removing any hint of
stimulus will cause the market to retreat.
We already expected the cash for clunkers program was largely a gimmick
with auto sales dropping like a stone in the last reading. Home sales are being artificially juiced by
the $8,000 tax credit and the Federal
Reserve keeping 30 year mortgages near historical lows. You can expect that if the Fed and the tax
credit were removed we would see a similar reaction as the cash for clunkers
program in the housing market. It is
amazing that so much energy and focus is being put on bailouts, gimmicks, and
transient market forces all the while ignoring one major component. Jobs.

The jobs report issued on Friday was another
disappointment. The problem with how the
jobs argument has been framed since the start of the year is any report is
going to look good compared to the 741,000 job losses in January. Did anyone really think we were going to stay
at an annualized job loss pace of nearly 9 million? Of course not. So every subsequent reading seemed like a
blessing to the media. The rate of
change on a month over month basis has been referred to as the second
derivative (or more specifically the rate of change OF the rate of change). Let us look at both job losses and the rate
of change:

It is rather obvious that we were not going to see 741,000
job cuts per month even if we were heading into another Great
Depression. So as you can see from
the chart above the second derivative from February to May of 2009 was
positive. Yet anyone can see how flawed
this argument really is. It is using the
ground shaking monthly loss of -741,000 as a backdrop for every subsequent
month. Nothing can compete with
that. In fact, the following months had
equally bad reports:

February 2009: -681,000

March 2009: -652,000

April 2009: -519,000

And then in June, we had the second derivative give out
again. Of course the market being guided
by easy money and unlimited stimulus kept moving on up. This minor hiccup was nothing to worry
about. That is until the last report
that shows the rate of change giving way again.
Even at our current pace, we are losing over 3 million jobs a year yet
somehow this is good.

Yet in this new economy apparently buying a car and buying a
home are more important than having a stable job. Even Henry Ford understood that you needed to
pay workers a wage to afford the product you were dishing out. In this new economy, apparently having a job
is an afterthought.

Let us set aside the job losses for the moment.
Who in the world is hiring?
Apparently very few:

Those hiring are still at the levels seen in the March
abyss. Virtually nothing has changed on
the jobs front since March of this year.
Instead of playing hide and seek with mortgages and creating a massive shadow
inventory why not at least focus
some energy on the employment situation?

There is this pervasive tunnel vision focus on everything
put job creation. It seems like very few
want to talk about this. They want to
obsess that the Case Shiller has stabilized or that home sales have increased
but fail to examine the employment front.
For the first time in our history did we have an economy largely built
on a housing and credit bubble. So why
are we to expect similar outcomes in this so-called recovery? In fact, many of these jobs losses are
permanent:

5.4 million people have been unemployed for 27 weeks or
more. In times like this simple
questions bring out the best answers.
This is like asking how a person with no income and no job is going to
pay a $500,000 mortgage in California? If you asked a question like that the outcome
would have been obvious. So with this
above chart, we ask who or what industry is going to employ these people? That is the question that has no answer even
as we pass 21 months of our deep recession.

? Washington’s Blog.

Why isn’t the government breaking up the giant, insolvent banks?

We Need Them To Help the Economy Recover?

Do we need the Too Big to Fails to help the economy recover?

No.

The
following top economists and financial experts believe that the economy
cannot recover unless the big, insolvent banks are broken up in an
orderly fashion:

• Nobel prize-winning economist, Joseph Stiglitz

• Nobel prize-winning economist, Ed Prescott

• Dean
  and professor of finance and economics at Columbia Business School, and
  chairman of the Council of Economic Advisers under President George W.
  Bush, R. Glenn Hubbard

• MIT economics professor and former IMF chief economist, Simon Johnson (and see this)

• President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

• Deputy Treasury Secretary, Neal S. Wolin

• The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine

• The Congressional panel overseeing the bailout

• The head of the FDIC, Sheila Bair

• The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

• Economics professor and senior regulator during the S & L crisis, William K. Black

• Economics professor, Nouriel Roubini

• Economist, Marc Faber

• Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

• Economics professor, Thomas F. Cooley

• Former investment banker, Philip Augar

• Chairman of the Commons Treasury, John McFall

Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.

In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke’s thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.

Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:

The
report was particularly scathing in its assessment of governments’
attempts to clean up their banks. “The reluctance of officials to
quickly clean up the banks, many of which are now owned in large part
by governments, may well delay recovery,” it said, adding that
government interventions had ingrained the belief that some banks were
too big or too interconnected to fail.

 

This was dangerous because it reinforced the risks of moral hazard
which might lead to an even bigger financial crisis in future.

If We Break ‘Em Up, No One Will Lend?

Do we need to keep the TBTFs to make sure that loans are made?

Nope.

Fortune pointed out
in February that smaller banks are stepping in to fill the lending void
left by the giant banks’ current hesitancy to make loans. Indeed, the
article points out that the only reason that smaller banks haven’t been
able to expand and thrive is that the too-big-to-fails have decreased
competition:

Growth for the nation’s smaller banks
represents a reversal of trends from the last twenty years, when the
biggest banks got much bigger and many of the smallest players were
gobbled up or driven under…

 

As big banks struggle to find a way forward and rising loan losses
threaten to punish poorly run banks of all sizes, smaller but well
capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…

At a congressional hearing on small business and the economic
recovery earlier this month, economist Paul Merski, of the Independent
Community Bankers of America, a Washington (D.C.) trade group, told
lawmakers that community banks make 20% of all small-business loans,
even though they represent only about 12% of all bank assets.
Furthermore, he said that about 50% of all small-business loans under
$100,000 are made by community banks…

Indeed, for the past two years, small-business lending among community
banks has grown at a faster rate than from larger institutions,
according to Aite Group, a Boston banking consultancy. “Community banks
are quickly taking on more market share not only from the top five
banks but from some of the regional banks,” says Christine Barry,
Aite’s research director. “They are focusing more attention on small
businesses than before. They are seeing revenue opportunities and
deploying the right solutions in place to serve these customers.”

And Fed Governor Daniel K. Tarullo said in June:

The
importance of traditional financial intermediation services, and hence
of the smaller banks that typically specialize in providing those
services, tends to increase during times of financial stress. Indeed,
the crisis has highlighted the important continuing role of community
banks…

For example, while the number of credit unions has declined by 42
percent since 1989, credit union deposits have more than quadrupled,
and credit unions have increased their share of national deposits from
4.7 percent to 8.5 percent. In addition, some credit unions have
shifted from the traditional membership based on a common interest to
membership that encompasses anyone who lives or works within one or
more local banking markets. In the last few years, some credit unions
have also moved beyond their traditional focus on consumer services to
provide services to small businesses, increasing the extent to which
they compete with community banks.

Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.

Specifically
since Glass-Steagall was repealed in 1999, the giant banks have made
much of their money in trading assets, securities, derivatives and
other speculative bets, the banks’ own paper and securities, and in
other money-making activities which have nothing to do with traditional
depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still
have trillions in bad derivatives gambling debts to pay off, and so
they are only loaning to the biggest players and those who don’t really
need credit in the first place. See this and this.

So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.

The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

The
largest banks often don’t show the greatest efficiency. This now seems
unsurprising given the deep problems that the biggest institutions have
faced over the past year.

 

“They actually experience diseconomies of scale,” Narter wrote of
the biggest banks. “There are so many large autonomous divisions of the
bank that the complexity of connecting them overwhelms the advantage of
size.”

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many
community banks have thrived, in large part because their local
presence and personal interactions give them an advantage in meeting
the financial needs of many households, small businesses, and
agricultural firms. Their business model is based on an important
economic explanation of the role of financial intermediaries–to
develop and apply expertise that allows a lender to make better
judgments about the creditworthiness of potential borrowers than could
be made by a potential lender with less information about the
borrowers.

A small, but growing, body of research suggests that the financial
services provided by large banks are less-than-perfect substitutes for
those provided by community banks.

It is simply not true
that we need the mega-banks. In fact, as many top economists and
financial analysts have said, the “too big to fails” are actually
stifling competition from smaller lenders and credit unions, and
dragging the entire economy down into a black hole.

The Giant Banks Have Recovered, And Are No Longer Insolvent?

Have the TBTFs recovered, so that they are no longer insolvent?

Negatory.

The giant banks have still not put the toxic assets hidden in their SIVs back on their books.

The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.

The
overhang of derivatives is still looming out there, and still dwarfs
the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).

Indeed, Nobel prize winning economist Joseph Stiglitz said recently:

The
U.S. has failed to fix the underlying problems of its banking system
after the credit crunch and the collapse of Lehman Brothers Holdings
Inc.

 

“In the U.S. and many other countries, the too-big-to-fail banks
have become even bigger,” Stiglitz said in an interview today in Paris.
“The problems are worse than they were in 2007 before the crisis.”

 

Stiglitz’s views echo those of former Federal Reserve Chairman
Paul Volcker, who has advised President Barack Obama’s administration
to curtail the size of banks, and Bank of Israel Governor Stanley
Fischer, who suggested last month that governments may want to
discourage financial institutions from growing “excessively.”

While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.

Some
very smart people say that the big banks – even after many billions in
bailouts and other government help – have still not repaired their
balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.

But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.

The Government Lacks the Power to Break Them Up?

Does the government lack the power to break up the TBTFs?

Wrong.

One of the world’s leading economic historians – Niall Ferguson – argues in a current article in Newsweek:

[Geithner is proposing that] there should be a new “resolution
authority” for the swift closing down of big banks that fail. But such
an authority already exists and was used when Continental Illinois failed in 1984.

Indeed, even the FDIC mentions Continental Illinois in the same breadth as “too big to fail” banks.

And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and
Law) – says that the Prompt Corrective
Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government
to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.

Whether or not the banks’ holding companies can be broken up using the PCA, the banks themselves could be. See this

And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.

FDR seized gold during the Great Depression under the Trading With The Enemies Act.

Geithner
and Bernanke have been using one loophole and “creative” legal
interpretation after another to rationalize their various
multi-trillion dollar programs in the face of opposition from the
public and Congress (see this, for example).

And the government could use 100-year old antitrust laws to break them up.

So
don’t give me any of this “our hands are tied” malarkey. The Obama
administration could break the “too bigs” up in a heartbeat if it
wanted to, and then justify it after the fact using PCA or another
legal argument.

Is Temporarily Nationalizing the Giant Banks Socialism?

Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.

That
may be true. But government regulators in the U.S., Sweden and other
countries which have broken up insolvent banks say that the government
only has to take over banks for around 6 months before breaking them up.

In
contrast, the Bush and Obama administrations’ actions mean that the
government is becoming the majority shareholder in the financial giants
more or less permanently. That is – truly – socialism.

Breaking
them up and selling off the parts to the highest bidder efficiently and
in an orderly fashion would get us back to a semblance of free market
capitalism much quicker.

The Real Reason the Giant Banks Aren’t Being Broken Up

So what is the real reason that the TBTFs aren’t being broken up?

Certainly, there is regulatory capture, cowardice and corruption:

• Joseph Stiglitz
  (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the
  financial industry because it is politically difficult, and that he
  hopes the Group of 20 leaders will cajole the U.S. into tougher action

• Economic historian Niall Ferguson asks:
  

  Guess
  which institutions are among the biggest lobbyists and campaign-finance
  contributors? Surprise! None other than the TBTFs [too big to fails].

• Manhattan Institute senior fellow Nicole Gelinas agrees:
  

  The
  too-big-to-fail financial industry has been good to elected officials
  and former elected officials of both parties over its 25-year life span

• Investment analyst and financial writer Yves Smith says:
  

  Major financial players [have gained] control over the all-important over-the-counter debt markets…It is pretty hard to regulate someone who has a knife at your throat.

• William K. Black says:
  

  There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .

  Instead, the Treasury and the Fed are urging us not to
  examine the crisis and to believe that all will soon be well. There
  have been no prosecutions of the chief executives of the large nonprime
  lenders that would expose the “epidemic” of fraudulent mortgage lending
  that drove the crisis. There has been no accountability…

  The Obama administration and Fed Chairman Ben Bernanke have
  refused to investigate the nature and causes of the crisis. And the
  administration selected Timothy Geithner, who with then Treasury
  Secretary Paulson bungled the bailout of A.I.G. and other favored “too
  big to fail” institutions, to head up Treasury.

  Now Lawrence Summers, head of the White House National Economic
  Council, and Mr. Geithner argue that no fundamental change in finance
  is needed. They want to recreate a secondary market in the subprime
  mortgages that caused trillions of dollars of losses.

  Traditional
  neo-classical economic theory, particularly “modern finance theory,”
  has been proven false but economists have failed to replace it. No
  fundamental reform can be passed when the proponents are pretending
  that there really is no crisis or need for change.

• Harvard professor of government Jeffry A. Frieden says:
  

  Regulatory
  agencies are often sympathetic to the industries they regulate. This
  pattern is so well known among scholars that it has a name: “regulatory
  capture.” This effect can be due to the political influence of the
  industry on its regulators; or to the fact that the regulators spend so
  much time with their charges that they come to accept their world view;
  or to the prospect of lucrative private-sector jobs when regulators
  retire or resign.

• Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.

But there is an even more interesting reason . . .

The number one reason the TBTF’s aren’t being broken up is [drumroll] . . . the ‘ole 80′s playbook is being used.

As the New York Times wrote in February:

In
the 1980s, during the height of the Latin American debt crisis, the
total risk to the nine money-center banks in New York was estimated at
more than three times the capital of those banks. The regulators,
analysts say, did not force the banks to value those loans at the
fire-sale prices of the moment, helping to avert a disaster in the
banking system.

In other words, the nine biggest banks were all insolvent in the 1980s.

And the Times is not alone in stating this fact. For example, Felix Salmon wrote in January:

In
the early 1980s, when a slew of overindebted Latin governments
defaulted to their bank creditors, a lot of big global banks, Citicorp
foremost among them, became insolvent.

So the
government’s failure to break up the insolvent giants – even though
virtually all independent experts say that is the only way to save the
economy, and even though there is no good reason not to break them up – is nothing new.

William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (“the entire strategy is to keep people from getting the facts”) makes a lot more sense.