Johnson: Raise equity requirements for TBTF banks

Johnson's argument is a bit technical for us non-bankers, but the gist is this: regulators should force banks to hold more "tangible" equity -- meaning real money from investors -- as a share of their tangible assets.  A bank's tangible assets include customers' deposits (which are liabilities the bank must pay back).  

The truth is that nobody has come up with a good way to assess a bank's riskiness when they are so highly leveraged, no matter how much the banks may assure us they know how.  Right now, the banks basically regulate themselves, telling the regulators how risky they are.  This can't continue. 

Big banks resist a higher Tangible Common Equity (TCE) ratio because: 1) they can make a lot more profit using high leverage (over-borrowing) than they can raising equity from investors; and 2) if they make bad bets with borrowed money then we taxpayers will bail them out anyway.

If you're interested in this somewhat abstruse but absolutely crucial issue, you can learn more here.

A Very Strange Way to Assess the Safety of Banks

By Simon Johnson

October 1, 2012 | Bloomberg

URL: http://www.bloomberg.com/news/2012-09-30/a-very-strange-way-to-assess-the-safety-of-banks.html

Reagan judge: Deregulating banks was 'fundamental mistake'

Said Judge Richard Posner:

I was an advocate of the deregulation movement and I made -- along with a lot of other smart people -- a fundamental mistake, which is that deregulation works fine in industries which do not pervade the economy. The financial industry undergirded the entire economy and if it is made riskier by deregulation and collapses in widespread bankruptcies as what happened in 2008, the entire economy freezes because it runs on credit.

I just want to remind you what Mitt Romney proposes to do on bank regulation: "Repeal Dodd-Frank and replace with streamlined, modern regulatory framework."  In fact he's been reticent to discuss exactly what that means.  But it is telling that Romney's advised lawmakers "not to rush" to pass new legislation after bailed-out mega-bank JPMorgan lost at least $2 billion on risky gambling.

Reagan-Appointed Judge: Deregulation Movement Made 'A Fundamental Mistake'

August 24, 2012 | Huffington Post

URL: http://huff.to/PMYz38

TARP wasn't 'paid back,' not by a long shot

So it turns out that TARP loans weren't "paid back," we should be owed about $300 billion in risk premiums for the year 2009 alone, and this is not to mention the $16 trillion in Fed bailouts for the international TBTF banks. TARP was absolutely free money.

TARP wasn't really even a loan, it was a gift, it was a sick joke on U.S. taxpayers, because the bailed-out banks can pay off their TARP loans with even more government loans at zero-percent interest. (Remember how the GOP went ballistic when GM tried a similar trick to pay off some of its TARP loan?) The bailed-out banks have in turn used this borrowed money to fund their trades, which only have to earn more than 0.0% return to net them a profit. In fact, it gets worse, because often the banks have turned around and used those borrowed funds to... buy risk-free U.S. treasuries, which means they loaned their government loan money back to the government at a guaranteed higher rate of interest. But it's even worse still: the banks have been leveraging their trades, "borrowing at least $10 for every $1 of equity capital they have, to increase the size of their bets."

Stealing isn't enough vice for these sleazebags -- they have to gamble, too!

Any small-time crook of average intelligence could be explained this scam in a matter of an hour and then become a successful present-day Wall Street CEO. I mean, how could you not make stacks of cash with a scam as perfectly foolproof as this?

(Well, nearly foolproof. There is one remote pitfall: If the banks' unlimited ATM machine, the U.S. Government, is severely downgraded and defaults on its debt. Then the banks would be pretty screwed... which is why they've been giving U.S. politicians and the unwashed electorate sanctimonious lectures about the need to get our fiscal house in order, i.e. gut Social Security, Medicare, Medicaid, unemployment insurance, and government-sponsored health care, so that their scam can continue indefinitely.)

"We've got to re-think the relationship between taxpayers and financial institutions," said Prof. Ed Kane of Boston College, "Taxpayers are essentially implicit stockholders. And they're in for the worst part of the ride." The downside, that is. While the banks get all the upside -- all the profit. This is moral hazard, big time. Not to mention colossally unjust corporate socialism on a scale never before seen on Earth.

This is further evidence that the Occupy protests, despite their shortcomings like the occasional errant turd, have chosen absolutely the correct target, while erstwhile bailout opponents in the Tea Parties have, sadly, taken their eyes off the ball. The TPs now blame the attempted cure (fiscal stimulus) for the illness caused by the financial crisis and aggravated by the bank bailouts which continue to distort the real economy while denying desperately needed credit to firms and households.

Ed Kane - Measuring Systemic Risk To Empower the Taxpayer

Uploaded by INETeconomics

August 23, 2011 | YouTube

URL: http://youtu.be/REvOBX2jg14

'We are the 1 percent': 147 firms own 40% of global wealth

Gee, I'm relieved to hear that 1 percent of transnational corporations (TNCs) control the world not thanks to a global conspiracy, but thanks to nature.

And it's comforting to hear that the top 25 TNCs includes many global financial institutions, such as Barclays, Bank of America, Credit Suisse, Deutsche Bank, JPMorgan Chase, Meryll Lynch, Morgan Stanley, UBS, Societe Generale, and Goldman Sachs, which are all officially Too Big Too Fail -- and all recipients of the $16 trillion Fed bailout (see page 131).

Run wild and free, TNCs, like you were born to do! OWS, stop opposing nature!

Seriously though, the problem here is not necessarily industry concentration, but rather interconnectedness that, in a case like the 2007-08 financial crisis, could lead to a systemic collapse. As Nassim Taleb notes, nature loves "robustness," meaning, through evolution, biological systems favor backups & redundancies which don't necessarily lend themselves to optimal efficiency, but are quite effective at preventing system failure.

In our new global economy the establishment of transnational anti-monopoly rules is a timely idea, but we must figure out how to implement them in practice.

Revealed – the capitalist network that runs the world

By Andy Coghlan and Debora MacKenzie

October 24, 2011 | New Scientist

AS PROTESTS against financial power sweep the world this week, science may have confirmed the protesters' worst fears. An analysis of the relationships between 43,000 transnational corporations has identified a relatively small group of companies, mainly banks, with disproportionate power over the global economy.

The study's assumptions have attracted some criticism, but complex systems analysts contacted by New Scientist say it is a unique effort to untangle control in the global economy. Pushing the analysis further, they say, could help to identify ways of making global capitalism more stable.

The idea that a few bankers control a large chunk of the global economy might not seem like news to New York's Occupy Wall Street movement and protesters elsewhere (see photo). But the study, by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, is the first to go beyond ideology to empirically identify such a network of power. It combines the mathematics long used to model natural systems with comprehensive corporate data to map ownership among the world's transnational corporations (TNCs).

"Reality is so complex, we must move away from dogma, whether it's conspiracy theories or free-market," says James Glattfelder. "Our analysis is reality-based."

Previous studies have found that a few TNCs own large chunks of the world's economy, but they included only a limited number of companies and omitted indirect ownerships, so could not say how this affected the global economy - whether it made it more or less stable, for instance.

The Zurich team can. From Orbis 2007, a database listing 37 million companies and investors worldwide, they pulled out all 43,060 TNCs and the share ownerships linking them. Then they constructed a model of which companies controlled others through shareholding networks, coupled with each company's operating revenues, to map the structure of economic power.

The work, to be published in PLoS One, revealed a core of 1318 companies with interlocking ownerships (see image). Each of the 1318 had ties to two or more other companies, and on average they were connected to 20. What's more, although they represented 20 per cent of global operating revenues, the 1318 appeared to collectively own through their shares the majority of the world's large blue chip and manufacturing firms - the "real" economy - representing a further 60 per cent of global revenues.

When the team further untangled the web of ownership, it found much of it tracked back to a "super-entity" of 147 even more tightly knit companies - all of their ownership was held by other members of the super-entity - that controlled 40 per cent of the total wealth in the network. "In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network," says Glattfelder. Most were financial institutions. The top 20 included Barclays Bank, JPMorgan Chase & Co, and The Goldman Sachs Group.

John Driffill of the University of London, a macroeconomics expert, says the value of the analysis is not just to see if a small number of people controls the global economy, but rather its insights into economic stability.

Concentration of power is not good or bad in itself, says the Zurich team, but the core's tight interconnections could be. As the world learned in 2008, such networks are unstable. "If one [company] suffers distress," says Glattfelder, "this propagates."

"It's disconcerting to see how connected things really are," agrees George Sugihara of the Scripps Institution of Oceanography in La Jolla, California, a complex systems expert who has advised Deutsche Bank.

Yaneer Bar-Yam, head of the New England Complex Systems Institute (NECSI), warns that the analysis assumes ownership equates to control, which is not always true. Most company shares are held by fund managers who may or may not control what the companies they part-own actually do. The impact of this on the system's behaviour, he says, requires more analysis.

Crucially, by identifying the architecture of global economic power, the analysis could help make it more stable. By finding the vulnerable aspects of the system, economists can suggest measures to prevent future collapses spreading through the entire economy. Glattfelder says we may need global anti-trust rules, which now exist only at national level, to limit over-connection among TNCs. Sugihara says the analysis suggests one possible solution: firms should be taxed for excess interconnectivity to discourage this risk.

One thing won't chime with some of the protesters' claims: the super-entity is unlikely to be the intentional result of a conspiracy to rule the world. "Such structures are common in nature," says Sugihara.

Newcomers to any network connect preferentially to highly connected members. TNCs buy shares in each other for business reasons, not for world domination. If connectedness clusters, so does wealth, says Dan Braha of NECSI: in similar models, money flows towards the most highly connected members. The Zurich study, says Sugihara, "is strong evidence that simple rules governing TNCs give rise spontaneously to highly connected groups". Or as Braha puts it: "The Occupy Wall Street claim that 1 per cent of people have most of the wealth reflects a logical phase of the self-organising economy."

So, the super-entity may not result from conspiracy. The real question, says the Zurich team, is whether it can exert concerted political power. Driffill feels 147 is too many to sustain collusion. Braha suspects they will compete in the market but act together on common interests. Resisting changes to the network structure may be one such common interest.