Thank heaven for Tom Hoenig, the only proven-honest central banker we\u2019ve got. Yes, I know he\u2019s moved on from the KC Fed to serve as Vice Chairman of the FDIC. He actually might do a lot more good over there, anyway.<\/p>\n
In recent months, we\u2019ve heard how Wall Street\u2019s Blood-sucking Vampire Squids have reformed themselves. They no longer pose any danger to our economy. They\u2019ve written \u201cliving wills\u201d that describe how they\u2019ll safely bury themselves without Uncle Sam\u2019s help next time they implode.<\/p>\n
You see, it doesn\u2019t matter that they remain big\u2014indeed, the biggest behemoths are much bigger than they were before they caused the last Global Financial Crisis. They are no longer \u201ctoo big to fail\u201d because they\u2019ve all got plans to unwind their dangerous positions when stuff hits the fan.<\/p>\n
This is very important to Wall Street and Washington because Dodd-Frank requires downsizing and simplification of the Vampire Squids if they remain a threat.<\/p>\n
Big financial institutions that are highly interconnected can cause a relatively small problem with one bank\u2019s assets to snowball into a national and international crisis that forces Uncle Sam to intervene to bail-out the miscreants.<\/p>\n
We know that the biggest half-dozen US banks are huge and have highly interconnected balance sheets. We know they have legacy garbage on their balance sheets, and they are creating massive quantities of new trashy assets every day they remain open.<\/p>\n
That\u2019s their business model. They love that model because it enriches a handful of top management at each institution. As Bill Black says, these are run as control frauds\u2014their motto is \u201cFrauds R Us.\u201d Nearly every day one of them gets caught red-handed in yet another fraud. They pay peanuts in fines and go about their fraudulent business. Nice work if you can get it.<\/p>\n
So it is critical that each of these demonstrate it has a way to disconnect its balance sheet from the others as it oversees its own demise. Otherwise, these institutions would have to be downsized and their frauds curtailed.<\/p>\n
As expected, most government officials have been congratulating themselves and Wall Street\u2019s \u201cfinest\u201d for the \u201checkuva job, Brownie\u201d they\u2019ve been doing in writing those living wills.<\/p>\n
As she left office, Mary Miller, Treasury\u2019s undersecretary for domestic finance, claimed<\/a> that we no longer have any TBTF institutions. Like magic, with a tip of her wand, she made them all disappear.<\/p>\n A common use of the too-big-to-fail shorthand is the notion that the government will bail a company out if it is in danger of collapse because its failure would otherwise have too great a negative impact. With respect to this understanding of too-big-to-fail, let me be very clear: It is wrong. No financial institution, regardless of its size, will be bailed out by taxpayers again. Shareholders of failed companies will be wiped out; creditors will absorb losses; culpable management will not be retained and may have their compensation clawed back.<\/em><\/p>\n<\/blockquote>\n I heard her say pretty much the same thing at a Levy conference<\/a>. It is not believable. When huge financial institutions are closely interconnected, problems in one impact another. The other \u201ccreditors\u201d that she claims will absorb the losses are largely other financial institutions. It is a huge daisy chain of lending to each other, so if one goes down they all go down. That wipes out shareholders of all of them, plus all the unsecured creditors of all of them.<\/p>\n A full-blown run to safety occurs, which means asset prices collapse. The Fed and the Treasury will bail-out. You can bet on it. Indeed, markets are betting on it every day. Otherwise no one would be a creditor of any of these TBTF frauds.<\/p>\n Miller\u2019s boss, Treasury Sectretary Jack Lew, who is on loan from Citigroup to oversee Wall Street\u2019s interests, made claims similar<\/a> to hers.<\/p>\n Dodd-Frank ended \u201ctoo big to fail\u201d as a matter of law; tough rules are now in place to make sure banks have the capital to absorb their own losses; monitoring through stress tests is underway; and resolution authorities and plans are in place.\u00a0 There is a growing recognition of these changes, and market analysts are now factoring them into their assumptions.\u00a0Put simply, the reforms we are putting in place raise the cost for a bank to be large, requiring firms to internalize their risks, and together, with resolution authority and living wills, make clear that shareholders, creditors, and executives\u2014not taxpayers\u2014will be responsible if a large financial institution fails.\u00a0 Earlier this year, I said if we could not with a straight face say we ended \u201ctoo big to fail,\u201d we would have to look at other options.\u00a0 Based on the totality of reforms we are putting in place, I believe we will meet that test, but to be clear, there is no precise point at which you can prove with certainty that we have done enough.\u00a0 If, in the future, we need to take further action, we will not hesitate.<\/em><\/p>\n<\/blockquote>\n He went on to celebrate the weak stress tests that the big banks are subjected to. (I note with some irony his own bank failed the tests.) He concluded with an upbeat assessment of his job so far:<\/p>\n We have made tough choices, and very significant progress toward reforming our financial system.\u00a0 Every day more change comes, not just on paper, but in the way banks, private funds, exchanges, and clearing houses do business.\u00a0 As we move forward, and as new, higher standards are phased in, the changes will be even more apparent.\u00a0 And our financial system will be even more secure.\u00a0 Because our financial system is always evolving, this is work that, by its basic nature, is never finished and it is our ongoing obligation to remain vigilant and responsive to a dynamic and changing financial system.<\/em><\/p>\n<\/blockquote>\n To be fair, he\u2019s right that you cannot know the \u201cprecise point\u201d at which you can be certain you\u2019ve done enough to protect the nation from Vampire Squids. Let\u2019s get the opinion of a regulator who\u2019s not in a bank\u2019s back pocket. Do the living wills pass the smell test, or are do they smell as fishy as three-day-old squid?<\/p>\n Here\u2019s<\/a> Tom Hoenig, who cannot be bought off:<\/p>\n Each plan being discussed today is deficient and fails to convincingly demonstrate how, in failure, any one of these firms could overcome obstacles to entering bankruptcy without precipitating a financial crisis. Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn\u2019t require unrealistic assumptions and direct or indirect public support.<\/em><\/p>\n<\/blockquote>\n Doesn\u2019t sound like he drank the Kool-Aide. He goes on:<\/p>\n These firms are generally larger, more complicated, and more interconnected than they were prior to the crisis of 2008. They have only marginally strengthened their balance sheet to facilitate their resolvability, should it be necessary. They remain excessively leveraged.<\/em><\/p>\n<\/blockquote>\n\n
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