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How Big Is “BIG”

“Repression” is what Richard Fisher, President of the Dallas Fed, called “the injustice of being held hostage to large financial institutions considered ‘too big to fail.’” He sketched out the destructive impact of these TBTF banks that, as “everyone and their sister knows,” were “at the epicenter” of the financial crisis—“whose owners, managers, and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction.” These banks “capture the financial upside” of their bets but are bailed out when things go wrong, he said, “in violation of one of the basic tenets of market capitalism.”

In his speech, “Ending ‘Too Big to Fail’: A Proposal for Reform Before It’s Too Late,” he offered a “simple” plan that would allow the nation to come to grips with these banks. But in the process, he did something else: he defined BIG.

For example, Dodd-Frank is BIG. Alone its name: Dodd–Frank Wall Street Reform and Consumer Protection Act. The congressional effort to address the nightmare of TBTF “has clearly benefited many lawyers and created new layers of bureaucracy,” Fisher explained. But other than that, it “has made things worse, not better.” It has failed “to constrain” the megabanks’ advantages. “Indeed, given its complexity”—he later called it copious amounts of complexity—“it unwittingly exacerbates them.”

The Act’s “mumbo-jumbo” is spelled out on 848 pages, which “spawned” 8,800 additional pages of proposed regulations, with many more pages of regulations to come. Complying with them would eat up—“conservatively, in my view,” Fisher added—2,260,631 labor hours per year. In other words, Dodd-Frank created 1,130 full-time jobs, assuming they’re working regular hours, not banking hours.

And these 1,130 jobs would be spread over the 5,600 banks that make up the US banking industry. So the burden on each bank wouldn’t be unbearable. But approximately 5,500 of these banks are small to tiny community banks with less than $10 billion in assets. While they make up 98.6% of all banks, they control only 12% of the assets in the banking industry. Another 1.2% of the banks are regional banks with up to $250 billion in assets. These 70 banks hold 19% of the assets in the banking industry. Should any of them fail, it would entail mostly routine “private-sector ownership changes and minimal governmental intervention,” Fisher said.

The rest (0.2% of the banks) are megabanks with assets exceeding $2.3 trillion at the top end. There are 12 of them, and they control 69% of the assets in the industry. But with them, BIG also means complex, inscrutable, and intertwined. When one of them pops, run for the exits--if there are any exits. Due to the “threat they could pose to the financial system and the economy,” Fisher said, they’re considered TBTF.

So how big is BIG? JPMorgan Chase is the largest of Fisher’s “big five” with $2.36 trillion in assets, amounting to 15.7% of GDP. Up from $2.27 trillion a year ago. Getting bigger is their mission. It has $983 billion in “nondeposit liabilities,” or 6.3% of GDP, Fisher pointed out. And it sports a mind-boggling 5,183 subsidiaries in 72 countries!

The other members of the big five: Bank of America with 4,647 subsidiaries in 56 countries; Goldman Sachs with 3,550 subsidiaries in 53 countries, Citigroup with 3,556 subsidiaries in 93 countries; and Morgan Stanely, the baby, with 2,718 subsidiaries in 64 countries. Nondeposit liabilities of the big five amount to 26.3% of GDP.

By contrast, Lehman Brothers was only big, not BIG. In 2007, its total liabilities—not just nondeposit liabilities—amounted to $619 billion. It maintained a mere 209 subsidiaries in 21 countries. Next to the big five, it suffered from an outright lack of complexity. And yet, four years after its collapse, its bankruptcy proceedings are still ongoing.

Which begs the question: exactly how many of JPMorgan Chase’s 5,183 subsidiaries could CEO Jamie Dimon possibly be familiar with? OK, he has people working for him who have people working for them who have a lot of people working for them, and some of them (we hope) might be familiar with some of these subsidiaries and what they’re up to and what they’re hiding in their closets. But how the heck do you manage something like that?

Well, management by TBTF, of course. A new paradigm. Problems no longer matter. TBTF “exerts perverse market discipline on risk-taking activities,” Fisher said, as the “implicit government guarantee” induces unsecured depositors and creditors to “offer their funds at a lower cost to TBTF banks than to mid-sized and regional banks that face the risk of failure.” He called TBTF “an unfair tax upon the American people.”

Alas, Fisher has been up in arms about TBTF since July 2009, without visible effects—other than that the members of the financial cartel have gotten even bigger, even more complex, and even more inscrutable. And Congress isn’t about to change that.

Another powerful cartel, OPEC, however, is keeping a wary eye on Congress. In its January report, OPEC predicts that the US will post the highest oil production increase among non-OPEC states in 2013, while production from some OPEC members is declining—and Congress is playing with a monkey wrench. Read.... Why OPEC Is Worried About The US Congress.

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Reader Comments (1)

Look at why they got into trouble. Which is not rogue trading and even as it is that occasionally it is often more investors not being able to properly assess the risk combined with a clear indication that the bank's management cannot either.
It is board approved policies (taking up massive one-sided risks) combined by the fact that these banks are heavily interconnected plus no way investors (in any form (so also including account holders) can properly asses the risks that are run.
Attack this properly and you have solved the problem for 90% or so (which would be enough).

And there the problem starts.
1. Even the most obvious of bubbles RE could not be detected in a way that it lead to changed policies. By both the banks themselves and by regulators.

2. No way you can usually make a proper valuation of a bank. Results are mainly in provisions and reserves and so more important are the risks. If the trust is gone it becomes this way nearly impossible to restore it, in an other way than via stateguarantees.
Lot of very dodgy bookkeeping stuff allowed (combined with the fact that banks are operating obo these dodgy rules iso economic reality).

3. Trading as it is done now (as an important independent profit centre) is not an essential task for a bank doing the things why banks are essential for the rest of the economy for.
Anyway the contribution of this kind of trading for the rest of the economy might be very small. Especially in the days of HFT, bringing in relatively little real investment and if it does it is pretty unreliable (fast money) but for a big part determining the price and the volatility.

4. Interconnectivity. Because of the volume of trades compared to the size of the market (in the sense of value of real assets involved) risk can be gigantic. Like with derivatives who often cannot be sold, but have to be hedged.

Doubtful if banks can manage these issue and if they could subsequently if they would do it anyway. Effectivenes of regulators remains doubtful. In with in several countries regulators at wages that are a fraction of the wages of the people they are supposed to regulate, it is clear where the good people go. Or the good people in regualtion will end up (and subsequently how they will behave towards potential future employers).

The whole way how we as a society deal with these issues will have to change (and I donot see that happening).
-proper regulators not ones that move almost per definition after 3,4,5 years to the dark side. Needing proper market conform wages. Kicking the incompetents out in time (not as in government let them stay there for another 20-30 year to reach their pensions).
-simple old fashioned bookkeeping rules (highest of at liability side and lowest of at asset side) adjusted with clear possibly uniform provisionrules.
-long term claw back on boni.
-make assets (also new products) tradeble and asap . If things can be sold the risk is gone, if it has to be hedged always some risks will remain.
-banks should not be more complex than regulators can handle on the big stuff. If you have stupid regulators you need small and simple banks. Probably meaning that hedgefund like trading should be abolished.
Next to the stuff already proposed.
January 17, 2013 | Unregistered CommenterRik

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