It’s a wonderful life 2011

Jan 3, 2011 21:02 UTC

About a year ago, Arianna Huffington called my friend and colleague Dennis Santiago and asked if my firm could provide a list of “good banks” for an effort she was planning. Along with Rob Johnson from the Roosevelt Institute, Huffington conceived of something called “Move your Money,” which sought to get consumers to move their business from large banks to smaller community institutions.

The effort was modestly successful in terms of increasing awareness of consumers about the alternatives for financial services. But it did not really change the competitive equation between the too big to fail (TBTF) behemoths — Bank of America, JPMorgan, Wells Fargo and Citigroup — and the rest of the industry and the economy. Now that insurgents like Washington Mutual, Countrywide, Lehman Brothers and Bear Stearns & Co. and many others have disappeared, the banking industry is more concentrated than any time during the past century, both financially and in terms of the industry’s icy grip on political power.

One of the themes that motivated the “Move your Money” effort was the image of James Stewart as head of the mutual Building & Loan, who fought to keep his bank open in the Frank Capra film “It’s a Wonderful Life.” His nemesis was Potter played memorably by Lionel Barrymore, the head of the big bank that sought to take over the Building & Loan and thereby gain a monopoly position in the allegorical American town.

But given the state of the U.S. economy and the fact that almost 15% of the banks in the U.S. are considered “troubled” by the FDIC, perhaps we should reconsider this interpretation of the film’s apparent story line. My friend Fred Feldkamp, a veteran lawyer with decades of experience in banking and securitization, notes that the Capra movie “portrays Potter as the owner of the bank in town, but I see him as a stand-in for the conservators FDIC put in place at selected ‘too big to fail’ institutions which were supposed to buy local banks, fix them and re-sell them to locals.”

If you think of Potter not as a Robber Baron a la J.P. Morgan but instead as a government bureaucrat working for the FDIC or even the Reconstruction Finance Corporation, that puts a different light on the big bank vs. the world battle, does it not? Feldkamp notes that from the Great Depression of the 1930s and again in the 1980s real estate bust, the government played an important role in restructuring the banking industry — and never more so than today.

“Small banks ended up being temporarily swallowed into the designated “banks of last resort” in various states,” Feldkamp relates regarding previous banking busts going back to the 1930s. “Conservators ran most of those banks until the mid-1950s.  I represented one such bank in the 1970s… The only way the “managers” (conservators) could be criticized was by the head office of the FDIC in Washington D.C. That happened if they acted like real “bankers” and made loans into the community.”

Today many of my friends on the left and right are engaged in a protracted rear-guard battle, arguing over whether government sponsored entities such as Fannie Mae and Freddie Mac were the cause of the mortgage bubble. Most recently we saw the clash between Peter Wallison of American Enterprise Institute and Joe Nocera at the New York Times, essentially disputing whether these government sponsored entities are the cause of the financial collapse that has been unfolding since 2007.

Liberals like my friends Nocera and Johnson still cannot believe that the government was the moved-mover in the mortgage mess, the catalyst for Wall Street’s entirely rational exuberance that merely followed Washington’s bad example. But such distinctions are meaningless. The corrupt relationship between the large TBTF banks and the federal government is long-standing and should be the focus of people on all points of the political compass.  Indeed, somebody should tell Nocera he owes Peter Wallison and AEI an apology.

Look at the just announced settlement between Fannie and Freddie and Bank of America, where the government-sponsored enterprises (GSEs) now controlled by the Obama Administration are providing what appears to be a huge subsidy to Bank of America to the tune of tens of billions of dollars. If you look at the most recent quarterly earnings disclosure to the SEC from Bank of America on future losses from the GSEs, then look at today’s settlement with the GSEs, which was approved by the Geithner Treasury, and it is hard not to conclude that the settlement was a gift.

The losses hitting Fannie and Freddie will be borne by the American taxpayer and not the bond holders of Bank of America. The single digit billions BofA paid to Fannie and Freddie is less than a quarter of my firm’s estimate of such losses prior to the announcement. And our estimates were by no means the highest.

How can bankers like JPMorgan Chase CEO Jaime Dimon, who settled his own tab with Fannie and Freddie on equally attractive terms last year, complain about Barack Obama when the supposedly liberal President is so generous with public subsidies for the zombie banks? The truth of the matter is that the federal government, through agencies like Fannie, Freddie, the Federal Home Loan Banks and the FDIC, have been calling the shots in the banking industry since the 1930s.

While American banks have, from time to time, shown a certain degree of independence, this in the form of speculative lawlessness known as “innovation,” all lenders in the U.S. are ultimately appendages of Washington. The degree of government support for the financial markets has never been greater in the history of the American republic and the largest players in the industry thereby exercise enormous political power. This is why calls from observers as disparate as Kansas City Fed President Thomas Hoenig, Vermont Senator Bernard Sanders and Dallas Fed President Richard Fisher to break up the largest banks are entirely on target.


Brill! THANKS, Arianna!

For years I’ve been favoring credit unions and small banks. Not only do I believe in their principles, I dig NOT feeling like a peon/number.

The big banks left, with our money (immoral home-loan policies), and then stole some more through the bailouts. I think their goal is to ‘delete’ the Middle Class and with it, a work force that requires something of the employer, and a populace that requires something of their government. No integrity.

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Standing on the brink — of a fresh financial start

Nov 18, 2010 22:11 UTC

The opinions expressed are the author’s own.

For the past several years, governments around the world have been trying to avoid dealing with excessive debt, shrinking revenue and economic activity. The main approach has been for governments to lend their credit rating and cash to help banks and public sector entities paper over the problem, in the hope that a rising tide of economic activity will lift all boats.

Unfortunately, the efforts by the Federal Reserve and other monetary authorities to “reflate” asset prices and economic turnover have failed. The reason for this failure is a basic one, namely that once nations reach a certain level of indebtedness, each marginal increase in debt and/or the supply of fiat money has less and less impact. In the U.S., for example, the velocity or turnover of the money supply has fallen because the free flow of credit and related economic activity has been withdrawn.

The chief result of the temporizing approach to the crisis taken by the leaders of the G-20 nations has been to delay the day of reckoning and erode the credit standing of the member nations. First Greece, then Ireland and next likely Spain have been left insolvent due to efforts to prop up equally bankrupt commercial banks.

But now with the citizens of sovereign states from the Germany to California rejecting bailouts and cuts in government services, the day of reckoning is coming for the banks and creditors. But therein lies the path out of hopelessness and toward national renewal.

If you consider that the average price of a home in the U.S. has fallen by more than 25% from the peak levels of the housing boom, the fact of insolvency among our largest financial institutions is no big surprise. Indeed, one of the reasons why this writer has been so bearish on the situation facing the largest banks is that something like half of their assets are tied to housing — more if you include loans sold to investors.

The Fed has been attempting to reverse this large drop in asset values with a variety of expedients, but unfortunately the courts are open every day. Even as the U.S. central bank has used quantitative easing to artificially support asset prices in the securities markets at the macro level, the fact of liquidation and resolution is slowing eroding the capital of the biggest banks.

Likewise, as I wrote in an earlier piece for, “Bernanke conundrum is Obama’s problem,” the fact of financial insolvency makes the largest banks unwilling to refinance American homeowners, adding further deflationary pressure and thwarting Fed efforts to increase the velocity of money in the U.S. economy.

Earlier this month, Ambac Financial Group, a leading insurer of municipal bonds, was forced to file bankruptcy because claims by holders of residential mortgage backed securities (RMBS) were slowing eating away all of the company’s capital. The response by Treasury Secretary Timothy Geithner has been to try and paper over this situation and, once again, bail out the largest U.S. and European banks. The holders of RMBS with Ambac guarantees may get nothing if Secretary Geithner prevails (see “Ambac, CDS and Geithner: It’s AIG All Over Again,” The Institutional Risk Analyst, November 16, 2010).

So what is to be done? The first thing that Americans must do is to accept that the level of home prices, GDP, velocity and other indicia are not going to return to pre-crisis levels for many years to come. Once we accept this reality, then restructuring and recapitalization will become the obvious if painful choice. When I am speaking on the banking industry, I tell the audience that the task ahead is like cutting off a few fingers with a kitchen knife. The bad news is that it will hurt like hell. The good news is that the fingers, eventually, will grow back.

The Obama Administration needs to change direction and to embrace restructuring and national renewal instead of the current policy of extend and pretend. The same factors that drove Ambac into bankruptcy are working on Bank of America, Wells Fargo, JPMorganChase and will eventually force a restructuring. The sooner we start the process, the sooner the U.S. economy will recover.

Indeed, I expect that the Obama Administration will eventually, reluctantly be forced to invoke the powers under the Dodd-Frank law and restructure the top-three U.S. banks. This will be near-total losses for equity holders and haircuts for creditors, but the end result will be a solvent bank that is smaller, profitable and able to again lend.

It is important for Americans to remember that bankruptcy and liquidation are necessary steps to national renewal and economic stability. The Founders of the United States embedded bankruptcy in the U.S. Constitution for precisely this reason. The Founders knew that prolonged uncertainty and a lack of finality when it comes to insolvency was bad for society, thus they commanded Congress to create federal bankruptcy courts.

Having been through a personal restructuring a decade ago, the end result of five years of civil litigation, I do not make the recommendation of embracing restructuring lightly. But restructuring and liquidation of debt allowed me to rebuild my life. Each time that a family looses a home to foreclosure, that tragedy creates an opportunity for another family to make a fresh start. When a bank is restructured, the creditors lose money, but the bank is then able to support economic growth. And when an individual declares bankruptcy in the U.S., our Constitution provides the right for fresh start.

By speeding the process of resolving bad debts and restructuring viable companies, the U.S. courts are moving forward with the process of national renewal even though our politicians have not yet found the courage to lead the way. I suspect that this, too, is going to change and very soon. No amount of talk and obfuscation in Washington can prevent the process of liquidation underway on Main Street. Before long, the fact of renewal and restructuring at the micro level will be visible at the macro level as well, and that is good news.


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