After thorough analysis of the financial landscape, I strongly believe that giant banks need to be broken up NOW and before it is too late.
- Giant banks are the major reason why sovereign debt has become a major crisis today. In fact, the Bank for International Settlements (BIS) recently pointed out in a recent report that the giant bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened. In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don’t have, central banks have put their countries at risk from default. Given that Greece, Ireland, Portugal, Spain, Italy and many other European countries – as well as the U.S. and Japan – are facing serious debt crises, we are no longer wealthy enough to keep bailing out the bloated banks….and since big banks hold 80% of the country’s derivatives risk, and 96% of the exposure to credit derivatives, it is clear that derivatives will never be reined in until the mega-banks are broken up.
- Giant banks sheer size are drawing the American and world economy down into a black hole. Again, size matters. If a bunch of small banks did what giant banks did, manipulation by numerous small players would tend to cancel each other out. But with a handful of giants doing it, it can manipulate the entire economy in ways which are not good for any world citizen. Hence, if we don’t break up the giant banks now, they’ll most probably be bailed out again and again, and will drag the world economy down with them. By failing to break them up, the government is guaranteeing that they will take crazily risky bets again and again, and will rack up more and more debt bailing them out in the future.
- Giant banks get too big a benefit from “information asymmetry” which disrupts the free market. Indeed, Nobel prize-winning economist Joseph Stiglitz recently noted that giants are using their size to manipulate the market. In some markets, they have indeed a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information….and this raises serious potential of conflicts of interest, using that inside information for your proprietary desk. And that’s why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you’re going to trade on behalf of others, if you’re going to be a commercial bank, you can’t engage in certain kinds of risk-taking behavior. Giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government’s blessings.
- Giant banks use extensively high-frequency program trading which not only distorts the markets – making up more than 70% of stock trades – but also lets the program trading giants take a sneak peak at what the real (that is, human) traders are buying and selling, and then trade on the insider information. This is front running, which is illegal; but it is a lot bigger than garden variety front running, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing. Goldman itself recently admitted that its proprietary trading program can “manipulate the markets in unfair ways”.
- Giant banks are still barely lending today while small banks have been lending much more . In fact, giant banks which received taxpayer bailouts have been harming the economy by slashing lending, giving higher bonuses, and operating at much higher costs than banks which didn’t get bailed out. The only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition. It is a fact that the very size of the giants squashes competition, and prevents the small and medium size banks to start lending to Main Street again. Moreover, the banks’ enormous size means that the executives make orders of magnitude more in bonuses and salary than the executives of small banks. They are so big that their executives are living like kings. This is making inequality worse … and rampant inequality was another primary cause of the Great Depression and the current financial crisis.
- Since fraud was one of the main causes of the Great Depression and the current financial crisis, giant banks have become so big that they are buying off politicians to the extent that it has become official policy not to prosecute fraud. Indeed, everyone from Paul Krugman to Simon Johnson has said that the banks are so big and politically powerful that they have bought the politicians and captured the regulators. So their very size is allowing economy-killing corruption to flourish.
- Giant banks’ substantial portion of their profits is still essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions. Indeed, I believe ALL of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. A “jobless recovery” is basically a redistribution of wealth from the little guy to the big boys. The Bush tax cuts and failure to enforce corporate taxes also redistribute wealth to the top 1%. This is the biggest transfer of wealth in history, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.
Now anyone who thinks that Congress will use the current financial regulation – Dodd-Frank – to break up banks in the middle of an even bigger crisis is dreaming.
But by the same token, I am afraid if the giant banks aren’t broken up now – when they are threatening to take down the world economy – they won’t be broken up next time they become insolvent either. In other words, there is no better time than today to break them up.
Failing to break them up will result in the sale of national assets and the looting of national treasuries in order to pay off debts to the giant banks. This, in turn, will destroy the national sovereignty of virtually every country out there.
What do you say?
Your feedback as always is greatly appreciated.
Thanks much for your consideration.