Newsweek: Tear Down Wall Street - Mercedes-Benz Forum

LinkBack Thread Tools Display Modes
post #1 of 3 (permalink) Old 02-14-2009, 07:29 PM Thread Starter
BenzWorld Elite
Date registered: Jul 2006
Posts: 5,543
Mentioned: 0 Post(s)
Quoted: 0 Post(s)
(Thread Starter)
Newsweek: Tear Down Wall Street

Tear Down Wall Street | Print Article |

Tear Down Wall Street

The survivors who appeared before Congress are 'too big to fail.' But guess what: They're failing.
Michael Hirsh
Newsweek Web Exclusive

It was a classic populist spectacle, reminiscent of William Jennings Bryan's "Cross of Gold" speech or Huey Long's mid-Depression campaign to "Share the Wealth." There, arrayed before Rep. Barney Frank and other voices of the people's outrage, sat the former titans of Wall Street, each of them trying desperately to convince their congressional questioners, and the world, that they deserved some fate other than oblivion.

And these were the survivors! The hardy ones. The eight CEOs who appeared before the House Financial Services Committee on Wednesday—among them Jamie Dimon of JPMorgan Chase, Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley—were actually the bankers who have best navigated the financial turmoil in recent months after taking money from the "Troubled Asset Relief Program," or TARP. That may help explain why some of the angrier congressmen, like Gary Ackerman of New York (who last week roared to former SEC officials: "You couldn't find your backside with two hands if the lights were on!") were a little calmer this time. But it was a striking display of the new balance of power in America. One by one, the former "captains of the universe," as Rep. Maxine Waters described them, genuflected before their congressional masters. "I feel more like a corporal of the universe," Bank of America's Ken Lewis joked weakly. The CEOs described how much they've slashed their salaries and bonuses, how hard they've tried to lend out the billions of taxpayer dollars, and how quickly they'll try to get off the federal dole.

Truth is, this is all mostly whistling past the graveyard—which is where most of these giant banks are headed someday. Or at least let us hope so, while Washington still has the power to make it happen. With a couple of possible exceptions, these financial behemoths can't be allowed to survive and securitize us to the brink again, only to have to be rescued because they're too important to the economy to be permitted to go bankrupt. This is still the heart of the crisis—the problem that President Obama's stimulus package and Treasury Secretary Tim Geithner's financial plan don't even touch. If it weren't for the fact that too many of these banks are too big to fail—"systemic risks," in the jargon—we would have been through a lot of the worst already. Bankruptcy and oblivion is supposed to be the fate of market players who make bad choices. That's how capitalism works. The system gets cleaned out, the survivors deservingly pick up their failed rivals' business and get richer, and the economy comes back to life quickly. But that's what is not working now. Oversize screw-ups like AIG and Citigroup survive on, zombielike, with Fed and Treasury "commissars" on the inside watching their every move, because no one can bear the thought of how many other institutions they would take down if they failed.

Among those who appear to understand this is Federal Reserve Chairman Ben Bernanke. " 'Too big to fail' is an enormous problem," Bernanke said in his own congressional testimony on Tuesday. "We are very unhappy with this problem, and we think that it should be a top priority to fix it as we go forward, so that … the situation doesn't arise again." One of the most telling moments at the CEO hearing came when one congresswoman asked if any of them had grown too large. All were silent. At other points, the CEOs tried to make the case that, with a thaw in lending barely under way, the issue is not with them but with the "nonbank" sector that was responsible for most of the worst mortgage-lending practices during the bubble. What they didn't say is that some of their own companies, among them Bank of America, actually went out and bought the most predatory and seamiest nonbank lenders, like Countrywide Mortgage. Just swallowed them whole. They're incorrigible.

This is the main reason why, to the market's chagrin, Geithner declines to provide details on how to unwind the bad loans and assets at these big companies. Geithner's predecessor, Hank Paulson, dithered over this problem as well. The indecision has been dragging on for five months. That's because the problem is all but insurmountable. If you value those toxic assets at actual market levels, most of these banks would become insolvent. Letting them fail would almost automatically trigger the depression the government has been trying to avert. But if instead the government artificially inflates the assets' values, it commits itself to spending trillions more in public money at a time when Congress and the public are fed up with bailouts (the IMF estimates that potential losses are still $2.2 trillion; Bernanke countered Tuesday that only half of those are with U.S. institutions, but he admitted the banks still have yet to write down about $500 billion in losses). And if the government declines to do either of these things—if it neither values the bad assets at market level nor buys them up at inflated prices—bank stocks will continue to be suspect and private capital will stay on the sidelines. The economy will remain frozen.

In other words, there are no good choices. According to a Treasury source, Geithner knows what a lot of these assets are worth. "The government has gone through these assets very carefully," Citigroup's Vikram Pandit told the House committee. But knowing the value doesn't help. So the Treasury secretary is trying to finesse his way through, probably case by case, hoping he can gradually nudge asset values higher by restoring confidence to the market.

Geithner may be too optimistic. As one senior economic official in Washington said to me the other day, "the Obama administration has got as much political capital as it's ever going to have. This is the time to lay it all out." In other words, tell everyone just how bad the problem really is. It's more than a matter of how much public money to commit. The "fundamental reshaping" of the financial system that Geithner referred to on Tuesday has to be part of the solution as well. The Citigroups and AIGs should be carefully broken up as soon as possible.

True, you're not going to place artificial limits on a firm's size; that's a bridge too far into socialism. But as John Kay of the Financial Times wrote on Wednesday, there's no reason why we can't rediscover the wisdom of Senators Glass and Steagall during the Depression. "Tension between the buccaneering culture appropriate to trading and investment banking and the meticulous processing and caution needed for retail banking is perpetual," Kay wrote. Indeed, as Joseph Stiglitz wrote in 2003, the wisdom behind Glass-Steagall goes "back even further to Teddy Roosevelt and his efforts to break up the big trusts." Let's simply acknowledge that. Yes, finance marches on. We're not going back to 1933. But some things about human nature never change. Now that we understand the fallacy of the "dispersion of risk" idea—which Wall Street, with a big assist from Alan Greenspan, sold us on before the crash—we should arrive at about the same place as Glass, Steagall and Teddy Roosevelt did. We can't have a free-market economy dominated by institutions so huge that they don't have to play by free-market rules. And yet we still do.
maine_coon is offline  
Sponsored Links
post #2 of 3 (permalink) Old 02-15-2009, 07:17 AM
Surely A Large Human
Qubes's Avatar
Date registered: Jun 2006
Vehicle: '08 C219
Location: Between Earth and Mars
Posts: 34,234
Mentioned: 2 Post(s)
Quoted: 482 Post(s)
Lifetime Premium Member
Hear hear.
Qubes is offline  
post #3 of 3 (permalink) Old 02-15-2009, 08:21 AM
Lifetime Premium Member
Shane's Avatar
Date registered: Aug 2002
Vehicle: And what was left was what was guilt was what u gave to me
Location: A cavalcade of strangers came to tear ur world apart
Posts: 41,527
Mentioned: 6 Post(s)
Quoted: 1728 Post(s)
Lifetime Premium Member
I have never been for the bail outs. Let the pain happen now, not later.
Shane is offline  
Sponsored Links

  Mercedes-Benz Forum > General Mercedes-Benz Forums > Off-Topic

Quick Reply

Register Now

In order to be able to post messages on the Mercedes-Benz Forum forums, you must first register.
Please enter your desired user name, your email address and other required details in the form below.

User Name:
Please enter a password for your user account. Note that passwords are case-sensitive.


Confirm Password:
Email Address
Please enter a valid email address for yourself.

Email Address:


  • Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
    Thread Tools
    Show Printable Version Show Printable Version
    Email this Page Email this Page
    Display Modes
    Linear Mode Linear Mode

    Similar Threads
    Topic Author Forum Replies Last Post
    Wall Street Still Doesn't Get It Qubes Off-Topic 8 11-06-2008 02:16 PM
    14 Reasons Main Street Loses While Wall Street Sinks Democracy Qubes Off-Topic 6 10-21-2008 08:25 PM
    Who will win on the new Wall Street? Jayhawk Off-Topic 7 09-24-2008 08:33 AM
    Hey, Wall Street Qubes Off-Topic 0 09-23-2008 04:54 PM
    Patriarch Tells Israel: "Tear Down This Wall" Marsden Off-Topic 0 12-25-2005 02:27 PM

    Posting Rules  
    You may post new threads
    You may post replies
    You may not post attachments
    You may not edit your posts

    BB code is On
    Smilies are On
    [IMG] code is On
    HTML code is Off
    Trackbacks are On
    Pingbacks are On
    Refbacks are On


    Title goes here

    video goes here
    description goes here. Read Full Story
    For the best viewing experience please update your browser to Google Chrome