too big to fail

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pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, Savings and loan crisis, sovereign wealth fund, Tax Reform Act of 1986, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

Jamie Dimon, “No More ‘Too Big to Fail,’ ” The Washington Post, November 13, 2009, available at http://www.washingtonpost.com/wp-dyn/content/article/2009/11/12/AR2009111209924.html. 35. Gary H. Stern and Ron J. Feldman, Too Big to Fail: The Hazards of Bank Bailouts (Washington: Brookings Institution Press, 2009). 36. Andrew Ross Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (New York: Viking, 2009), 236. 37. On the race to save Morgan Stanley and Goldman Sachs, see ibid. at 409–83. 38. See, e.g., Paul Krugman, “Too Big to Fail FAIL,” The Conscience of a Liberal Blog, The New York Times, June 18, 2009, available at http://krugman.blogs.nytimes.com/2009/06/18/too-big-to-fail-fail/. 39.

Market share is the top five bank holding companies’ share of all derivatives contracts held by all U.S. bank holding companies, by notional value. 64. From Federal Deposit Insurance Corporation data, cited in Dean Baker and Travis McArthur, “The Value of the ‘Too Big to Fail’ Big Bank Subsidy,” Center for Economic and Policy Research Issue Brief, September 2009, available at http://www.cepr.net/documents/publications/too-big-to-fail-2009–09.pdf. 65. Cho, “Banks ‘Too Big to Fail’ Have Grown Even Bigger,” supra note 62. 66. Tyler Durden, “Exclusive: AIG Was Responsible for the Banks’ January & February Profitability,” Zero Hedge, March 29, 2009, available at http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html. 67.

A new agency also cannot reverse the political momentum of the last thirty years and dislodge Wall Street from its position of power in Washington. That will require stronger medicine. TOO BIG TO EXIST “Too big to fail” was the slogan of the financial crisis. It was the justification for bailing out Fannie Mae, Freddie Mac, AIG, Citigroup, and Bank of America (and, extended into the auto industry, General Motors, Chrysler, and GMAC as well). It was the problem that administration officials and congressmen swore they would fix; even bank CEOs agreed, including Jamie Dimon of JPMorgan Chase, who wrote, “The term ‘too big to fail’ must be excised from our vocabulary.”34 The phrase has been around at least since the 1984 government rescue of Continental Illinois, and was the subject of a 2004 book by the president and vice president of the Federal Reserve Bank of Minneapolis.35 But only in 2008 did it become a pillar of government policy.


pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

"Robert Solow", Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

Fannie and Freddie were taken over: Sorkin, Too Big to Fail, chapter 11. Paulson refused: Paulson, On the Brink, 190. “what would you need from us?”: Sorkin, Too Big to Fail, 94. “‘I can’t do it again’”: Wessel, In Fed We Trust, 14. “financial crisis was lunacy”: Wessel, In Fed We Trust, 15–16. “statement is way out of line!”: Ibid. “import our cancer”: Sorkin, Too Big to Fail, 350. “take precautionary measures”: Bernanke, “The Economic Outlook,” testimony before the Joint Economic Committee, September 24, 2008. voiced the same opinion: Sorkin, Too Big to Fail, 343. “secure a Federal Reserve loan”: Bernanke, “Federal Reserve Policies in the Financial Crisis,” speech at the Greater Austin Chamber of Commerce.

The first natural thought is incorrect: that the Bear Stearns rescue was an application of the age-old too big to fail doctrine. The too big to fail idea is that some companies, financial or not, are simply so large that their failure, especially if abrupt, would do so much damage to other companies, to consumers, and to the overall economy that the government has to intervene in some way.* The doctrine is actually misnamed. In some cases, the preferred solution may be to lay the company to rest slowly and peacefully, with minimal disruption to other parties. So the idea should probably be called “too big to fail messily.” But labels, once assigned, have a way of sticking.

Chapter 6: The Panic of 2008 “most unbelievable week in America ever”: Quoted in Sorkin, Too Big to Fail, 2. 116,000 employees in 130 countries: FCIC Report, 139. “irresponsible bets”: Bernanke at a March 3, 2009, hearing of the Senate Budget Committee, as quoted by Wessel, In Fed We Trust, 194. “can’t think of one, than AIG”: Ibid virtually none of it was hedged: FCIC Report, 50. “losing $1 in any of those transactions”: Sorkin, Too Big to Fail, 160. “sleeping a bit easier at night”: Ibid. Scary stuff: Sorkin, Too Big to Fail, 239. “imminent danger”: Wessel, In Fed We Trust, 189–90. “Fed should bail it out”: Ibid.


When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A) by Scott McCleskey

Asian financial crisis, asset-backed security, bank run, barriers to entry, Bear Stearns, Bernie Madoff, break the buck, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, information asymmetry, invisible hand, Isaac Newton, iterative process, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, place-making, Ponzi scheme, prediction markets, risk tolerance, Savings and loan crisis, shareholder value, statistical model, The Wealth of Nations by Adam Smith, time value of money, too big to fail, web of trust

Having institutions that are too big to fail may not sit well with everyone in the policy debate, but good policy would recognize this fact and consider why they pose a threat in the first place. C02 06/16/2010 11:16:2 Page 15 2 CHAPTER TWO Can an Institution Be Too Big to Fail? T O A G R E A T E X T E N T , the debate over how to fix the financial system has boiled down to an argument over how to handle institutions that are ‘‘too big to fail.’’ Do you ban a firm from getting that big? Do you penalize it for its size in order to create an incentive to remain small? Do you guarantee it against failure? This section delves into the nature of firms that are ‘‘too big to fail’’ and how policymakers have proposed to address the issues they raise. It begins by considering how these firms are identified in the first place and the complications that arise in doing so.

. & In the end, the fate of Bear Stearns and others shows that firms can grow to the point that they are systemically important because their size brings large exposures to a large number of firms in the financial system, making them too big to fail. But the financial system isn’t vulnerable to these firms simply because they’re big. Their size makes them too interconnected to fail, so that the opacity of the market means that no one knows who is exposed to the failing firm. A lack of confidence in one firm becomes a lack of confidence in all firms. Having institutions that are too big to fail may not sit well with everyone in the policy debate, but good policy would recognize this fact and consider why they pose a threat in the first place.

But (spoiler alert) it will also conclude that a fixation on the size of a firm is misleading and an exercise in self-deception, which can result in overlooking other systemically important institutions. The first problem with the too-big-to-fail concept is the phrase itself. The term was too catchy not to catch on, but it is an unfortunate choice of words since it implies a narrow focus on size. Because of the complexity of the markets, size is not the only factor that makes a firm important (as discussed in other chapters). Though the more accurate term systemically important is used in official documents, the nature of many policy proposals reflects an obsession 15 C02 06/16/2010 11:16:2 16 & Page 16 Can an Institution Be Too Big to Fail? with the size of the firm. Overlooking ‘‘unimportant’’ firms simply because they aren’t behemoths is courting disaster: As one market expert has put it, ‘‘The history of financial crises is the history of the threatened failure and default of financial institutions previously considered unimportant.’’1 What really matters is the magnitude of the impact an institution’s failure would have on the system, by which we mean on a large number of other firms.


pages: 218 words: 62,889

Sabotage: The Financial System's Nasty Business by Anastasia Nesvetailova, Ronen Palan

algorithmic trading, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, big-box store, bitcoin, Black-Scholes formula, blockchain, Blythe Masters, bonus culture, Bretton Woods, business process, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, critique of consumerism, cryptocurrency, distributed ledger, diversification, Double Irish / Dutch Sandwich, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, financial repression, fixed income, gig economy, Gordon Gekko, high net worth, Hyman Minsky, independent contractor, information asymmetry, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Arrow, litecoin, London Interbank Offered Rate, London Whale, Long Term Capital Management, margin call, market fundamentalism, mortgage debt, new economy, Northern Rock, offshore financial centre, Paul Samuelson, peer-to-peer lending, Plutocrats, plutocrats, Ponzi scheme, Post-Keynesian economics, price mechanism, regulatory arbitrage, rent-seeking, reserve currency, Ross Ulbricht, shareholder value, short selling, smart contracts, sovereign wealth fund, Thorstein Veblen, too big to fail

Shaw, ‘Deposit Insurance and Wealth Effects: The Value of Being ‘Too Big to Fail’, Journal of Finance, vol. 45, 1990, pp. 1587–1600. 5. D. P. Morgan and K. J. Stiroh, ‘Too Big to Fail after All These Years (SSRN Scholarly Paper No. ID 813967), Social Science Research Network, Rochester, NY, 2005. 6. A. Haldane, ‘On Being the Right Size’, speech at the Institute of Economic Affairs, 22nd Annual Series, The 2012 Beesley Lectures, at the Institute of Directors, London, 25 October 2012, www.bis.org/review/r121030d.pdf. 7. M. J. Roe, ‘Structural Corporate Degradation Due to Too-Big-to-Fail Finance’, University of Pennsylvania Law Review, vol. 162, 2014, pp. 1419–64. 8.

These CEOs are using their considerable rhetorical skills to defend a very lucrative portion of their business: namely, the chance to be too big to fail (known as TBTF). TBTF is a classic sabotaging technique. Considering that the welfare of the entire nation depends on its banking institutions, if one bank becomes just big enough to the point that governments or, rather, the markets, believe that the state cannot afford to allow the bank to fail, such banks are able to borrow in the markets at lower rates. Or they may be in a position to take extra risks with their business without penalty (and presumably reap extra profits from those risky investments). The perception that a bank has become too big to fail is monetized, and becomes a great source of profit.

Minsky, H., Stabilizing an Unstable Economy, Yale University Press, 1986. Monaghan, A., ‘Too big to fail’ risks growing in asset management’, Guardian, 4 April 2014, www.theguardian.com/business/2014/apr/04/asset-management-risks-bailout-rising-warns-bank-of-england. Moody’s, ‘Danièle Nouy of ECB on consolidation in European banking sector’, 27 September 2017, www.moodysanalytics.com/regulatory-news/sept-27-daniele-nouy-of-ecb-on-consolidation-in-european-banking-sector. Morgan, D. P., and K. J. Stiroh, Too Big to Fail after All These Years (SSRN Scholarly Paper No. ID 813967), Social Science Research Network, 2005.


pages: 202 words: 66,742

The Payoff by Jeff Connaughton

algorithmic trading, bank run, banking crisis, Bear Stearns, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Neil Kinnock, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, Robert Bork, Savings and loan crisis, short selling, Silicon Valley, too big to fail, two-sided market, young professional

Every voter who wants to break Wall Street’s hold on Washington should put congressional and presidential candidates to the test with two questions (in addition to shunning lobbyist contributions and bundling): Will you agree not to take campaign contributions from too-big-to-fail banks and non-banks? Don’t stand idly by while too-big-to-fail institutions that will need Congress and the American taxpayer to bail them out when they fail—or else send us into another Great Depression—buy political influence. Politicians should pledge No on too-big-to-fail contributions. Will you support a tiny user fee on Wall Street trades to pay for adequate oversight and enforcement? A per trade fee would be specifically earmarked to construct a consolidated audit trail to allow better monitoring of trades and also strengthen the regulatory and law enforcement systems we need to prevent manipulation and wrongdoing.

I knew Ted talked to the vice president, but Ted never told me about the substance of those conversations. Those stayed forever in Ted’s vault. That’s one of the reasons Biden trusted him so much. That speech was the first time Ted used the phrase “too big to fail”—as recently popularized by Andrew Ross Sorkin’s book, which sat on Ted’s desk. In the next six months, he would practically wear it out, urging the Senate repeatedly to deal effectively with too-big-to-fail megabanks before they caused yet another disastrous financial crisis. On a subsequent trip to New York, we met with Bill Dudley, the former chief economist at Goldman Sachs who is president of the New York Fed.

He was determined to go to the Senate floor and start speaking out strongly. I began working on a major speech. We wanted to lay out Ted’s views on the importance of ending too-big-to-fail. He wanted it to be the foundational document (a favorite Biden tactic) for all he would argue during the debate. We went through several drafts. Simon Johnson, the former chief economist for the International Monetary Fund and leading critic of too-big-to-fail megabanks, was standing by to tout the speech in his blog and on Huffington Post, where he served as a senior contributor. It took us longer than I’d planned. At one point, I e-mailed Simon: “This is threatening to become the speech that ate the Senator.”


pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, business cycle, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, information asymmetry, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, Savings and loan crisis, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Government guarantees and subsidies thus reinforce the effects of bankers’ compensation and the focus on ROE, as well as the effects of debt overhang, all of which encourage borrowing and risk. The prospect of becoming systemically important or too big to fail provides banks with incentives to grow and become more complex. The implicit guarantees reduce the funding costs of the too-big-to-fail institutions and give these banks an advantage over other banks and over other companies in the economy. If banks respond to these incentives by growing and becoming more complex, this in turn increases the damage to society should these institutions become distressed or insolvent.

They view equity as expensive; borrowing is always attractive. As discussed in the previous chapter, the focus on ROE in banking reinforces the effect by compensating bank managers in ways that encourage risk taking and borrowing. Perverse Incentives When large banks are treated as too big to fail, this status has strong and perverse effects on the banks’ behavior. The prospect of benefiting from too-big-to-fail status can give banks strong incentives to grow, merge, borrow, and take risks in ways that take the most advantage of the potential or actual guarantees. Banks may also want to draw advantages from taking risks that are similar in that they are all likely to turn out well or to turn out poorly at the same time.

Banks in those countries grew and invested so much that their losses were larger than the countries could bear.27 Spain may be facing a similar experience. Being considered too big to fail is extremely valuable for a bank, because it lowers its borrowing costs. Just as Kate was able to borrow at a lower rate because of Aunt Claire’s guarantees, banks that benefit from implicit guarantees are given higher credit ratings, and thus pay less interest when they borrow. This reduces the banks’ overall funding costs and increases the amount of the total pie available to their investors. There is significant evidence that subsidies associated with being too big to fail can make these banks seem more profitable, when in fact they are not generating more value but simply benefiting from more subsidized funding.28 Banks do not seem to become more efficient when they grow beyond about $100 billion in assets, yet growing can allow them to enjoy the subsidized funding that comes with the implicit guarantees.29 With subsidized funding through guarantees, growth is easy, and building empires can be quite profitable.30 Mergers in banking have also been shown to be partly motivated by a desire to attain too-big-to-fail status, which generally lowers costs and makes for easier borrowing terms.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, Bear Stearns, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Bogle, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Savings and loan crisis, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, Tragedy of the Commons, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

“What we should probably do is go and split up investment banking from [commercial] banking,” Weill said. “Have banks be deposit takers. Have banks make commercial loans and real estate loans. Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be Too Big to Fail.”2 As conversions go, Weill’s was positively biblical. It came four years after a long chain of disastrous decisions by Citigroup and the rest of the Too Big to Fail banks had landed them at the epicenter of the financial crisis, with hundreds of billions of dollars of exploding securities on their books and worried customers on the verge of mass panic that threatened to throw the country into another Great Depression.

If Big Tech decided at any point to dump those bonds, it could become a market-moving event, an issue that is already raising concern among experts at the Office of Financial Research, the Treasury Department body founded after the 2008 financial crisis to monitor stability in financial markets.7 Big Tech isn’t alone in emulating finance. Airlines often make more money from hedging on oil prices than on selling seats—while bad bets can leave them with millions of dollars in losses. GE Capital, a subsidiary of the company launched by America’s original innovator, Thomas Alva Edison, was until quite recently a Too Big to Fail financial institution like AIG (GE has spun it off in part because of the risks it posed). Any number of Fortune 500 firms engage in complicated Whac-A-Mole schemes to keep their cash in a variety of offshore banks to avoid paying taxes not only in the United States but also in many other countries where they operate.

Many of the perverse trends associated with financialization, such as rising inequality, stagnating wages, financial market fragility, and slower growth, are often (rightly) spoken about in social terms and in highly politicized ways—with polarizing discussions of the 1 percent versus the 99 percent, and Too Big to Fail banks versus profligate consumers and rapacious investors. Indeed, the terms makers and takers were used in the 2012 US election cycle by conservative politicians to denigrate half the American population (an issue I’m hoping this book will go some way toward rectifying by redefining those terms).


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

"Robert Solow", accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Bear Stearns, Black Swan, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, Post-Keynesian economics, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, tail risk, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

The Book in Brief Following this overview, chapter 2, “America: Too Big to Fail: Bankers, Bailouts, and Blaming the State,” explains why the developed world’s debt crisis is not due to profligate state spending, at least in any direct sense. Rather, we piece together how the debt increase was generated by the implosion of the US financial sector and how this impacted sovereigns from the United States to the Eurozone and beyond. To explain this I stress how the interaction of the repo (sale and repurchase) markets, complex instruments, tail risks, and faulty thinking combined to give us the problem of too big to fail. It takes us from the origins of the crisis in the run on the US repo market in September 2008 to the transmission of this US-based crisis to the Eurozone, noting along the way how a banking crisis was deftly, and most politically, turned into a public-sector crisis and how much it all cost.34 Chapter 3, “Europe: Too Big to Bail: The Politics of Permanent Austerity,” analyzes how the private debt generated by the US banking sector was rechristened as the “sovereign debt crisis” of profligate European states.

Was the US financial system, comprising shadow banks, opaque instruments, bad risk models, and flawed blueprints, actually too big to fail? Giving a definitive answer is impossible because it would involve taking account of all the off-balance-sheet activities of the banks in question as well as their CDS exposures and other derivative positions. That is extremely difficult. However, looking only at balance-sheet assets, liabilities, and leverage ratios, one can clearly see why, after the failure of Lehman Brothers, the state blinked and shouted too big to fail. By the third quarter of 2008, the height of the crisis, the top six US banks, Goldman Sachs, JP Morgan, Bank of America, Morgan Stanley, Citigroup, and Wells Fargo, had a collective asset-to-GDP ratio of 61.61 percent.

Europe usually sits to the left of the United States politically, but it was acting far to its right economically by mid-2010. The basic reason for this was the same one we saw in the United States. If you think the risk posed by hugely levered US banks that were too big to fail was terrifying, then consider the following: in November 2011 the Financial Stability Board, a coordinating body for national financial regulators, published a list of systemically important banks, in other words, the too big to fail list. Of the twenty-nine banks named, only eight were US banks; seventeen were European. The Europeans have managed to build a system that is too big to bail, which is the real reason why a bunch of putative lefties are squeezing the life out of their welfare states.


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, Bear Stearns, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, two and twenty, zero-sum game

The fact that integrating investment banking and commercial banking products can give rise to ethical problems does not in itself make such a practice unethical, in the same way that while owning a shop or market stall and setting products out to be viewed by customers can give rise to the temptation to steal it is not tantamount to theft. Too big to fail The investment banking sector as a whole, and the largest players in the sector individually, are too big for Governments to allow them to fail. This implies that investment banks receive some form of economic free-ride. There are different reasons why a company could be too big to fail: (a) the company itself is so important economically it could not be allowed to cease trading; (b) it provides essential services, and disruption to service supply could be unduly damaging for consumers; (c) its failure would spread to other companies, for example by creating a chain of defaults (such as via the non-payment of trade creditors); and (d) its failure would cause a systemic failure in a vital economic sector.

In the US, the Dodd–Frank Act (Dodd–Frank Wall Street Reform and Consumer Protection Act) has aimed to end the risk of “too big to fail” institutions being rescued by the state and has brought in major reforms aimed at providing financial stability, including a Financial Stability Oversight Council and Orderly Liquidation Authority. The Act stops short of requiring a separation of investment and commercial banking, which has been called for by some politicians. The Dodd–Frank Act specifically aims to end “too big to fail” by a combination of measures, including regulation and supervision, a levy to be paid by major financial institutions to create an Orderly Liquidation Fund and provisions for orderly liquidation.

Recent legislative change is aimed at reducing the wider impact of failure of an investment bank or banks. It may also reduce the risk of failure. It will not, however, deal with the other fundamental issue of the competence of management and the behaviour of shareholders of investment and commercial banks. Ethical implications The “too big to fail” argument has a number of ethical implications: • “Too big to fail” can lead to an asymmetric risk–reward profile for investment bankers, encouraging relatively risky behaviour, which may be unethical with regard to both the investment bank’s resources and potential Government liabilities. • Pushing risk onto tax payers and away from shareholders and/or lenders can reduce the level of pay that is ethically acceptable within an investment bank, notably where the investment bank receives direct Government support. • The profitability and stability of investment banking relies in part on Government support, which may impose an ethical duty on investment banks.


pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

Asian financial crisis, banking crisis, Bear Stearns, Bernie Sanders, business cycle, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Silicon Valley, too big to fail, transaction costs

Yet somehow this massive intervention on behalf of these banks’ executives, shareholders, and bondholders – some of the richest people in the country – is not viewed as interference with the market.[1] While the bank bailouts were big news, there is no shortage of less-visible instances in which conservatives have long been eager for the government step in to support the interests of the wealthy. We’ll quickly discuss seven examples here: continued support for too-big-to-fail banks, patent and copyright protection, restrictions on organized labor, corporate liability limitations, Federal Reserve monetary controls, trade and dollar policy, and housing policy. Too-big-to-fail banks To start with an easy one, how many “free market fundamentalists” have rallied behind efforts to break up “too-big-to-fail” banks? This one should be a no-brainer for any genuine believer in free markets. A too-big-to-fail bank is a bank that everyone expects will be bailed out by the government if it gets in trouble, as happened in 2008.

Washington, DC: The Center for Economic and Policy Research. http://www.cepr.net/documents/publications/work-sharing-2011-06.pdf Baker, Dean and Rivka Deutsch. 2009. “The State and Local Drag on the Stimulus.” Washington, DC: Center for Economic and Policy Research. http://www.cepr.net/documents/publications/stimulus-2009-05.pdf Baker, Dean and Travis McArthur. 2009. “The Value of the ‘Too Big to Fail’ Big Bank Subsidy.” Washington, DC: Center for Economic and Policy Research. http://www.cepr.net/documents/publications/too-big-to-fail-2009-09.pdf Baker, Dean and Hye Jin Rho. 2009. “Free Trade in Health Care: The Gains from Globalized Medicare and Medicaid.” Washington, DC: Center for Economic and Policy Research. http://www.cepr.net/documents/publications/free-trade-hc-2009-09.pdf Baker, Dean and David Rosnick. 2011.

How could any believer in the virtue of free markets support the existence of large financial institutions that borrow at a lower cost than their competitors because of an implicit guarantee from the government? The fact that most of those claiming to be “free marketers” have overwhelmingly been on the side of the too-big-to-fail banks tells the world as clearly as possible that their motivations have nothing to do with a commitment to market fundamentalism and everything to do with a commitment to serving the interests of the rich and powerful. This is disguised as a commitment to the market for the obvious reason that doing things out of a commitment to free market principles sounds better than explicitly claiming to pursue policies that redistribute income from the vast majority of the population to the rich.


pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

Affordable Care Act / Obamacare, American ideology, bank run, banking crisis, Bear Stearns, Bernie Madoff, business cycle, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, money market fund, moral hazard, negative equity, obamacare, Paul Samuelson, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve, zero-sum game

This oligopoly has been created not by market forces, but by the arbitrary action of government regulators during a government-created crisis. There are at least six financial institutions that have clearly been defined as “too big to fail” (Citi, Bank of America, Wells Fargo, Goldman Sachs, JPMorgan Chase, and Morgan Stanley). The Dodd-Frank bill does not deal with the “too-big-to-fail” issue effectively, despite the comments of its proponents. In fact, the rating agencies have indicated that the credit ratings of these giant financial institutions are several grades higher than they would be without the implied government guarantee post-Dodd-Frank.

The legislation will be more detrimental to the healthy banks than to those financial institutions that should have failed. The well-run companies will be permanently damaged by the irrationality of their competitors and the related socialist/statist government reaction. I am opposed to the antitrust laws. Also, I do not believe that these oligopoly banks are too big to fail. However, if the government regulators do believe that these companies are too big to fail (and the government regulators and the rating agencies do believe it), they should be broken up. Unfortunately, the antitrust policy of the Federal Reserve is completely arbitrary to the point of being irrational. A short time before the financial crisis started, BB&T acquired a small bank in the Tennessee/North Carolina mountains.

The consumer compliance segment of the law is not about consumer compliance, it is about credit allocation. This is a fundamental move toward statism. If the government wants to control the economic system, the most effective way to do so is to control the allocation of credit and capital. 2. The legislation does not deal with “too big to fail.” Instead, it identifies companies that are “too big to fail” and ensures that they will be protected by the government. 3. The Durbin amendment on debit card fees is price fixing. It will reduce the availability of banking services to low-income consumers and increase costs for middle-income consumers. This is a government-mandated redistribution of wealth from bank shareholders and consumers to large retailers, such as Walgreens. 4.


pages: 300 words: 78,475

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream by Arianna Huffington

American Society of Civil Engineers: Report Card, Bear Stearns, Bernie Madoff, Bernie Sanders, call centre, carried interest, citizen journalism, clean water, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, extreme commuting, Exxon Valdez, full employment, greed is good, housing crisis, immigration reform, invisible hand, knowledge economy, laissez-faire capitalism, late fees, market bubble, market fundamentalism, Martin Wolf, medical bankruptcy, microcredit, new economy, New Journalism, offshore financial centre, Ponzi scheme, post-work, Report Card for America’s Infrastructure, Richard Florida, Ronald Reagan, Rosa Parks, Savings and loan crisis, single-payer health, smart grid, The Wealth of Nations by Adam Smith, too big to fail, transcontinental railway, trickle-down economics, winner-take-all economy, working poor, Works Progress Administration

Think Bigger, Way Bigger,” 13 May 2010, www.huffingtonpost.com. 54 The names of the Wall Streeters: Matthew Vadum, “Goldman Sachs Government,” 16 Oct. 2008, www.spectator.org. 55 The finance industry has 70 former members of Congress: Public Citizen, “Stop Congress’ Revolving Door of Corruption,” www.citizen.org. 56 This includes 33 chiefs of staff, 54 staffers of the House: Arthur Delaney, “Big Bank Takeover: Report Blames Revolving Door for ‘Too Big to Fail,’ ” 11 May 2010, www.huffingtonpost.com. 57 Five of Senate Banking Committee chair Chris Dodd’s: Kevin Connor, “Big Bank Takeover: How Too-Big-to-Fail’s Army of Lobbyists Has Captured Washington,” Institute for America’s Future, 11 May 2010, www.ourfuture.org. 58 Of course, the revolving door spins both ways: Arthur Delaney, “Big Bank Takeover: Report Blames Revolving Door for ‘Too Big to Fail,’ ” 11 May 2010, www.huffingtonpost.com. 59 On the mining front, former Massey chief operating officer: Brad Johnson, “Don Blankenship’s Record of Profits Over Safety: ‘Coal Pays the Bills,’ ” 8 Apr. 2010, www.thinkprogress.org. 60 At the time of the Upper Big Branch accident he was: Ibid. 61 And President Bush named Massey executive Richard Stickler: Ibid. 62 Stickler had such a lousy safety record: Ibid. 63 That’s what happened when Bush put Edwin Foulke: Stephen Labaton, “OSHA Leaves Worker Safety in Hands of Industry,” 25 Apr. 2007, www.nytimes.com. 64 Earlier in his career, while serving as chairman: Ibid. 65 Then there was Bush’s choice of Mary Sheila Gall: “Mary Sheila Gall Named to Chair CPSC,” 20 Apr. 2001, www.consumeraffairs.com. 66 In her ten years on the commission: Lizette Alvarez, “Consumer Product Safety Chief Sets Deadline to Resign,” 9 Aug. 2001, www.nytimes.com. 67 She even adopted a “Let them eat marbles” stance: Hearing on the nomination of Mary Sheila Gall to chair the Consumer Product Safety Commission before the Committee on Commerce, Science, and Transportation, U.S.

It’s no surprise that people such as Tim Geithner and Larry Summers believe in bank centrism—they’re both creatures of it. And in a bank-centric universe, funneling no-strings-attached money to too-big-to-fail banks is the logical thing to do. The longer this remains the dominant cosmology in the Obama administration—and the longer it takes to switch to a plan that reflects a cosmology in which the American people are the center of the universe and are deemed “too big to fail”—the greater the risk that the economic crisis will be more prolonged than necessary. And the greater the suffering. There is an enormous human cost to this dogma.

Create a Glass-Steagall Act for the twenty-first century, restoring the Chinese wall between commercial and investment banking. Follow the path of Teddy Roosevelt and break up the big banks. It’s essential to end “too big to fail” in order to ensure that taxpayers are not on the hook next time. Even Alan Greenspan, the oracle of free markets and a longtime cheerleader for banking deregulation, thinks the megabanks are too big.72 In October 2009, he said, “If they’re too big to fail, they’re too big.… So I mean, radical things—you know, break them up. In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole.


pages: 454 words: 134,482

Money Free and Unfree by George A. Selgin

"Robert Solow", asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, unorthodox policies, Y2K

AIG played a central role guaranteeing financial instruments, so its failure had the potential to lead to a cascade of failures and a meltdown of the global financial system. To contain this threat, the Federal Reserve provided secured loans to AIG. The trouble with such a mingling of Bagehotian and too-big-to-fail lending criteria is, as we have seen, that it raises a moral hazard. Bernanke himself was fully aware of the danger. “Some particularly thorny issues,” he observed after the Bear rescue, are raised by the existence of financial institutions that may be perceived as “too big to fail” and the moral hazard issues that may arise when governments intervene in a financial crisis. [Bear’s rescue was] necessary and justified under the circumstances that prevailed at that time.

“In its nearly 100-year history,” Allan Meltzer (2012: 261) observes, “the Fed has never announced its policy as lender of last resort. From the 1970s on, it acted on the belief that some banks were too-big-to-fail. Although the FOMC discussed last resort policy at times, the Fed never committed itself to a policy rule about assistance.” Michael Lewis (2008) was among those who correctly anticipated the consequences of the Bear rescue. “Investment banks,” Lewis wrote just afterwards, “now have even less pressure on them than they did before to control their risks.” He continued: There’s a new feeling in the Wall Street air: The big firms are now too big to fail. If the chaos that might ensue from Bear Stearns going bankrupt, and stiffing its counterparties on its billions of dollars of trades, is too much for the world to endure, the chaos that might be caused by Lehman Brothers Holdings Inc. or Goldman Sachs Group Inc. or Merrill Lynch & Co. or Morgan Stanley going bankrupt must also be too much to endure.  

When the inevitable reckoning came, the Fed faced a stark choice: it could either abandon “too big to fail” or set aside, more flagrantly than ever before, Bagehot’s call for lending only on good collateral. To the financial industry’s immense surprise, it took the former course, provoking a panic that was only compounded when Bernanke and Henry Paulson, in attempting to get $700 billion from Congress, warned that, without this assistance, the crisis “would threaten all parts of our economy” (U.S. Treasury 2008).22 Many Fed critics conclude that, having justified its rescue of Bear Stearns on too-big-to-fail grounds, the Fed ought also to have rescued Lehman.


pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, light touch regulation, London Whale, Money creation, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

Those commercial banks took over dozens of other banks and financial institutions across the globe and consequently became ‘too big to fail’. In a relatively short time the ownership structure of investment banks has radically changed. They are now publicly listed themselves so the risk lies with shareholders rather than partners, while bankers are paid partly in shares and options. The higher the share price, the more their shares and options are worth, and a really good way to raise that share price is by taking more risk. And as we’ve seen, what ‘too big to fail’ really means is that the taxpayer will bear much of that risk. There is an expression in the City for this new state of affairs: ‘It’s only OPM’ – Other People’s Money.

In today’s system, the risk and compliance department only serves to reassure the shareholders, regulators and taxpayers: those who shoulder the real risks. Now I began to understand why the interviewees who worked in hedge funds, private equity and venture capital scoffed at the publicly listed ‘too big to fail’ banks claiming to be part of the free market. Capitalism without the possibility of failure is like Catholicism without a hell, they’d say. Or: ‘Heads you lose, tails I win.’ And: ‘Banking today is like playing Russian roulette with someone else’s head.’ I was still mulling this over when an intriguing message popped into my inbox: ‘I’d be happy to discuss a part of banking that’s not really seen.’ 5 When the Call Comes ‘It’s amazing how fast the news spreads.

Whether interviewees were who they said they were was quite easy to check on social media such as LinkedIn. Verifying their stories was a different matter, frustratingly, because I was not allowed to observe anyone working in the banks. However, the most important things in their stories could be substantiated: the existence of caveat emptor, zero job security, the dangerous logic of ‘too big to fail’ and the implications and pressures of a listing on the stock exchange. It was clear that these conflicts of interest and perverse incentives are real, even if it came to light that each and every interviewee I spoke to was a delusional fantasist. A year into my research the blog was beginning to feel like an organisational detective.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

banking crisis, banks create money, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bond market vigilante , Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, mobile money, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nixon triggered the end of the Bretton Woods system, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, Savings and loan crisis, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Shotgun weddings putting weak or walking-dead banks together into larger players are encouraged or compelled. Once this could be done with private capital, as when J. P. Morgan singlehandedly stopped the Panic of 1907. Now the banking sector is so large and interwoven that many individual banks are “too big to fail,” which in practice means the government (i.e., the taxpayers) has to save them from collapse. Although so-called bailouts are politically toxic, not doing them risks total economic collapse. Thus, sooner or later, they get into the story line. Scene Six More subtly, the authorities try to restore banks to profitability so they can go back to lending to businesses and households.

The ability to offset depressed US and European growth with emerging market dynamism will likely prove a delusion. 9 10 Chapter 1 | The Rise and Fall of the Finance-Driven Economy Final Scene and Fade to Credits Global financial markets will not long remain broken and dormant, as human ingenuity and the desire to make money will always find new ways to connect borrowers and investors. The entrenched, too-big-to-fail institutions left standing by the second leg of the crisis, as well as the most heavily regulated financial centers, will increasingly be bypassed as capital, talent, and customers go elsewhere. Money, like water, always finds a way around efforts to dam it. Innovation trumps regulation over time.

However, in the 1990s the US banking industry became very concentrated in the top ten or so banks for reasons noted above. The investment banks went from partnerships to public companies and also got very, very large.The global financial markets became so intertwined that these institutions were exposed to every other bank of every size and vice versa. This situation is often called “too big to fail” because all these complex interconnections between market players are impossible to understand in detail but clearly have the potential to bring down everybody if a really big institution suddenly ceased paying what they owed the other banks. The problem during the crisis was that it was not at all obvious who could be allowed to go to the wall and who had to be saved at all costs.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

He knew there would be a rocky period but that markets adapt. Looking past that, he ramped up his campaign for legislation to break up the “too-big-to-fail” banks. “I think the disagreeable but sound thing to do regarding institutions that are [too big to fail] is to dismantle them over time into institutions that can be prudently managed and regulated across borders,” Fisher said on March 3, 2010, in a speech before the Council on Foreign Relations. Even Greenspan had come around to this position. “If they’re too big to fail, they’re too big,” Greenspan had said in the autumn of 2009 in a speech before the same audience. “In 1911 we broke up Standard Oil—so what happened?

“I think the disagreeable but sound thing”: FRBD: Richard Fisher, “Lessons Learned, Convictions Affirmed” (speech, Council on Foreign Relations, New York City, New York, March 3, 2010), www.dallasfed.org/news/speeches/fisher/2010/fs100303.cfm. “If they’re too big to fail”: DealBook, “Greenspan Calls to Break Up Banks ‘Too Big to Fail,’” New York Times, October 15, 2009, DealBook.nytimes.com/2009/10/15/greenspan-break-up-banks-too-big-to-fail/?_r=0. But in the interim Volcker: Michael Lewis, Liar’s Poker (New York: W. W. Norton, 2014), 44. Now a household word: The CBOE VIX measures stock market volatility, www.cboe.com/micro/VIX/vixintro.aspx.

He was the lone member of the FOMC who voted against the professor’s theories at that fateful meeting. He fought the good but lonely fight, and I, in my capacity as trusted adviser, waged many a battle with him. But the sad truth is we lost the people’s war. In a world rendered unsafe by banks that were too big to fail, we came to understand the Fed was simply too big to fight. I wrote this book to tell from the inside the story of how the Fed went from being lender of last resort to savior—and then destroyer—of America’s economic system. During my nine-year tenure at the Federal Reserve Eleventh District Bank of Dallas, where I served as adviser to President Richard Fisher, I witnessed the tunnel vision and arrogance of Fed academics who can’t understand that their theoretical models bear little resemblance to real life.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, Plutocrats, plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

In plain English, G-SIFI means “too big to fail.” If your company is on the G-SIFI list, it will be propped up by governments because a failure topples the global financial system. That list went beyond large national banks into a stratosphere of super-size players who dominated global finance. G-SIFI even went beyond too big to fail. G-SIFI was a list of entities that were too big to leave alone. The G20 and IMF did not just want to watch the G-SIFIs. They wanted to control them. Each major country has its own sublists of SIFIs, and systemically important banks (SIBs) that are also too big to fail. In the United States, these banks include JPMorgan, Citibank, and some lesser-known entities such as the Bank of New York, the clearing nerve center for the U.S. treasury market.

In the real world, velocity is not constant, real growth is constrained by structural (i.e., nonmonetary) impediments, and money supply is ill defined. Apart from that, Mrs. Lincoln, how was the play? Prevailing theory does even more damage when weighing the statistical properties of risk. The extended balance sheet of too-big-to-fail banks today is approximately one quadrillion dollars, or one thousand trillion dollars poised on a thin sliver of capital. How is the risk embedded in this leverage being managed? The prevailing theory is called value at risk, or VaR. This theory assumes that risk in long and short positions is netted, the degree distribution of price movements is normal, extreme events are exceedingly rare, and derivatives can be properly priced using a “risk-free” rate.

A troika consisting of the European Central Bank (ECB), the European Union (EU), and the IMF had fought hard to preserve the euro in the 2011 sovereign debt crises and did not want to see that work undone in Cyprus. Cyprus did not have the clout to drive a hard bargain. It had to take whatever assistance it could get on whatever terms it could get it. For its part, the troika decided the days of too-big-to-fail banks were over. Cyprus was where they drew the line. Banks were temporarily shut down. ATM machines were taken offline. A mad scramble for cash ensued. Those who could flew to mainland Europe, returning with wads of euros stuffed in their luggage. Laiki Bank was closed permanently, and Bank of Cyprus was restructured by the government.


pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

access to a mobile phone, affirmative action, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Bear Stearns, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, disruptive innovation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, Money creation, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, Ronald Reagan: Tear down this wall, Savings and loan crisis, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

Robert Solomon, an advocate for the community banking model, summarized the story of ShoreBank’s rescue as such: “If the lesson is that we will use taxpayer funds as a last resort for necessary interventions for those banks whose failure places an untenable risk on the financial system, i.e. those too big to fail, then we are privileging those institutions at the expense of smaller banks. Once we accept that, we can take for granted that small banks are inefficient, have no special purpose, and will inevitably be absorbed into larger, more efficient banks.”24 Perhaps ShoreBank failed because of toxic politics and the federal government’s decision to favor Too-Big-to-Fail over “Too Good to Fail,” but the bank also failed because of unavoidable financial realities: its loans were concentrated in a struggling geographic area, which probably exposed it to more significant risk during the economic downturn.25 REVIVAL OF BANKS WITH A SOUL?

And when it comes to these large banks, they rarely are “normal circumstances.”17 The truth is that even while the banking industry was rejecting any public duties, they were being supported by public funds. When commentators discuss this era of bank transformation, or deregulation, they tend to focus on the creation of Too-Big-to-Fail financial giants and their size, power, and riskiness. No less consequential, however, was the loss of banking services for average people. For much of U.S. history, the answer to banking for the poor—whether the rural farmer or the working-class city dweller—has been through local and community-controlled credit.

Because they were not banks and their creditors were not depositors, there was no established system of insurance. Once the run started, it rapidly spread and threatened to take down all of the uninsured shadow banks. This time, the federal government stepped in and stopped the hemorrhaging through bailouts. Thus began the era of “Too Big to Fail” institutions and a recognition that certain institutions are so large and powerful that the federal government cannot let them fail, lest trust in the entire financial system be undermined. This handful of banks controls the majority of the country’s banking assets. Trillions of dollars in federal bailouts flowed to these banks.22 It is important to understand why the federal government bailed out these banks.


pages: 257 words: 64,763

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer

banking crisis, Bear Stearns, Bernie Madoff, Bernie Sanders, business cycle, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, facts on the ground, financial deregulation, fixed income, housing crisis, invisible hand, Long Term Capital Management, mega-rich, mortgage debt, new economy, old-boy network, Ponzi scheme, profit motive, Ralph Nader, Ronald Reagan, Savings and loan crisis, too big to fail, trickle-down economics

Left to their own devices, freed of rational regulatory restraint by an army of lobbyists and the politicians who serve them, one after another of the very top financial conglomerates imploded from the weight of their uncontrolled greed. Or would have imploded, as in the examples of Citigroup and AIG, if the government had not used taxpayer dollars to bail out those “too big to fail” conglomerates. Along the way, these companies—including the privatized quasi-governmental Fannie Mae and Freddie Mac monstrosities—were exposed as poorly run juggernauts, with top executives having embarrassingly little grasp of the chicanery and risk taking that was bolstering their bottom lines.

The near-collapse of Citigroup came nine years and six months after the Times editorial confidently assured America that “Citigroup threatens no one because it would not dominate banking, securities, insurance or any other financial market.” The federal government, later concluding that the merger celebrated by the Times had produced a true monster “too big to fail,” prevented its total collapse by pumping $50 billion directly into it, while also guaranteeing $300 billion of Citigroup’s “toxic assets.” Clearly, the merger of Citigroup had ended up a considerable threat to U.S. taxpayers and, indeed, to the entire world economy. Clinton was dispossessed of the wisdom to foresee this disastrous outcome of the bills he signed into law, or else he simply fell under the thrall of Wall Street hucksters—or both.

Among the few to sound the alarm, he raised his voice alongside that of Nader, pointing out that a major positive consequence of the New Deal regulations was that commercial banks had been prevented from gambling with depositors’ savings, which were insured by the Federal Deposit Insurance Corporation, created by Glass-Steagall. “No private enterprise should be allowed to think of itself as ‘too big to fail,’” wrote Safire in a foreshadowing of exactly what would ensue. Having the support of the FDIC—the federal government guaranteeing your accounts—had to come with restrictions, or it would be exploited, he argued. “Federal deposit insurance, protecting a bank’s depositors, should not become a subsidy protecting the risks taken by non-banking affiliates.


Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Swan, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, joint-stock company, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

During the first week of September Fannie Mae and Freddie Mac, the US government-sponsored lenders that accounted for more than 50 percent of the credit risk on home mortgages, were taken over by the US Treasury – both institutions were bankrupt and the owners of their common shares and their preferred shares lost virtually all of their money. It appeared as if the US government had in effect adopted a ‘too big to fail’ policy – these institutions would continue in business, although there would be a dramatic change in ownership. At the outset of the crisis, the markets viewed the decision not to ‘save Lehman Brothers’ as a major change in policy, but a day after Lehman closed its doors, there was a run on AIG, then the largest insurance company in the world, and the ‘too big to fail’ policy was resurrected. Nevertheless, investors still panicked, evidenced by the sharp increase in the spreads on riskier assets.

If the shareholders lose 90 or 95 percent of their money before the government provides financial assistance, has the bank failed? Most of the shareholders are unlikely to agree to the statement that they have been bailed out. These bondholders may receive somewhat higher interest rates because the managers of the banks believe that they are ‘too big to fail’ and undertake somewhat riskier investments – and they will be able to pay higher interest rates – at least for a while. The ‘too big to fail’ doctrine may have the same impact as deposit insurance – unless the authorities reduce the value of the claims of the creditors below their face value if the banks are closed and re-organized with government assistance. Thereafter the owners of the deposits that are much larger than the amounts covered by deposit insurance may be ready to withdraw their money whenever there is modest skepticism about the solvency of the bank.

Lehman was not a commercial bank, and hence it was regulated by the Securities and Exchange Commission rather than by the Federal Reserve, although after the rescue of Bear the Fed had opened its discount window to investment banks. One interpretation of ‘too big to fail’ is that a faltering bank is so large that there is no other institution has sufficient excess capital to acquire the firm, much as Bear had been purchased by Morgan; hence the government must provide financial assistance to any of the five to ten very large firms because its demise would have costly consequences both for its competitors and the economy. One of the concerns implicit in the ‘too big to fail’ cliché is that the various stakeholders in the bank benefit from the proverbial ‘free lunch’ because they are protected against losses that their counterparts in smaller firms would have incurred when they failed.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

Airbnb, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, patent troll, pension reform, price mechanism, price stability, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, zero-sum game

By 2010, as the worst of the banking crisis had passed, the top ten EU banks had about €15 trillion in assets, equivalent to 122 percent of GDP.6 And Europe remains home to ten globally systemically important banks (G-SIBs), the designation that the international Financial Stability Board set up in response to the crisis, which highlights banks whose failure would have a significant effect on the world’s economy. Because the failure of any of these huge banks imposes such large collateral damage on the rest of the economy, governments typically will not allow them to fail—hence the moniker “too big to fail.” Europe still has a serious too-big-to-fail dilemma on its hands. This is because too-big-to-fail banks represent a triple problem. First, they know that they are too big to fail so they take on inordinate risk since they will not pay the ultimate price of bankruptcy. They will be rescued, come what may—or at least with a high probability—thus, their incentives are distorted. Second, when these banks do fail, not only is the direct cost to the government and the economy large, but so are the indirect costs caused by their interlinkage with virtually all the other banks (even smaller banks can be too interlinked to fail).

More equity means a lower share price, which is a major benchmark for banker compensation. And with higher capital, the chances of a government bailout falls. Banks like these hidden subsidies; the public does not and for good reason. Overall, the increase in capital requirements is a move in the right direction, but it is not enough. Too-big-to-fail and other bank maladies The European Union, like the United States, nurtured the creation of large banks (whose collapse would one day threaten the financial system) for a variety of reasons including misplaced pride in having European mega-banks, and the political influence of large banks at the national and European level.

Second, when these banks do fail, not only is the direct cost to the government and the economy large, but so are the indirect costs caused by their interlinkage with virtually all the other banks (even smaller banks can be too interlinked to fail). Third, because of the greater likelihood of a bailout, the too-big-to-fail banks can borrow at a lower rate. This hidden subsidy, granted because they are perceived as safer borrowers, allows them to grow still larger. As the financial crisis unfolded, regulators, lawmakers, and eventually the public came to appreciate the consequences of letting banks grow to enormous size.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Bogle, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, tail risk, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs, two and twenty

Presented with an opportunity to borrow at near zero cost, people borrowed unsustainably. The crisis has also shown that financial firms are riddled with dysfunctional incentives. The clearest problem is “too big to fail”—Wall Street behemoths load up on risk because they expect taxpayers to bail them out, and other market players are happy to abet this recklessness because they also believe in the government backstop. But this too-big-to-fail problem exists primarily at institutions that the government has actually rescued: commercial banks such as Citigroup; former investment banks such as Goldman Sachs and Morgan Stanley; insurers such as AIG; the money-market funds that received an emergency government guarantee at the height of the crisis.

According to the International Monetary Fund, the cash infusions, debt guarantees, and other assistance provided to too-big-to-fail institutions in the big advanced economies came to a staggering $10 trillion, or $13,000 per citizen of those countries.3 The sums spent on rescuing well-heeled financiers damaged the legitimacy of the capitalist system. In December 2009, President Barack Obama said plaintively that he “did not run for office to be helping out a bunch of fat cat bankers.”4 But help them out is what he did, and populist anger at his openhanded policies is hardly surprising. Even more worryingly, neither Obama nor any other leader knows how to prevent too-big-to-fail institutions from fleecing the public all over again.

For example, if investors had been forced to absorb the cost of the Bear Stearns bankruptcy in early 2008, rather than having the blow softened by a Fed-subsidized rescue, they might have prepared themselves better to absorb the costs of Lehman’s failure some months later. But this purported solution to the too-big-to-fail problem denies its existence: Precisely because some institutions are indeed too big to fail, they cannot be left to go under. What’s more, the behemoths and those who lend to them understand their inviolability all too well; the government may claim that it won’t rescue them, but everybody understands that it will have no choice when the time comes.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

When the bubble burst, it left no real growth behind and destroyed the illusion of progress. Systemic Risk and Too Big to Fail The issue of companies that are “too big to fail” has been brought up many times throughout history, including during the LTCM crisis. Larger firms might be harder to manage, less transparent, and treated differently than smaller firms on the assumption that they will be bailed out in case of trouble. If they fail, large firms cause equally large reverberations, because so many other market participants are connected to it.4 Firms can be too big to fail for many different reasons, including the amount of leverage they have, the interconnectedness of their space, and the web of financial system connections they provide.

Morgan and legal opinion on bankruptcy of leverage liquidity pool liquidity stress test results losses of market imbalances and moving business strategy profits of real estate exposure Repo repo imbalance and Reserve Primary Fund and run on Russian default and size of stock price storage business strategy swap imbalance and Lehman Brothers Bank Lenders: of last resort marking to market by mortgage, and housing bubble Lessons from financial crisis: arbitrage conflicts of interest counterparty interaction derivatives hedge funds interconnectedness and crowds leverage overview of policy lessons risk management systemic risk and “too big to fail,” Lessons from LTCM failure: compensation contingency capital counterparties and clearinghouses counterparty due diligence Fed as coordinator of last resort interconnected crowds leverage overview of quantitative theory regulation size of firms and “too big to fail,” spread the love VaR Leverage: capital ratio and dangers of of investment banks lessons from financial crisis at LTCM Leveraged bank loans Levitt, Arthur Lewis, Joe Lewis, Ken LIBOR (London Interbank Offer Rate) Liebowitz, Martin Liew, John Lim, Steven Liquidity, price of during crisis Liquidity risk Liquid securities London Interbank Offer Rate (LIBOR) Long swap spread trade Long-Term Capital Management (LTCM).

Mortgage Securities Hedged The Box Spread in Japan The Italian Swap Spread Fixed-Income Volatility Trades The On-the-Run and Off-the-Run Trade Short Longer-Term Equity Index Volatility Risk Arbitrage Trades Equity Relative-Value Trades Emerging Market Trades Other Trades The Portfolio of Trades Chapter 5: The Collapse The Collapse Early Summer 1998 The Salomon Shutdown The Russian Default The Phone Calls The Meriwether Letter Buffett’s Hostile Alaskan Offer The Consortium Bailout Too Big To Fail Why Did It Happen? Appendix 5.1 The John Meriwether Letter Appendix 5.2 The Warren Buffett Letter Chapter 6: The Fate of LTCM Investors The Fate of LTCM Investors Chapter 7: General Lessons from the Collapse Interconnected Crowds VaR Leverage Clearinghouses Compensation What’s Size Got to Do with It?


pages: 320 words: 87,853

The Black Box Society: The Secret Algorithms That Control Money and Information by Frank Pasquale

Affordable Care Act / Obamacare, algorithmic trading, Amazon Mechanical Turk, American Legislative Exchange Council, asset-backed security, Atul Gawande, bank run, barriers to entry, basic income, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bonus culture, Brian Krebs, business cycle, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chelsea Manning, Chuck Templeton: OpenTable:, cloud computing, collateralized debt obligation, computerized markets, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, Debian, don't be evil, drone strike, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, Filter Bubble, financial innovation, financial thriller, fixed income, Flash crash, full employment, Goldman Sachs: Vampire Squid, Google Earth, Hernando de Soto, High speed trading, hiring and firing, housing crisis, Ian Bogost, informal economy, information asymmetry, information retrieval, interest rate swap, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, John Bogle, Julian Assange, Kevin Kelly, knowledge worker, Kodak vs Instagram, kremlinology, late fees, London Interbank Offered Rate, London Whale, Marc Andreessen, Mark Zuckerberg, mobile money, moral hazard, new economy, Nicholas Carr, offshore financial centre, PageRank, pattern recognition, Philip Mirowski, precariat, profit maximization, profit motive, quantitative easing, race to the bottom, recommendation engine, regulatory arbitrage, risk-adjusted returns, Satyajit Das, Savings and loan crisis, search engine result page, shareholder value, Silicon Valley, Snapchat, social intelligence, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical arbitrage, statistical model, Steven Levy, the scientific method, too big to fail, transaction costs, two-sided market, universal basic income, Upton Sinclair, value at risk, WikiLeaks, Yochai Benkler, zero-sum game

But, as Peter Boone and Simon Johnson have shown, the interconnections between the two can also erode confidence. Boone and Johnson foresee a “doom loop”: as financial institutions are increasingly treated as too big to fail, they are empowered to take greater and greater risks, which will inevitably lead to greater stresses on the governments that effectively sponsor them.146 These obligations foment worries about governments’ ability to support both too-big-to-fail banks and the tens of millions who depend on health and welfare benefits. Meanwhile, as interest rates on sovereign debt are suppressed to spark a recovery, investors feel compelled to flee to the finance sector to gain more than nominal returns.

Google is also reported to have entered into deals with the NSA, but an effort by the Electronic Privacy Information Center (EPIC) to find out whether that was indeed the case was quashed by a federal 50 THE BLACK BOX SOCIETY judge.184 The NSA neither confirms nor denies working with Google to develop its intelligence operations, even after the spectacular revelations of Edward Snowden in 2013. Armies and spies have always relied on stealth; after all, loose lips sink ships. But secrecy also breeds conflicts of interest. Why should Google worry about potential antitrust violations if it’s monitoring Internet access side by side with the DHS and the NSA?185 Like the “too big to fail” banks, it may be “too important to surveillance” for the government to alienate the firm. In 2013, in fact, leaked documents showed that the NSA (or a British partner) targeted the official who was in charge of investigating Google’s alleged violations of EU competition law.186 As a growing literature suggests, privatization can be more than a transaction between government and business.

To be sure, there are many conscientious souls working on Wall Street. But their voices and values matter little if they can be summarily overruled by their bosses. The aftermath of the housing crisis has exposed a critical mass of unethical and hugely costly deals. It has created a presumption of suspicion for large firms—particularly those that now enjoy “too big to fail” status. Black box finance ranges from the crude to the cunning, the criminal to the merely complex. Countless narratives and analyses of the crisis have tried to pin down whether bankers, mortgage brokers, regulators, and insurers knew or should have known that the mortgage industrial complex was building a house of cards.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

"Robert Solow", airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, bond market vigilante , Bretton Woods, business cycle, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

“None of us like this too-big-to-fail doctrine and we all look forward to its demise,” he concluded breezily. Greenspan’s new optimism about taming the too-big-to-fail problem was not altogether honest. He had spent much of his career lamenting that banks would act prudently only in a parallel world, one with no government bailouts, no central bank to act as a lender of last resort, and no deposit insurance. Something like this libertarian utopia might have confronted the nineteenth-century industrialists whom Greenspan had idolized in his youth, but in the late twentieth century, the too-big-to-fail problem was far less tractable than Greenspan now pretended.

The United States had to provide the money to allow Mexico to repay its creditors. But for Greenspan and the Treasury, there were risks in saying yes. The weakening of market discipline that results from any bailout would be replicated on an international scale. Just as Continental Illinois had been revealed to be too big to fail, so Mexico would now appear too big to fail, or too geopolitically important. The resulting “moral hazard”—the precedent suggesting that Wall Street could spray money at emerging markets and expect taxpayers to make good their losses—would be more toxic by far than anything that had happened during the third-world debt crises of the previous decade.

Cynics quipped that the Financial Services Modernization Act of 1999 would be better named the “Citicorp Authorization Act.”18 But what was more astonishing was the nature of the debate leading up to the reform. Rather than questioning whether the nation could afford too-big-to-fail banks, the Treasury had focused on a turf question: whether securities operations of banks should be structured as subsidiaries, implying that they would be overseen by the Treasury, or as affiliates, in which case the Fed would supervise them. Congress, for its part, had staged a battle royal over banks’ obligations to low-income communities—a worthy issue, perhaps, but not one that came close to the too-big-to-fail question. Greenspan’s dubious bet on market discipline was left unaddressed. The elephant in the room was too enormous to confront directly.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, Post-Keynesian economics, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, Savings and loan crisis, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Whether this change in bank behaviour will actually happen is not guaranteed, but regardless, banks that become insolvent will be allowed to fail, rather than being rescued by the taxpayer. The ‘too big to fail’ subsidy is removed Since it is possible to allow banks to fail under the reformed system, the banking sector will lose its ‘too big to fail’ subsidy. This subsidy was partly a consequence of the implicit guarantee that the government would rescue any banks that failed, due to the fact that within the current system it is more expensive for the government to allow a bank to fail than to rescue it. The ‘too big to fail’ subsidy also arose as a direct result of deposit insurance. Deposit insurance effectively makes lending to a bank risk-free, lowering the interest rates that banks need to pay to depositors and on their other borrowings.

3.1 The demand for credit Borrowing due to insufficient wealth Borrowing for speculative reasons Borrowing due to legal incentives 3.2 The demand for money Conclusion: the demand for money & credit 3.3 Factors affecting banks’ lending decisions The drive to maximise profit Government guarantees & ‘too big to fail’ Externalities and competition 3.4 Factors limiting the creation of money Capital requirements (the Basel Accords) Reserve ratios & limiting the supply of central bank reserves Controlling money creation through interest rates Unused regulations 3.5 So what determines the money supply?

7.3 Accounting for money creation 7.4 The mechanics of creating new money 7.5 Spending new money into circulation Weighing up the options 7.6 Lending money into circulation to ensure adequate credit for businesses 7.7 Reducing the money supply MAKING THE TRANSITION An overview of the process 8.1 The overnight ‘switchover’ to the new system Step 1: Updating the Bank of England’s balance sheet Step 2: Converting the liabilities of banks into electronic state-issued money Step 3: The creation of the ‘Conversion Liability’ from banks to the Bank of England 8.2 Ensuring banks will be able to provide adequate credit immediately after the switchover Funds from customers Lending the money created through quantitative easing Providing funds to the banks via auctions 8.3 The longer-term transition Repayment of the Conversion Liability Allowing deleveraging by reducing household debt Forcing a deleveraging of the household sector UNDERSTANDING THE IMPACTS OF THE REFORMS 9.1 Differences between the current & reformed monetary systems 9.2 Effects of newly created money on inflation and output 9.3 Effects of lending pre-existing money via Investment Accounts Lending pre-existing money for productive purposes Lending pre-existing money for house purchases and unproductive purposes Lending pre-existing money for consumer spending 9.4 Limitations in predicting the effects on inflation and output 9.5 Possible financial instability in a reformed system A reduced possibility of asset price bubbles Central bank intervention in asset bubbles When an asset bubble bursts 9.6 Debt 9.7 Inequality 9.8 Environment 9.9 Democracy IMPACTS ON THE BANKING SECTOR 10.1 Impacts on commercial banks Banks will need to acquire funds before lending The impact on the availability of lending Banks will be allowed to fail The ‘too big to fail’ subsidy is removed The need for debt is reduced, shrinking the banking sector’s balance sheet Basel Capital Adequacy Ratios could be simplified Easier for banks to manage cashflow and liquidity Reducing the ‘liquidity gap’ 10.2 Impacts on the central bank Direct control of money supply No need to manipulate interest rates A slimmed down operation at the Bank of England 10.3 Impacts on the UK in an international context The UK as a safe haven for money Pound sterling would hold its value better than other currencies No implications for international currency exchange Would speculators attack the currency before the changeover?


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

The exponential growth of the transformation of risk via increased financialization has led to a proliferation of financial claims and obligations, as a result of which a growing percentage of total wealth now exists not in the form of real assets but in the form of financial assets or claims by creditors. Its growth has also led to banks getting too big to fail. TBTF The term Too Big to Fail (TBTF) has captured the headlines since the crisis. But the growing popularity of this term should not come as a surprise. In the same way that financialization can be considered as a process of events, TBTF was a looming event being built to fruition well before the crisis.

Coupled with these limitations is the fragility caused by individual nodes. The complexity article goes on the state that “systemic repercussions of the failure of individual nodes…shows that the issue of too-central-to-fail may be more important than too-big-to-fail” (Battiston et al., 2016). Hence, although Kashkari and others who are pushing for the end of TBTF are right in generating scenarios, what needs to be done is to think about the concept of ending too big to fail from a more multidisciplinary perspective. Using the scientific methods cited in the aforementioned article would not only give the regulators the ability to simulate more scenarios, but would also help answer the questions of those critics who have defended the current structure of the financial system under the pretext of advantages offered by economies of scale.

Retrieved from Fintech Innovation: http://www.enterpriseinnovation.net/article/accenture-study-says-chinese-deals-dominate-q1-2016-global-fintech-investment-1052478246 Accenture. (2016). Fintech’s Golden Age: Competition to Collaboration . Accenture. Bernanke, B. S. (2016, May 13). Ending “too big to fail”: What’s the right approach? Retrieved from Brookings: https://www.brookings.edu/2016/05/13/ending-too-big-to-fail-whats-the-right-approach/ Bipartisan Policy Center. (2014). The Big Bank Theory: Breaking Down the Breakup Arguments. Bipartisan Policy Center. Birch, D. (2014). Identity is the New Money. London: London Publishing Partnership. Buterin, V. (2016).


pages: 154 words: 47,880

The System: Who Rigged It, How We Fix It by Robert B. Reich

Adam Neumann (WeWork), affirmative action, Affordable Care Act / Obamacare, Bernie Madoff, Bernie Sanders, business cycle, clean water, collective bargaining, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, crony capitalism, cryptocurrency, Donald Trump, ending welfare as we know it, financial deregulation, Gordon Gekko, immigration reform, income inequality, independent contractor, Jeff Bezos, job automation, London Whale, Long Term Capital Management, market fundamentalism, mass incarceration, mortgage debt, Occupy movement, Ponzi scheme, race to the bottom, Robert Bork, Ronald Reagan, Savings and loan crisis, shareholder value, too big to fail, trickle-down economics, union organizing, WeWork, women in the workforce, working poor, zero-sum game

JPMorgan returned its bailout money quicker than other big banks, but it has continued to make a nice profit from being “too big to fail.” By 2019, America’s five biggest banks, including Dimon’s, accounted for 46 percent of all U.S. bank deposits. In the early 1990s, they had accounted for only 12 percent. Their giant size has translated into a huge but hidden federal subsidy estimated to be $83 billion annually, reflecting the premium investors are willing to pay for the stocks and bonds of banks they believe are too big to fail. Dimon says it’s wrong to “vilify” people who succeed under free market capitalism, like himself.

It seems not to include the bank bailout and its ongoing $83 billion hidden government insurance. Take this subsidy away and Wall Street’s entire bonus pool would disappear, along with most of its profits, and Dimon would be worth far less than $1.6 billion. A few years after the crisis Dimon told Roger Lowenstein of The New York Times that “no bank should be too big to fail” and that if JPMorgan couldn’t pay its bills, “Morgan should have to file for bankruptcy.” Dimon was either stunningly naïve or was pandering to Times readers, saying what he assumed they wanted to hear. Given the mammoth size and dominance of JPMorgan and the other behemoths on the Street, their failures would put the national economy into a tailspin.

(In 2018, the Trump tax cut saved Buffett’s businesses $37 billion.) But Buffett’s investment strategy is indirectly taking money out of the pockets of average Americans. As I’ve explained, the sky-high profits at JPMorgan and the other banking behemoths on the Street are due to their being too big to fail, along with their political power to keep regulators at bay. Similarly, high profits at the four remaining major American airlines come from inflated prices, overcrowded planes, overbooked flights, and weak unions. High profits of Big Tech come from wanton invasions of personal privacy, the weaponizing of false information, and a widening moat that’s discouraging innovation.


pages: 455 words: 138,716

The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi

banking crisis, Bear Stearns, Bernie Madoff, butterfly effect, buy and hold, collapse of Lehman Brothers, collateralized debt obligation, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fixed income, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, Savings and loan crisis, short selling, telemarketer, too big to fail, two and twenty, War on Poverty

Everyone else—the politicians, the company itself, the towns that see new jobs for white folks—they all win. And someone else wins, too: Wall Street. Some of the biggest investors in private prison companies are, you guessed it, the too-big-to-fail banks. Wells Fargo, for instance, has nearly $100 million invested in the GEO Group, plus about $6 million in CCA. Bank of America, General Electric, Fidelity, and Vanguard are all major investors in at least one of the three big prison companies. And why not? Like too-big-to-fail banking itself, private prisons are an industry that depends not on the unpredictable economy but upon political connections. It’s the perfect kind of business in the oligarchical capitalism age, with guaranteed profits to provide a low-cost public insurance against the vagaries of the market.

After all, these companies had all been involved in countless scandals since the financial crisis of ’08, a disaster caused by an epidemic of criminal fraud that wiped out some 40 percent of the world’s wealth in less than a year, affecting nearly everyone in the industrialized world. If ever there was a wave of white-collar crime that cried out for a criminal trial, it was this period of fraud from the mid-2000s. And it would make sense that the defendants should come from one of these companies. In the years since the crash, all of them, and a half-dozen more too-big-to-fail megafirms just like them, had already paid hundreds of millions of dollars in civil settlements for virtually every kind of fraud and manipulation known to man. Moreover, District Attorney Vance had once seemingly had all these Wall Street firms in his sights. He’d sent subpoenas out to Goldman and other companies the previous year.

JPMorgan Chase … another $3.3 billion for the same purpose, civil settlement, no criminal charges.” Talkin’s point was clear—all these other, far richer banks had been caught selling defective loans that had actually cost victims huge amounts of money, and nobody from those giant companies was being arrested. But in the Abacus case, unlike in cases involving too-big-to-fail banks, the state could not identify so much as a dollar of loss suffered by the state as a result of the loans. The defense lawyer pleaded with the judge: How did this make sense? The judge frowned. “Are you arguing selective prosecution?” she grumbled. “I don’t know what the point is.” The room was silent for a moment.


pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business cycle, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, creative destruction, crony capitalism, David Brooks, delayed gratification, disruptive innovation, double helix, factory automation, financial deregulation, financial innovation, fixed income, full employment, game design, greed is good, If something cannot go on forever, it will stop - Herbert Stein's Law, impulse control, income inequality, inflation targeting, invisible hand, job automation, John Markoff, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, mass immigration, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

Peter Beinart, “The Republicans’ Reagan Amnesia,” The Daily Beast, Feb. 1, 2010, http://www.thedailybeast.com/articles/2010/02/01/the-republicans-reagan-amnesia.html. 15. Richard W. Fisher, “Ending ‘Too Big to Fail.” 16. Evan Pérez, “First on CNN: Regulator Warned against JPMorgan Charges,” CNN, Jan. 9, 2014, http://www.cnn.com/2014/01/07/politics/jpmorgan-chase-regulators-prosecutors/. 17. Fisher, “Ending ‘Too Big to Fail.’ ” 18. George F. Will, “Time to Break Up the Big Banks,” Washington Post, Feb. 9, 2013, http://www.washingtonpost.com/opinions/george-will-break-up-the-big-banks/2013/02/08/2379498a-714e-11e2-8b8d-e0b59a1b8e2a_story.html. 19. Fisher, “Ending ‘Too Big to Fail.’ ” 20. Communication with author. 21. Liz Benjamin, “What Would Cuomo Do to Get Public Financing” Capital New York, Jan. 20, 2014, http://www.capitalnewyork.com/article/albany/2014/01/8539039/what-would-cuomo-do-get-public-financing. 22.

Consider: just twelve banks, including JPMorgan, Citicorp, and Goldman Sachs, control 69 percent of the entire U.S. banking industry15—a share so large that, no matter how egregious or reckless the banks’ behavior, the government can’t let them fail lest they take the rest of the economy down with them. Indeed, megabanks are not only too big to fail or regulate, but also too big for government even to prosecute for blatantly criminal activities. As U.S. attorney general Eric Holder admitted in congressional testimony in 2013, U.S. megabanks are so large that “if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”16 As the saying goes, megabanks are not only “too big to fail,” but “too big to jail.” For this reason, financial policy experts have long argued that the risks of a financialized economy won’t truly be curbed until so-called TBTF (“too big to fail”) banks have been broken up into smaller, more regulatable entities.

Rubin also helped defeat efforts to regulate credit swaps and other financial derivatives. Both these deregulatory initiatives would open up huge new streams of revenues and profits for Wall Street—and a huge new source of campaign finance for Democrats. But both actions were also pivotal in the meltdown in 2007, when “too-big-to-fail” banks playing the markets lost hundreds of billions of dollars in unregulated derivatives and nearly destroyed the global financial system. But, if anything, the alliance between Democrats and Wall Street has remained strong. Although Barack Obama has pursued an unabashedly progressive agenda in many arenas, notably health care, his stance on finance has been largely old-school.


Global Financial Crisis by Noah Berlatsky

accounting loophole / creative accounting, asset-backed security, banking crisis, Bear Stearns, Bretton Woods, capital controls, Celtic Tiger, centre right, circulation of elites, collapse of Lehman Brothers, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, mass immigration, Money creation, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

In the past few weeks we have seen leading executives at Barclays awarding themselves millions while the bank ultimately remains dependent on government guarantees, despite its precarious independence. It is not surprising that executives of the seminationalised banks want to follow suit. What has brought the issue to a head is the judgement that the major UK-based banks are “too big to fail” and have to be rescued in a financial emergency. This concept is an economic and democratic outrage. Either they must be subject to tight state control or they should be broken up so that they are not “too big to fail”. The point has been grasped, improbably, by ministers in banker-friendly countries such as Switzerland, and by our own central bank’s governor. Yet ministers today seem no less terrified of confronting the banks than when Brown initially fled the battlefield a decade ago. 46 Causes of the Global Financial Crisis Change in UK Regulations Contributed to the Crisis In 1997 Mr.

Shiller 32 Boom thinking is a kind of social contagion; once a commodity starts rising in price, people convince themselves and then each other that the price will keep going up. This happened in the United States with home prices, which rose to unsustainable levels. 4. The Weakness of Banking Regulations Caused the Crisis Vince Cable Some British banks have grown too big to fail, and perhaps too big for regulators to handle. Yet they want freedom from regulation and freedom to persue high risk investments. But the British taxpayer should not be responsible for financial risks taken outside the nation’s borders. 42 5. Low Interest Rates Caused the Crisis Tito Boeri and Luigi Guiso 53 The housing crisis was fueled by the actions of the chairman of the Federal Reserve, Alan Greenspan, who kept interest rates low.

This text has been suppressed due to author restrictions. 37 The Global Financial Crisis This text has been suppressed due to author restrictions. 38 Causes of the Global Financial Crisis This text has been suppressed due to author restrictions. 39 The Global Financial Crisis This text has been suppressed due to author restrictions. 40 Causes of the Global Financial Crisis This text has been suppressed due to author restrictions. 41 4 Viewpoint The Weakness of Banking Regulations Caused the Crisis Vince Cable Vince Cable, economic spokesman for the Liberal Democrats, is the author of The Storm: The World Economic Crisis and What It Means. In the following viewpoint, Cable discusses various options that are available for fixing the banking industry in the United Kingdom (UK). Certain UK banks are considered “too big to fail” and they want to retain their investment banking wings, but these pose a great financial risk to the taxpayer; therefore, the author favors either tighter government regulation of them or less government protection for them. Cable suggests that lack of regulation as well as the inability of regulators to monitor financial activity effectively were failures of the banking system revealed by the financial crisis.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, Tragedy of the Commons, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

Dean Baker and Travis McArthur have estimated that the difference between the interest rates at which too-big-to-fail banks can raise capital and the rate smaller banks have access to increased from 0.29 percentage points—where it had been for about seven years before the crisis—to 0.78 percentage points in a matter of months after the bailouts. This, they argue, shows that markets recognized that too-big-to-fail banks had become “official government policy,” and implied “a government subsidy of $34.1 billion a year to the 18 bank holding companies with more than $100 billion in assets in the first quarter of 2009.” Baker and McArthur, “The Value of the ‘Too Big to Fail’ Big Bank Subsidy,” Center for Economic and Policy Research, September 2009, available at http://www.cepr.net/documents/publications/too-big-to-fail-2009-09.pdf (accessed March 5, 2012).

In the aftermath of the crisis, the Fed’s position in the regulatory debate showed where their allegiance was. Regulations should have been designed to encourage banks to go back to the boring business of lending. Recognizing that the too-big-to-fail banks had perverse incentives, they should have focused on how to limit the size and interconnectedness of the banks. Moreover, too-big-to-fail banks have a competitive advantage over other banks—those who provide them finance know that they can count, in effect, on a government guarantee, and thus they are willing to provide them funds at lower interest rates. The big banks can thus prosper not because they are more efficient or provide better service but because they are in effect subsidized by taxpayers.

Bernanke and the big banks that made billions a year from the credit default swaps, or CDSes, won. Meanwhile, there emerged a broad consensus among economists and policy makers (including at least one Federal Reserve regional governor and the governor of the Bank of England, Mervyn King) that something ought to be done about the too-big-to-fail banks. King pointed out that if they were too big to fail, they were too big to exist. Even earlier, Paul Volcker, former chairman of the Federal Reserve, had observed that these banks were also too big to be managed. But the Federal Reserve Board’s current and past chairmen (Greenspan and Bernanke, responsible for bringing on the crisis) have never seemed even to recognize the problem, at least not enough to suggest that something be done.


pages: 405 words: 109,114

Unfinished Business by Tamim Bayoumi

algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, hiring and firing, housing crisis, inflation targeting, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Robert Shiller, Rubik’s Cube, Savings and loan crisis, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

Estimated output losses in Euro area crisis countries. 4. Euro area banking boomed after 1985. 5. Investment banking in the Euro area core expanded rapidly after 1996. 6. Most European bank mergers involved domestic agglomeration. 7. Euro area banks were largely national in 2002. 8. Euro area mega-banks were already becoming too big to fail. 9. Mergers in the late 1990s completed the European mega-banks. 10. Internal risk models led to thin capital buffers. 11. Structure of Euro area banking in 2002. 12. Regulated banking did not grow from 1980–2002. 13. Securitization of mortgages boomed after 1980. 14. Banks sold most mortgages via securitizations by 2002. 15.

They were smaller than most of their rivals in the core and were still basically commercial banks. In many ways, the southern Euro area mega-banks are best seen as a defensive agglomeration of commercial banks in response to the rapid expansion of their northern counterparts. Figure 8: Euro area mega-banks were already becoming too big to fail. Source: Scientific Committee of the European Systemic Risk Board (2014). Figure 9: Mergers in the late 1990s completed the European mega-banks. Source: Corporate websites. The rapidly expanding mega-banks were already becoming too large to be managed by the corresponding national governments.

Controversially, after Continental Illinois filed for bankruptcy regulators decided to fully recompense deposits above the federal insurance cap (including the 179 banks that had deposits worth more than half of their equity capital) and also bondholders, rather than let them absorb the losses. The bailout of these uninsured lenders caused outrage and popularized the phrase “too big to fail”. The outrage was compounded by the even larger and costlier Savings and Loans crisis.6 Savings and Loans were a specialized sector that lent for home mortgages using savings deposits. Their deposits were popular with investors because under Regulation Q they could offer slightly higher deposit rates than regulated banks.


pages: 413 words: 117,782

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

activist fund / activist shareholder / activist investor, algorithmic trading, Bear Stearns, Berlin Wall, bonus culture, BRICs, business process, buy and hold, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, eat what you kill, Emanuel Derman, financial innovation, fixed income, friendly fire, Goldman Sachs: Vampire Squid, high net worth, housing crisis, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Nature of the Firm, too big to fail, value at risk

Ellis (The Partnership—The Making of Goldman Sachs [New York: Penguin, 2008], 667) wrote that all could be lost—in fact, that all “would be lost if the firm squandered its reputation or failed to anticipate, understand, and manage the potential conflicts or failed to excel in its important agency business.” 19. A. R. Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves (New York: Viking, 2009). 20. Ibid. 21. The business standards committee investigation and report are discussed in detail in chapter 8 as one of the outcomes of Goldman’s experience during the credit crisis. 22. See, for example, Sorkin (Too Big to Fail) and W. D. Cohan, “Goldman’s Double Game,” Businessweek, March 14, 2012, http://www.businessweek.com/articles/2012-03-14/goldmans-double-game. 23.

A coinvestment relationship was seen to have many advantages, including establishment of a closer relationship than did a merely advisory one. The industry consolidation brought about in part by the changes to Glass–Steagall resulted in fewer but much larger banks—banks that many would later argue were “too big to fail,” so large that their failure was deemed a risk to the stability of the entire banking system. Another result was that the pace at which these companies now had to grow in order to stay competitive challenged their organizational cultures. Companies growing via acquisition have significant cultural and integration challenges.

Thornton co-founds Goldman’s European M & A business in London (O). 1984: Continental Illinois National Bank and Trust becomes the largest-ever bank failure in US history. Continental was at one time the seventh-largest bank in the United States as measured by deposits, with approximately $40 billion in assets. Because of the size of Continental Illinois, regulators are not willing to let it fail (R). The term “too big to fail” becomes popularized. 1985: Bear Stearns goes public (C). Whitehead leaves Goldman after thirty-eight years and later becomes deputy secretary of state to George Schultz, serving until 1989 (O). Steve Friedman, a former M&A banker, and Bob Rubin, a former equities proprietary trader, co-head Goldman’s fixed income division (O). 1986: Goldman’s capital has grown to $1 billion, almost entirely through retained earnings.


Firefighting by Ben S. Bernanke, Timothy F. Geithner, Henry M. Paulson, Jr.

Asian financial crisis, asset-backed security, bank run, Basel III, Bear Stearns, break the buck, Build a better mousetrap, business cycle, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Doomsday Book, financial deregulation, financial innovation, housing crisis, Hyman Minsky, income inequality, invisible hand, Kenneth Rogoff, labor-force participation, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, pets.com, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Savings and loan crisis, savings glut, short selling, sovereign wealth fund, special drawing rights, tail risk, The Great Moderation, too big to fail

In 2018, the Fed concluded they would still have more capital after a severe global recession with losses larger than those experienced in the 2007–2009 crisis than they had during the good times before the crisis. And a report back in 2014 by the Government Accountability Office, commissioned by congressional critics who expected it to prove the too-big-to-fail problem was worse than ever, found the biggest banks could no longer borrow at much lower rates than small banks, a sign markets are less convinced that they are too big to fail. We would have liked to see more restructuring of the antiquated financial regulatory system, a key element of Hank’s original blueprint for reform, with the Fed in charge of monitoring systemic risks and several redundant agencies consolidated to create more consistency and accountability.

And this crisis was particularly difficult to anticipate because it was the result of not just one or two evident factors, but of a host of complex interactions among many evolving trends: the explosion of financial leverage, the reliance on runnable short-term funding, the migration of risk to the shadow banking system, the rise of “too-big-to-fail” institutions, and the ubiquity of murky derivatives backed by shoddy mortgages. Each of these factors would play an independent role in what unfolded, but their rolling interactions created a particularly dangerous panic. Of course, we were not alone in our failures; the crisis caught just about everyone by surprise.

But the explosion was devastating anyway. The cost of insuring the bonds of Morgan Stanley and Goldman Sachs doubled on Monday, as markets lost confidence in the investment bank business model. The run also extended into the commercial banking sector. Citi’s credit default swaps spiked, reflecting growing market fears that even too-big-to-fail banks might fail, and spooked depositors withdrew twice as much from Washington Mutual as they had withdrawn after the run on IndyMac. Even the industrial giant General Electric struggled to roll over its commercial paper, a troubling sign that the financial virus had infected the broader economy.


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

accounting loophole / creative accounting, Albert Einstein, anti-globalists, asset-backed security, banking crisis, banks create money, basic income, bond market vigilante , Boris Johnson, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", James Dyson, job automation, Julian Assange, Kickstarter, labour market flexibility, laissez-faire capitalism, land value tax, long term incentive plan, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, Plutocrats, plutocrats, popular capitalism, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, WikiLeaks, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

Offloading the risk allows the lender to issue more credit and escape capital controls on the ratio of loans to cash reserves. Apologists call this managing or distributing risk, but all too often it has just encouraged more risky lending. More on this when we come to the financial crisis. Worst of all, when banks are deemed ‘too big to fail’, they have less reason to manage risk prudently, for they know that if they get into trouble they will be bailed out by taxpayers. The very fact that one group of people’s debts can be treated by another group as assets – as a reliable source of income – should give us pause. Finally, the risk defence tries to treat charging interest at rates related to risk purely as a matter of prudence.

As long as the value of financial assets was inflating, this was extraordinarily lucrative, particularly for those whose pay was tied to the profit made through bonuses or fixed shares of profits (‘the comp ratio’); no wonder they imagined they were masters of the universe. But, as leverage rose to over 1:30 in some banks, even a small percentage of failures in their ‘investments’ could land them in deep trouble. And it did, only they could rely on ‘socialism for bankers’ to rescue them: governments, recognising that the banks were too big to fail, or too interconnected to the rest of the economy, had guaranteed retail deposits.46 This of course means that taxpayers pick up the bill for protecting their own deposits and rescuing failing banks. So leverage was key to how the banks privatised the gains from using other people’s money to take risks and managed to socialise the losses, leaving ordinary taxpayers to pick up the bill.

In 2010, the notional value of derivatives held by commercial banks in the US was $212.8 trillion. ‘Of the 1,030 US commercial banks that submitted information on their derivatives exposure, the top five claimed 97% of this notional value.’51 In this situation, the risk ended up being held by taxpayers, because banks of this size were too big to fail and had to be bailed out. For all the hubris and macho talk about ‘risk management’ to be found on the websites of the financial sector and in the textbooks teaching its practices, prudence and long-term perspectives were dumped in favour of quick gains and offloaded risk. Deregulation allowed the buyers of the securities to use them as collateral for borrowing, so streams of interest payments on loans supposedly backed by collateral in the shape of houses were themselves used as collateral by holders of these asset-backed securities for borrowing.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, lateral thinking, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, Sam Peltzman, savings glut, tail risk, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

Bernanke and Hank Paulson, the Treasury secretary who would have had to sign off on a bailout, felt similarly. Certainly, the “too big to fail” label should never have been allowed to take root; it was an implicit taxpayer subsidy to big firms and their executives that put smaller firms at a disadvantage. But once the status had been accorded, its abrupt withdrawal triggered panic. The failure of Lehman shattered assumptions about the safety of all the major financial institutions. If Lehman wasn’t too big to fail, nobody was: not Goldman Sachs, Morgan Stanley, Citigroup, or any other institution. The second assumption that had been allowed to take root was that money market funds were basically the same as bank deposits.

Two years after the Deauville Declaration, the European Central Bank sought to undo its damage when its president, Mario Draghi, promised to do “whatever it takes” to save the euro. This meant that if a private saver wouldn’t buy Italy’s or Spain’s bonds, the ECB would. Much as the Federal Reserve responded to its Lehman moment by treating the big banks as too big to fail, the ECB responded to its own by declaring sovereign governments too big to fail. This proved remarkably successful: at the time of this writing, in early 2015, the ECB has yet to invoke this emergency authority to buy a single bond, and interest rates on southern governments’ bonds have fallen substantially, although not to northern levels.

When other banks could not be persuaded to take over the slowly capsizing bank, the FDIC did, becoming its largest shareholder—an unfamiliar role for an agency whose main job was to regulate and when necessary close banks, not run them. The rescue of Continental prompted a congressman to observe that a new class of banks now existed: “too big to fail.” The crises didn’t end with Volcker. In 1987, a few months after his successor, Alan Greenspan, took office, the stock market crashed. Greenspan slashed interest rates while his colleagues persuaded banks to keep lending to crippled Wall Street dealers. A total meltdown in the markets was narrowly averted; the economy never skipped a beat.


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"Robert Solow", 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, bitcoin, bond market vigilante , Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, salary depends on his not understanding it, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

In June 2013, Bank of England governor Sir Mervyn King stated: “It is not in our national interest to have banks that are too big to fail, too big to jail, or simply too big.”10 But the combination of government support (which protects depositors and creditors), limited liability (which protects shareholders), profit maximization, and incentive pay for financiers continued to encourage a culture among large banks of “rational carelessness.”11 Too-big-to-fail banks have been increasingly joined by too-big-to-fail fund managers, who are responsible for investing over US$87 trillion in retirement and other savings, around three-quarters of the size of the global banking system and 150 percent of global GDP.

In the US, the six largest banks now control nearly 70 percent of all the assets in the US financial system, having increased their share by around 40 percent. The largest US bank, JP Morgan, with over US$2.4 trillion in assets, is larger than most countries. Banks continue to be regarded as too big to fail by governments. Individual countries have sought to export their troubles, abandoning international cooperation for beggar-thy-neighbor strategies. Destructive retaliation, in the form of tit-for-tat interest rate cuts, currency wars, and restrictions on trade, limits the ability of any nation to gain a decisive advantage.

American imports were rising again, with the trade deficit approaching 3 percent of GDP and heading towards its pre-recession peak of 6 percent, despite the much lower prices of imported energy. Germany and China continued to run ever-larger trade surpluses and to export capital. The imbalances remained unbalanced. In the years since the GFC, too-big-to-fail banks have become larger, not smaller, increasing in both size and concentration. This is the result of forced consolidation (shotgun mergers), regulations that favor larger banks, and promotion of them internationally by governments as national champions. A flight by customers to the perceived safety of large banks, a reduction in alternative funding sources, and less competition from smaller institutions have also enhanced the position of these entities.


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bear Stearns, Bernie Madoff, Bretton Woods, business climate, business cycle, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, longitudinal study, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, school vouchers, short selling, sovereign wealth fund, tail risk, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

A recent example of the differences may be useful.11 In early 2009, as a result of the financial panic and the associated difficulty in securing financing, car demand plummeted around the world. In both North America and Europe, politicians approved billions of dollars of aid to car manufacturers because they felt the millions of jobs tied to the industry made it too big to fail. In the United States, General Motors and Chrysler secured government funding on condition that they take drastic action to restructure their firms, close unviable plants, and sell unprofitable brands. After an initial restructuring plan was rejected by government overseers as too timid, the firms did indeed take drastic action, emerging from bankruptcy significantly shrunken.

Even as conspiracy theorists have a field day, painting everyone remotely associated with the financial system into a web of corruption, the damage to the public’s faith in the system of private enterprise is enormous: it senses two sets of rules, one for the systemically important and another for the rest of us. And the conspiracy theorists do have a point: the leeway afforded to the authorities in choosing who is too systemic to fail allows tremendous scope for discretion, and hence corruption. I have avoided referring to institutions as too big to fail. This is because there are entities that are very large but have transparent, simple structures that allow them to be closed down easily—for example, a firm running a family of regulated mutual funds. By contrast, some relatively small entities—examples include the monoline bond insurers who guaranteed municipal bonds, and Bear Stearns—caused substantial stress to build up through the system.

To the extent that these small banks are important in making loans in the local community—to the local bakery or toy shop—they have some economic and social value. One possibility is to retain deposit insurance for small and medium-sized banks in return for their paying a fair insurance premium, but to reduce it progressively for larger banks until it is eliminated. Clearly, if banks are seen as too big to fail, eliminating deposit insurance is moot, as the bank will be bailed out anyway. The United Kingdom deposit insurance system, which was partial, did not prevent Northern Rock from getting into trouble or the government from coming to the rescue. The point of eliminating deposit insurance, however, is to make depositors think before they make a bank too big.


pages: 459 words: 103,153

Adapt: Why Success Always Starts With Failure by Tim Harford

Andrew Wiles, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Black Swan, car-free, carbon footprint, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, disruptive innovation, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, Firefox, food miles, Gerolamo Cardano, global supply chain, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spectrum auction, Steve Jobs, supply-chain management, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen: Great Stagnation, web application, X Prize, zero-sum game

After those fateful few days in 2008 when the US government let Lehman Brothers fail and then propped up AIG, many people drew one of two contradictory conclusions: either AIG should have been treated like Lehman, or Lehman should have been treated like AIG. But the real lesson is that it should have been possible to let both Lehman and AIG collapse without systemic damage. Preventing banks from being ‘too big to fail’ is the right kind of sentiment but the wrong way of phrasing it, as the domino analogy shows: it would be absurd to describe a single domino as being too big to fail. What we need are safety gates in the system that ensure any falling domino cannot topple too many others. Above all, when we look at how future financial crises could be prevented, we need to bear in mind the two ingredients of a system that make inevitable failures more likely to be cataclysmic: complexity and tight coupling.

Kemeny, ‘President’s Commission: the need for change: the legacy of TMI’, October 1979, Overview, http://www.threemileisland.org/resource/item_detail.php?item_id=00000138 192 ‘When you look at the way the accident happened’: author interview with Philippe Jamet, 24 March 2010. 194 Turned back to concentrate on the Lehman Brothers problem: Andrew Ross Sorkin,Too Big to Fail (London: Allen Lane, 2009), pp. 235–7. 194 ‘Hold on, hold on’: Sorkin, Too Big to Fail, p. 372. 195 ‘We’re a million miles away from that at the moment’: Squam Lake Working Group on Financial Regulation, ‘A new information infrastructure for financial markets’, February 2009, http://www.cfr.org/publication/18568/new_information_infrastructure_for_financial_markets.html; and Andrew Haldane, ‘Rethinking the financial network’, speech given on 28 April 2009 to the Financial Student Association in Amsterdam, http://www.bankofengland.co.uk/publications/speeches/2009/speech386.pdf, and author interview with Andrew Haldane, August 2010. 196 And that man was Tony Lomas: for the account of Lehman’s bankruptcy in Europe, I have relied on the superb account by Jennifer Hughes, ‘Winding up Lehman Brothers’, FT Magazine,8 November 2008, http://www.ft.com/cms/s/2/e4223c20-aad1-11dd-897c-000077b07658.html 198 It had one million derivatives contracts open: Andrew Haldane, ‘The $100 billion question’, speech given at Institute of Regulation & Risk, Hong Kong, 30 March 2010, http://www.bankofengland.co.uk/publications/speeches/2010/speech433.pdf 199 The courts refused: Jane Croft, ‘Definition on Lehman client money sought’, Financial Times, 10 November 2009; and Anousha Sakoui & Jennifer Hughes, ‘Lehman creditors face long delays’, Financial Times, 14 September 2009. 199 It is quite possible that Lehman’s financial indicators: Henny Sender & Jeremy Lemer, ‘“epo 105” accounting in focus’, Financial Times, 12 March 2010, http://www.ft.com/cms/s/0/1be0aca2-2d79-11df-a262-00144feabdc0.html 199 About three years after the bankruptcy process began: Sakoui & Hughes, ‘Lehman creditors’. 200 Dominoes, unlike banks, are supposed to fall over: Andrew Haldane, ‘The $100 billion question’. 201 The job the poor bird had started: BBC News, ‘Sparrow death mars record attempt’, 19 November 2005, http://news.bbc.co.uk/1/hi/world/europe/4450958.stm; and embedded video at http://news.bbc.co.uk/player/nol/newsid_4450000/newsid_4452600/4452646.stm?

Transocean defended its safety record. 7 The adaptive organisation 221 ‘One doesn’t have to be a Marxist’: Gary Hamel with Bill Breen, The Future of Management (Harvard Business Press, 2007), p. 130. 221 ‘Your first try will be wrong’: Cory Doctorow, ‘How to prototype and iterate for fun and profit’, 9 November 2010, http://www.bomg-boing.net/2010/11/09/howto-prototype-and.html 222 Endler decided to test his hypothesis: Richard Dawkins, The Greatest Show on Earth (London: Bantam Press, 2009), pp. 135–9, and http://highered.mcgraw-hill.com/sites/dl/free/0072437316/120060/evolution_in_action20.pdf 225 Sales were $8 billion in 2009: Whole Foods Presentation at Jeffries 2010 Global Consumer Conference, 22 June 2010, http://www.wholefoodsmarket.com/pdfs/jefferieswebcast.pdf 226 The description of many of the management practices: Hamel with Breen, Future of Management, chapter 4. 226 Timpson has several hundred: Timpson website accessed July 2010, http://www.timpson.co.uk/ 227 And he drops in frequently: details about Timpson’s management methods, and interview with John Timpson, from In Business: Hell for Leather, broadcast Thursday, 7 August 2009, 8.30 pm, BBC Radio 4, http://www.bbc.co.uk/programmes/b00lvlv3 228 Nor do we want to allow a situation: John Kay, ‘Too big to fail? Wall Street, we have a problem’, Financial Times, 22 July 2009, http://www.johnkay.com/2009/07/22/too-big-to-fail-wall-street-we-have-a-problem/ 229 ‘It made us pay more attention’: Glynn Davis, ‘Interview with James Timpson’, HR Magazine, 4 January 2010, http://www.hrmagazine.co.uk/news/9749k/"iew-Top-Interview-James-Timpson-managing-director-Timpsons/ 230 Views his role at Google as: Hamel with Breen, Future of Management, p. 119. 230 Schmidt took the second desk without protest: Ken Auletta, Googled (London: Virgin Books, 2010), p. 71. 230 ‘If you tell anybody what to do here’: Hamel with Breen, Future of Management, pp. 88–92. 231 The instant correction of a problem: author visit to Hinkley Point, Somerset, 22 July 2010. 231 A machine he’d built himself: Auletta, Googled, p. 95. 232 The book went from paper to pixels in forty minutes: Hamel with Breen, Future of Management, p. 115. 232 Every engineer at Google had the same deal: Auletta, Googled, p. 18; and Google website, ‘What’s it like to work in Engineering, Operations, & IT?’


pages: 380 words: 109,724

Don't Be Evil: How Big Tech Betrayed Its Founding Principles--And All of US by Rana Foroohar

"side hustle", accounting loophole / creative accounting, Airbnb, algorithmic bias, AltaVista, autonomous vehicles, banking crisis, barriers to entry, Bernie Madoff, Bernie Sanders, bitcoin, book scanning, Brewster Kahle, Burning Man, call centre, cashless society, cleantech, cloud computing, cognitive dissonance, Colonization of Mars, computer age, corporate governance, creative destruction, Credit Default Swap, cryptocurrency, data is the new oil, death of newspapers, Deng Xiaoping, disinformation, disintermediation, don't be evil, Donald Trump, drone strike, Edward Snowden, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Etonian, Filter Bubble, future of work, game design, gig economy, global supply chain, Gordon Gekko, greed is good, income inequality, independent contractor, informal economy, information asymmetry, intangible asset, Internet Archive, Internet of things, invisible hand, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, Kenneth Rogoff, life extension, light touch regulation, Lyft, Mark Zuckerberg, Marshall McLuhan, Martin Wolf, Menlo Park, move fast and break things, move fast and break things, Network effects, new economy, offshore financial centre, PageRank, patent troll, paypal mafia, Peter Thiel, pets.com, price discrimination, profit maximization, race to the bottom, recommendation engine, ride hailing / ride sharing, Robert Bork, Sand Hill Road, search engine result page, self-driving car, shareholder value, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, smart cities, Snapchat, South China Sea, sovereign wealth fund, Steve Bannon, Steve Jobs, Steven Levy, subscription business, supply-chain management, surveillance capitalism, TaskRabbit, Telecommunications Act of 1996, The Chicago School, the new new thing, Tim Cook: Apple, too big to fail, Travis Kalanick, trickle-down economics, Uber and Lyft, Uber for X, uber lyft, Upton Sinclair, WeWork, WikiLeaks, zero-sum game

Yet unlike many other countries, including a number of thriving free markets such as Finland and Israel, the U.S. taxpayer does not reap a penny of the profits these innovations yield.13 Instead, these companies were offshoring both profits and labor at the very time that tech titans were asking the government to spend more money on things like educational reform to ensure that the twenty-first-century workforce would be digitally savvy. The consequences are not just economic; by fueling populist discontent with capitalism and liberal democracy, they have high-stakes political ramifications, too. For someone who’d been tracking the financial industry closely since 2007, the parallels were fascinating. There was a new too-big-to-fail, too-complex-to-manage industry out there, one that had grown like ragweed right under our noses. It had more wealth and a bigger market capitalization than any other industry in history, yet it created fewer and fewer jobs than the behemoths of the past. It was reshaping our economy and labor force in profound ways, turning people into products via the collection and monetization of their personal data, and yet went virtually unregulated.

I always found it interesting, for example, that the Lean In approach to gender equality seemed to put all the onus on the woman, versus focusing on the public responsibility to provide things like, say, humane working hours or decent childcare. It’s a view that’s common within the corporatist wing of the Democratic Party that many in the tech community gravitate toward, just like many of their “liberal” brethren on Wall Street do. (On that note, it’s worth remembering that Sandberg was a protégé of corporatist Democrat and “too-big-to-fail” deregulator Larry Summers, for whom she was chief of staff in the Treasury Department.) While the Silicon Valley crew likes to think of themselves as do-gooders, they often don’t make much room for the common good. It’s always seemed ironic to me that even as many tech titans complain about the need for public sector education reform to create a twenty-first-century workforce, they also push for tax cuts and corporate subsidies that starve government of its ability to pay for such reform.

CHAPTER 10 Too Fast to Fail The late, great management guru Peter Drucker once said, “In every major economic downturn in U.S. history the ‘villains’ have been the ‘heroes’ during the preceding boom.”1 I can’t help but wonder if that might be the case over the next few years, as the United States (and possibly the world) heads toward its next big slowdown. Downturns historically come about once every decade, and it’s been more than that since the 2008 financial crisis. Back then, banks were the “too-big-to-fail” institutions responsible for our falling stock portfolios, home prices, and salaries. Technology companies, by contrast, have led the market upswing over the past decade. But this time around, it’s the Big Tech firms that could play the spoiler role. You wouldn’t think it could be so when you look at the biggest and richest tech firms today.


pages: 409 words: 125,611

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"Robert Solow", accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, Plutocrats, plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Ronald Reagan, Savings and loan crisis, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

Moreover, when an ordinary business fails, there are consequences for its owners and their families, but not typically for the entire economy. As our political leaders and the banks themselves said, we cannot allow any of the big banks to fail. But if that is the case, then they must be regulated. For if they are too big to fail, and they know it, excessive risk-taking is a one-sided bet: if they win, they keep the profits; if they lose, taxpayers pick up the tab. Dodd-Frank, the financial sector reform bill, did nothing to address the too-big-to-fail problem. Indeed, the way we addressed the crisis made it worse: we encouraged, in some cases forced, banks to merge, so that today concentration of market power is even greater than it was before the crisis.

The repeal of the Glass-Steagall Act played an especial role, not just because of the conflicts of interest that it opened up (made so evident in the Enron and WorldCom scandals), but also because it transmitted the risk-taking culture of investment banking to commercial banks, which should have acted in a far more prudential manner. It was not just financial regulation and regulators that were at fault. There should have been tougher enforcement of antitrust laws. Banks were allowed to grow to be too big to fail—or too big to be managed. And such banks have perverse incentives. When it’s heads I win, tails you lose, too-big-to-fail banks have incentives to engage in excessive risk taking. Corporate governance laws, too, are partly to blame. Regulators and investors should have been aware of the risks that the peculiar incentive structures engendered. These did not even serve shareholder interests well.

There were economists who provided the politicians, the bankers, and the regulators with a convenient ideology: According to this ideology, the policies and practices that they were pursuing would supposedly benefit all. There are those who now would like to reconstruct the system as it was prior to 2008. They will push for regulatory reform, but it will be more cosmetic than real. Banks that are too big to fail will be allowed to continue little changed. There will be “oversight,” whatever that means. But the banks will continue to be able to gamble, and they will continue to be too big to fail. Accounting standards will be relaxed, to give them greater leeway. Little will be done about incentive structures or even risky practices. If so, then, another crisis is sure to follow. Notes 1. Greenspan supported the 2001 tax cut even though he should have known that it would lead to the deficits which previously he has treated as such an anathema.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, salary depends on his not understanding it, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

Interdependencies between financial institutions have increased to a point at which the system as a whole displays fragility born of complexity. The phrase ‘too big to fail’ came into wide use in the global financial crisis to describe the dilemma that policymakers faced in resolving the affairs of systemically important financial institutions.4 The phrase provoked the justified rejoinder that ‘too big to fail is too big’. But ‘too big to fail’ misses the key point. Financialisation has led to increases in the size of financial institutions, but the central problem is not size but complexity. Size in banking can enhance stability, at least up to a point.

The geographer John Adams has coined the metaphor of the ‘risk thermostat’: we have a certain tolerance for risk and adjust our behaviour accordingly.31 Fewer children are killed in road accidents today than eighty years ago: although traffic has increased very substantially, precautions taken by children and their parents have fully offset this. The issue of moral hazard takes on particular importance in the financial sector in the context of ‘too big to fail’ banks. Critics of bail-outs complain that public indemnity of the liabilities of risktaking financial institutions encourages these institutions to take more risk. This is a complex issue. It is unlikely that the chief executives of failed banks thought, ‘I needn’t worry about running my institution into the ground because the government will see the creditors right.’

In the sub-prime mortgage fiasco such moral hazard arose at every level. Fannie Mae and Freddie Mac, the failed US mortgage agencies, could not conceivably have built their enormous, and severely under-capitalised, balance sheets had their lenders not believed (correctly, as it turned out) that their liabilities were guaranteed by the US government. ‘Too big to fail’ takes responsibility for the supervision of credit risks away from market participants and places it more or less exclusively in the hands of regulators: a duty that in this instance (and many others) they were not capable of discharging. The term ‘moral hazard’ is perhaps unfortunate, because moral hazard is about incentives, not about ethics: about deterrence rather than punishment.


pages: 221 words: 55,901

The Globalization of Inequality by François Bourguignon

Berlin Wall, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Credit Default Swap, deglobalization, deindustrialization, Doha Development Round, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, financial intermediation, gender pay gap, Gini coefficient, income inequality, income per capita, labor-force participation, liberal capitalism, minimum wage unemployment, offshore financial centre, open economy, Pareto efficiency, purchasing power parity, race to the bottom, Robert Gordon, Simon Kuznets, structural adjustment programs, The Spirit Level, too big to fail, very high income, Washington Consensus

In particular, returning to a strict separation between managing savings and offering loans to individuals or companies, and investing in financial markets,15 would allow us to cease being held hostage to these giant banks whose risky investments threaten individual savings as well as the financing of the economy. It is in part this idea that some banks are “too big to fail” that has allowed them to extract the rents that make possible the astronomical remuneration they offer a portion of their employees. More generI.e., re-­establishing some form of the Glass-­Steagall Act in the United States, which was abolished in 1999. 15 Policies for a Fairer Globalization 175 ally, any regulation that would lower the probability of systemic risk and by extension decrease the pressure that the large financial institutions are able to exert on elected officials would have the same effect.

Index 9/11 attacks, 139 Abacha, 151 Abu Dhabi, 127 Africa: Economic Partnership Agreements (EPAs) and, 156; evolution of inequality and, 46t, 54–55; fairer globalization and, 147, 151, 154–56, 179, 183; global inequality and, 16, 21, 23, 30–31, 34, 36; globalization and, 122–23, 126–27; population growth and, 183; rise in inequality and, 90, 109, 111–12, 185 African Growth Opportunity Act (AGOA), 155 agriculture, 12, 82, 84, 122–23, 127–28, 155 AIDS, 156 Alesina, Alberto, 134 Anand, Sudhir, 13n4 Argentina, 46t, 110, 172 artists, 86–87 Asian dragons, 34, 82 Bangladesh, 30, 46t, 54 Belgium, 46t, 53, 101–2, 169 Berlin Wall, 91 Big Bang, 95 Bolivia, 16, 24 Bolsa Familia, 166 bonuses, 87, 174 Bottom Billion, The (Collier), 23 Brazil, 110, 186; evolution of inequality and, 46t, 55, 59, 70; fairer globalization and, 150, 154, 166–68, 173; Gini coeffi- cient of, 22; global inequality and, 21–23; globalization and, 127, 133 Buffett, Warren, 5–6, 159–60 Cameroon, 46t, 54 Canada, 46t, 51f capital: developed/developing countries and, 5; evolution of inequality and, 55–58, 60, 73; fairer globalization and, 158–62, 167, 171, 175, 182; GDP measurement and, 13–15, 20–21, 23, 26, 27f, 29–30, 39, 41–45, 56–57, 94, 123, 127, 165–66, 176; globalization and, 117, 125–26, 132, 137; human, 74, 167, 175; labor and, 3–4, 55– 58, 60, 158, 161n7, 185; liberalization and, 96; mobility of, 3, 73–74, 93, 98–99, 115, 160, 162, 182, 185; rise in inequality and, 74, 76–80, 84–85, 89, 93, 95–99, 103, 109, 114–15; taxes and, 187, 189 (see also taxes) Card, David, 105–6 Caruso, Enrico, 86 Checchi, Daniele, 107 China: evolution of inequality and, 47, 53, 57–60; fairer globalization and, 150, 154, 165–66, 172, 178; geographical disequilibria and, 83; global inequality and, 16; globalization and, 120– 22, 128; Huajian and, 155; Human Development Report and, 25; international trade and, 75; Kuznets hypothesis and, 192 China (cont.) 113; protectionism and, 178; Revolution of, 26; rise in inequality and, 2, 11n2, 17, 25, 30, 36, 38, 46t, 75, 82–83, 112–13; standard of living and, 16, 120– 22; taxes and, 165 Cold War, 149, 153 Collier, Paul, 23 Colombia, 133 commodity prices, 147, 182 competition: Asian dragons and, 34, 82; deindustrialization and, 75–82; effect of new players and, 75–76; emerging economies and, 178, 187–88; fairer globalization and, 155, 169, 173, 176–79, 182; globalization and, 117–18, 130; markets and, 76– 77, 79–82, 84, 86, 94–98, 102, 104, 115–18, 130, 155, 169, 173, 176–79, 182, 186–88; offshoring and, 81–82; rents and, 102; rise in inequality and, 76– 77, 79–82, 84, 86, 94–96, 98, 102, 104, 115–16; Southern perspective on, 82–85; United Kingdom and, 78–79; United States and, 78–79; wage ladder effects and, 78–79 conditional cash transfers, 165–66 consumers: fairer globalization and, 177–78; spending of, 10, 12–13, 61; subsidies and, 109–10 consumption: evolution of inequality and, 42t, 44t; expenditure per capita and, 13, 15, 42t, 44t; fairer globalization and, 159, 177; globalization and, 137–39; growth and, 13–15, 42t, 44t, 80, 137–39, 159, 177; protection- Index ism and, 7, 147, 154, 157, 176– 79; rise in inequality and, 80 convergence: evolution of inequality and, 65, 69; fairer globalization and, 146–47, 157; globalization and, 120–22, 125; growth and, 16; income and, 16; poverty reduction and, 147–48; standard of living and, 7, 147–48 credit: default swaps and, 139; evolution of inequality and, 61; fairer globalization and, 164–65, 172, 180; globalization and, 131–32, 137–40; rise in inequality and, 96; taxes and, 164 credit cards, 165 criminal activity, 133–34, 152 crises: evolution of inequality and, 48, 50, 54, 57, 73–74; fairer globalization and, 163, 176; Glass-­ Steagall Act and, 174n15; global inequality and, 20, 38–41; globalization and, 119–22, 125, 135–39, 142; recent, 48, 110, 135, 142, 163, 188; rise in inequality and, 92, 94, 96, 99, 109–11; “too big to fail” concept and, 174–75 Current Population Survey, 21 debit cards, 165 deindustrialization, 1, 102, 188; effects on developed countries, 75–82; exports and, 76, 82; globalization and, 120; international trade and, 75–76, 78–79; manufacturing and, 75–82, 84, 123; North vs. South and, 77; offshoring and, 81–82; single market and, 76; wage ladder effects and, 78–79 Index193 Dell, Michael, 70–71 Democratic Republic of Congo, 127 democratic societies, 135–36 Denmark, 46t, 51f, 108 deregulation: disinflation and, 95, 102, 110; efficiency and, 94, 96, 105, 108; fairer globalization and, 173; globalization of finance and, 95–99; institutions and, 91–112; Kuznets hypothesis and, 113; labor market and, 99–109; liberalization and, 96– 99, 108–10, 112; privatization and, 94–112; Reagan and, 91; rise in inequality and, 76, 83, 91, 94–116; Thatcher and, 91; United Kingdom and, 91, 94, 97n14; United States and, 91, 94–95, 97–98, 102–8 developed countries: deindustrialization and, 75–82; evolution of inequality and, 47, 52–53, 56, 59–64, 66; fairer globalization and, 150, 154–57, 160, 162, 164, 168–72, 176, 178–79, 181; global inequality and, 10–11, 21, 34–39; globalization effects on, 75–82, 117, 119, 121, 127n4, 128, 133, 143; rise in inequality and, 7, 75–86, 92–93, 96, 99–100, 102, 105, 107–9, 113, 115, 186, 188–89 developing countries: aid to, 148– 53, 157; effect of new players, 75–76; evolution of inequality and, 47, 53–55, 57, 63, 68; fairer globalization and, 154, 166; global inequality and, 10–11, 13, 21, 32, 34–39; globalization and, 121, 127n4, 128, 132, 143; Millennium Development Goals and, 149–50, 185; rise in inequality and, 76, 79, 82–85, 90, 186; Southern perspective on, 82–85.

See also emerging economies development aid, 148–53, 157 development gap, 34–35, 83 Di Bao program, 166 discrimination: ghettos and, 66– 67; immigrants and, 64, 66, 127; labor and, 64–66, 69, 132, 142, 180–81; non-­material inequalites and, 64–66, 69; racial, 65; women and, 64–65, 103 disinflation, 95, 102, 110 distribution, 10n1, 186; capital-­ labor split and, 55–58, 60; efficiency and, 142–45; evolution of inequality and, 41, 42t, 44t, 45, 46t, 48–59, 64, 71–72; fairer globalization and, 148, 153, 156–73, 175, 178; geographical disequilibria and, 83; Gini coefficient and, 18 (see also Gini coefficient); global, 18–19, 25, 29, 39, 41, 46t, 121, 124–38, 141– 45, 156; growth and, 49–50, 188; international, 17–18, 30, 148; median of, 31; OECD countries and, 10–11, 12n3; policy and, 26, 72, 135, 188; range of, 16; real earnings loss and, 78; redistribution and, 4, 7, 37 (see also redistribution); rise in inequality and, 74, 77–79, 82, 85, 90–92, 94–96, 99, 103–4, 106–7, 112, 114–15; Southern perspective on, 82–85; standard of living and, 16, 18 (see also standard of living); taxes and, 37, 92–94 (see also taxes); Theil coefficient and, 18–19, 37–38, 194 distribution (cont.) 52; transfers and, 4, 14, 48, 105, 110, 130, 135–36, 142, 148, 153, 158–67, 170, 175, 181, 183, 187; wage, 3, 78–79, 107 Divided We Stand report, 52 Doha negotiations, 154 drugs, 66, 133 Dubai, 127 Economic Partnership Agreements (EPAs), 156 education, 34, 187; college, 132; evolution of inequality and, 61, 65–68; fairer globalization and, 149, 152, 167–73, 180–81; globalization and, 132, 140, 143; labor and, 168, 180; Millennium Development Goals and, 149– 50; national inequality and, 167–73; poverty and, 24; preschool, 169–70; redistribution and, 149, 152, 167–73; rise in inequality and, 111; taxes and, 167–73; tuition and, 170 efficiency: data transfer technology and, 78; deregulation and, 94, 96, 105, 108; economic, 1, 4, 6, 111, 116, 119, 129–33, 135, 140–45, 158, 164, 167, 171, 181; emerging economies and, 78; equality and, 116, 129–31; fairness and, 8, 129– 31; globalization and, 1, 4, 6, 8, 36, 78, 94, 96, 105, 108, 111, 116, 118–19, 129–35, 140–45, 157–58, 164, 167, 170–71, 175, 180–81, 188; human capital and, 175; import substitution and, 34, 180; inefficiency and, 105, 129–30, 132–33, 135, 140, 170–71, 180, 188; labor Index and, 175; loss of, 142, 164; opportunity and, 142–45; Pareto, 130n5; privatization and, 94, 96, 105, 108; redistribution and, 142–45; rents and, 180; social tensions and, 188; spontaneous redistribution and, 133; taxes and, 170; technology and, 78; weak institutions and, 36; wealth of nations and, 1 elitism, 182; fairer globalization and, 151, 165; globalization and, 127n4, 136, 138; rise in inequality and, 4, 6–7 emerging economies: Africa and, 122–23 (see also Africa); competition and, 178, 187–88; conditional cash transfers and, 165– 66; credit cards and, 165; domestic markets and, 120, 125; efficient data transfer and, 78; evolution of inequality and, 57; fairer globalization and, 147, 154, 158, 165–66, 177–78, 182; global inequality and, 40, 77– 80, 82, 109, 113, 115, 188–89; globalization and, 117, 119–22, 125–27; institutions and, 109– 12; Kuznets curve and, 113; labor and, 77; natural resources and, 127; profits and, 117; rise in inequality and, 109–12; structural adjustment and, 109– 12; taxes and, 165; trends in, 57; Washington consensus and, 109–10, 153 entrepreneurs, 83, 92, 96, 131–32, 135, 143, 170–71, 188 equality: efficiency and, 116, 129– 31; policy for, 184–89; relative gap and, 18, 28, 30, 31–32, 36 Ethiopia, 21–22, 46t, 155 Index195 European Union (EU), 24, 156, 174, 177 Everything But Arms (EBA) initiative, 155 evolution of inequality: Africa and, 46t, 54–55; Brazil and, 46t, 55, 59, 70; capital and, 55–58, 60, 73; China and, 47, 53, 57–60; consumption and, 42t, 44t; convergence and, 65, 69; credit and, 61; crises and, 48, 50, 54, 57, 73–74; developed countries and, 47, 52–53, 56, 59–64, 66; developing countries and, 47, 53–55, 57, 63, 68; distribution and, 41, 42t, 44t, 45, 46t, 48–59, 64, 71– 72; education and, 61, 65–68; elitism and, 4, 6–7, 46t; emerging economies and, 57; exceptions and, 52–53; France and, 46t, 51f, 52–53, 55, 58, 59n8, 62–63, 66, 70–71; ghettos and, 66–67; Gini coefficient and, 39, 42t, 44t, 48, 50, 51f, 53, 58–59; Great Depression and, 48; growth and, 33, 49–50, 54; India and, 54, 57, 59–60; institutions and, 55, 69; investment and, 56; labor and, 55–58, 60; markets and, 48–50, 53–54, 64, 69; national income inequality and, 48–52; non-­monetary inequalities and, 49, 60–70; normalization and, 41, 43–44; opportunity and, 61–62, 68, 70–71; perceptions of inequality and, 69–73; policy and, 55, 72; primary income and, 48–50, 58; production and, 57; productivity and, 63; profit and, 56; reform and, 54, 72; rise in inequality in, 48–52, 73, 77–80, 91–95, 97–98, 102–8; risk and, 63, 66; standard of living and, 41, 43– 45, 46t, 53–55, 58, 60–62, 67, 69, 73; surveys and, 42t, 43–45, 56, 68n17, 69–71; taxes and, 12–14, 37, 48, 50, 56n5; Theil coefficient and, 42; United Kingdom and, 46t, 50, 51f, 59, 67, 68n17; United States and, 2, 4–6, 9, 11, 21, 33, 46t, 47–50, 51f, 58, 59n9, 66–70, 73; wealth and, 58–60 executives, 73, 88–89, 97, 174 expenditure per capita, 13, 15, 42t, 44t exports: deindustrialization and, 76, 82; fairer globalization and, 147, 154–55, 176, 178; globalization and, 124, 128; rise in inequality and, 76, 82–84 fairer globalization: Africa and, 147, 151, 154–56, 179, 183; African Growth Opportunity Act (AGOA) and, 155; Bolsa Familia and, 166; Brazil and, 150, 154, 166–68, 173; capital and, 158–62, 167, 171, 175, 182; China and, 150, 154, 165–66, 172, 178; competition and, 155, 169, 173, 176–79, 182; consumers and, 177–78; consumption and, 159, 177; convergence and, 146–47, 157; correcting national inequalities and, 158–80; credit and, 164–65, 172, 180; crises and, 163, 176; deregulation and, 173; developed countries and, 150, 154–57, 160, 162, 164, 168–72, 176, 178–79, 181; developing countries and, 154, 166; development aid and, 196 fairer globalization (cont.) 148–53, 157; Di Bao program and, 166; distribution and, 148, 153, 156–73, 175, 178; Economic Partnership Agreements (EPAs) and, 156; education and, 149, 152, 167–73; 180–81; elitism and, 151, 165; emerging economies and, 147, 154, 158, 165–66, 177–78, 182; Everything But Arms (EBA) initiative and, 155; exports and, 147, 154–55, 176, 178; France and, 147, 159–61, 164, 169, 175, 177; Gini coefficient and, 156, 166; goods and services sector and, 180; growth and, 147–52, 155, 162, 167–68, 171, 177, 180, 183; health issues and, 152, 166; imports and, 154, 177–78, 180; India and, 150, 154, 165– 66, 172; inheritance and, 170– 73; institutions and, 151, 168, 174–75; international trade and, 176–77; investment and, 150, 155, 157, 160, 170, 174, 179; liberalization and, 156, 179; markets and, 147–48, 154–58, 168, 173–75, 178–81; Millennium Development Goals and, 149–50; national inequality and, 147, 158; opportunity and, 155, 167, 170, 172; policy and, 147–53, 157, 167–73, 175, 177, 179–83; poverty and, 147–52, 164, 166, 175; prices and, 147– 48, 176, 178, 182; primary income and, 158, 163n10, 167, 173; production and, 155–57, 167, 176, 178–79; productivity and, 155, 177–78; profit and, 173, 176; Progresa program and, Index 166; protectionism and, 7, 147, 154, 157, 176–79; redistribution and, 148, 153, 156–73, 175, 178; reform and, 151, 161, 163, 168–69; regulation and, 152, 173–76, 181–82; risk and, 148, 154, 156, 159, 164, 171, 174–75, 178; standard of living and, 146–48, 154, 156–58, 160, 165, 168–69; surveys and, 169; taxes and, 148, 158–73, 175, 181–83; technology and, 156, 173; TRIPS and, 156; United Kingdom and, 163, 169; United States and, 155, 159–61, 163– 64, 169, 174–75, 182; wealth and, 162, 164, 167, 170–73 Fitoussi, Jean-­Paul, 14 France: evolution of inequality and, 46t, 51f, 52–53, 55, 58, 59n8, 62–63, 66, 70–71; fairer globalization and, 147, 159–61, 164, 169, 175, 177; Gini coefficient of, 20; global inequality and, 2, 9, 11, 20–21; offshoring and, 81; rise in inequality and, 80, 88, 92–93, 95, 97, 99, 103; soccer and, 87; wage deductions and, 159 G7 countries, 56 G20 countries, 182 Garcia-­Panalosa, Cecilia, 107 Gates, Bill, 5–6, 70, 150 Germany, 2, 21, 46t, 50, 51f, 80, 88, 92 Ghana, 46t, 54 ghettos, 66–67 Giertz, Seth, 160–61 Gini coefficient: Brazil and, 22; Current Population Survey and, 21; evolution of inequality and, Index197 39, 42t, 44t, 48, 50, 51f, 53, 58– 59; fairer globalization and, 156, 166; France and, 20; historical perspective on, 27–28; meaning of, 18–19; purchasing power parity and, 28; rise in inequality and, 110; United States and, 21; wealth inequality and, 58–60 Glass-­Steagall Act, 174n15 global distribution, 18–19, 25, 29, 39, 41, 46t, 121, 156 global inequality: Africa and, 16, 21, 23, 30–31, 34, 36; between countries, 2–3, 5, 7, 9, 16–19, 23, 33, 36, 38–39, 42–45, 47, 53, 58, 68, 90–91, 107, 117–19, 123, 128, 153; Brazil and, 21– 23; crises and, 20, 38–41; cross-­ country heterogeneity and, 13; definition of, 3–4, 9–10, 25–26, 30–32, 39; developed countries and, 10–11, 21, 34–39; developing countries and, 10–11, 13, 21, 32, 34–39; effects of, 38–40; emerging economies and, 40, 77–80, 82, 109, 113, 115, 188– 89; at the end of the 2000s, 20– 25; evolution of inequality and, 41 (see also evolution of inequality); expenditure per capita and, 13, 15, 42t, 44t; France and, 2, 9, 11, 20–21; globalization and, 117–18, 121–23, 128; great gap and, 33–36; historic turning point for, 25–32; Human Development Report and, 25; institutions and, 36; measuring, 10– 20; Millennium Development Goals and, 149–50, 185; normalization and, 13, 15, 22–23, 26, 29; OECD Database on Household Income Distribution and Poverty and, 11–12; policy and, 185–89; Povcal database and, 10, 12, 42t, 43, 44t; prices and, 27–28, 74, 80, 84, 91–92, 94, 97, 110; profit and, 13; reduction of, 2, 185–86; relative gap and, 18, 28, 30–32, 36; rise of, 2–4, 7; risk and, 20; standard of living and, 10–26, 29, 31–33, 36, 39; surveys on, 10, 12–15, 20n10, 21–22, 29, 42t, 43–45; technology and, 3–4, 34–35; trend reversal in, 37–38; within countries, 2, 5–7, 9, 16, 30, 33, 35–45, 47, 113–14, 118, 124– 29, 184–85, 189 globalization: Africa and, 122–23, 126–27; Asian dragons and, 34, 82; Brazil and, 127, 133; capital and, 117, 125–26, 132, 137; China and, 120–22, 128; competition and, 117–18, 130, 186 (see also competition); as complex historical phenomenon, 1–2; consumption and, 137–39; convergence and, 120–22, 125; credit and, 131–32, 137–40; crises and, 119–22, 125, 135–39, 142; debate over, 1; deindustrialization in developed countries and, 75–82; democratic societies and, 135–36; deregulation and, 95–99; developed countries and, 117, 119, 121, 127n4, 128, 133, 143; developing countries and, 121, 127n4, 128, 132, 143; education and, 132, 140, 143; efficiency and, 1, 4, 6, 8, 36, 78, 94, 96, 105, 108, 111, 116, 118–19, 129–35, 140–45, 157–58, 164, 167, 170–71, 175, 180–81, 188; elitism and, 127n4, 136, 138; 198 globalization (cont.) emerging economies and, 117, 119–22, 125–27; exports and, 124, 128; fairer, 146–83 (see also fairer globalization); future of inequality between countries and, 119–22; global inequality and, 117–18, 121–23, 128; goods and services sector and, 127, 130; growth and, 118–29, 134–39; health issues and, 140– 41, 144; Heckscher-­Ohlin model and, 76; imports and, 119, 124; inequality within countries and, 124–29; inheritance and, 144–45; institutions and, 124; as instrument for modernization, 1; international trade and, 3, 75–76, 78–79, 83, 112, 114, 176–77; investment and, 119, 130, 134–35, 143; laissez-­faire approach and, 118, 129; markets and, 118, 120–21, 124–37, 140, 143–44; as moral threat, 1; national inequality and, 119; negative consequences of inequality and, 131–42; opportunity and, 133–34, 139, 142–44; as panacea, 1; policy and, 118–19, 124, 126, 128–31, 139, 143–44; poverty and, 117, 123, 126–27, 134, 144; prices and, 118, 122, 126, 136–38; primary income and, 135, 143–44; production and, 119, 124, 126, 129, 131, 133, 137; productivity and, 120, 125, 127, 144; profit and, 117; redistribution and, 121, 124–38, 141–45; reform and, 124, 126–27, 138; regulation and, 136; rise in inequality and, 117–18; risk and, 127–28, Index 137–39, 144; shocks and, 38, 55, 91–92, 175; Southern perspective on, 82–85; standard of living and, 120–23, 126, 138, 143; surveys and, 127n4, 141n15; taxes and, 74, 89n10, 91–94, 104, 114–15, 129–30, 135–36, 142–45; technology and, 86–91, 118–20, 125; trends and, 118; United States and, 135–39; wealth and, 74, 95, 98, 125, 127, 129, 131–32, 139, 143–45 Great Depression, 48 Greece, 46t, 135 gross domestic product (GDP) measurement: Current Population Survey and, 21; evolution of inequality and, 41–45, 56–57; fairer globalization and, 123, 127, 165–66, 176; global inequality and, 13–15, 20–21, 23, 26, 27f, 29–30, 39; normalization and, 29, 41, 43–45; rise in inequality and, 94; Sen-­Stiglitz-­ Fitoussi report and, 14 Gross National Income (GNI), 148–49 Growing Unequal report, 52 growth, 4; African Growth Opportunity Act (AGOA) and, 155; constraints and, 35; consumption and, 13–15, 42t, 44t, 80, 137–39, 159, 177; convergence and, 16; determinants of, 34; distribution and, 49–50, 188; emerging economies and, 125 (see also emerging economies); evolution of inequality and, 33, 49–50, 54; fairer globalization and, 147–52, 155, 162, 167–68, 171, 177, 180, 183; GDP mea- Index199 surement of, 30, 39 (see also gross domestic product (GDP) measurement); globalization and, 118–29, 134–39; great gap in, 33–36; import substitution and, 34, 180; inflation and, 50, 95, 102, 110; negative, 31; political reversals and, 36; poverty and, 28–29; production and, 3, 34–35, 57, 74, 76–81, 84–86, 119, 124, 126, 129, 131, 133, 137, 155–57, 167, 176, 178–79; rate of, 15, 29–35, 79, 125, 185; recession and, 6, 31, 99, 120; relative gap and, 18, 20, 30–32, 36; rise in inequality and, 75, 79, 82, 84, 109–12; trends in, 40, 121 health issues, 24, 187; fairer globalization and, 152, 166; globalization and, 140–41, 144; public healthcare and, 37, 111, 140 Heckscher-­Ohlin model, 76 Hong Kong, 34, 82, 174 housing, 12, 61, 137 human capital, 74, 167, 175 Human Development Report, 25 Ibrahimovich, Zlata, 87 IKEA, 172 immigrants, 64, 66, 127 imports: fairer globalization and, 154, 177–78, 180; globalization and, 119, 124; import substitution and, 34, 180; rise in inequality and, 80 income: average, 9, 18, 21, 29–30, 43, 72; bonuses and, 87, 174; convergence and, 16; currency conversion and, 11; definition of, 45; deindustrialization and, 75–82; developed/developing countries and, 5, 36; disposable, 20, 22, 24, 48, 50, 51f, 74, 91, 163; distribution of, 3 (see also distribution); executives and, 73, 88–89, 97, 174; family, 10; financial operators and, 87–88, 90–91; gap in, 3, 5–6, 27f, 33– 36, 42t, 44t, 149; GDP measurement and, 13–15, 20–21, 23, 26, 27f, 29–30, 39, 41–45, 56–57, 94, 123, 127, 165–66, 176; high, 50, 52, 56, 85–93, 97–99, 140, 143, 158–62, 164, 189; household, 10–12, 43, 45, 50, 58, 105, 107, 137, 163, 177; inequality in, 2, 4, 41, 48–50, 56–64, 68, 70, 72–73, 83, 98, 102–3, 107–8, 114, 125, 132– 34, 137, 140–41, 143–44, 163; inflation and, 50, 95, 102, 110; international scale for, 17–18, 23, 30; lawyers and, 89–90; mean, 17, 20n10, 27f, 42t, 44t; median, 6, 49, 71, 102–3, 106; minimum wage and, 52–53, 100, 102–8, 175, 177; national, 7, 16–19, 30, 43, 48–52, 60, 73, 84n6, 125, 149, 153, 172; OECD Database on Household Income Distribution and Poverty and, 11; opportunity and, 5; payroll and, 53, 93, 100, 104, 107, 175; pension systems and, 167; per capita, 20, 25, 29–30, 42t, 45, 48, 55–56, 120; portfolios and, 88; poverty and, 1, 11, 15n6, 19–20, 22–25, 28–29, 32, 44t, 109, 117, 123, 126–27, 134, 144, 147–52, 164, 166, 175; primary, 48–50, 58, 135, 143–44, 158, 163n10, 167, 173; 200 income (cont.) purchasing power and, 11, 13, 19–24, 27f, 28, 50, 80, 144, 158, 178; real earnings loss and, 78; relative gap and, 18, 28, 30, 31– 32, 36; superstars and, 85–87, 89–90; taxes and, 37, 89n10, 92–93, 145, 159, 161–65, 170 (see also taxes); technology and, 34, 180; virtual, 12; wage inequality and, 51–53, 79, 101–3, 106, 108; wage ladder effects and, 78–79; wealth inequality and, 58–60; women and, 64– 65, 103 India: evolution of inequality and, 54, 57, 59–60; fairer globalization and, 150, 154, 165– 66, 172; household consumption and, 15; international trade and, 75; Kuznets hypothesis and, 113; rise in inequality and, 2, 15–16, 19, 30, 34, 46t, 75, 83, 90, 112–13; taxes and, 165 Indonesia, 30, 46t, 54, 111, 127 industrialization: deindustrialization and, 1, 75–82, 102, 120, 188; labor and, 1, 26, 29, 33, 35, 54, 82, 84, 102, 113, 120, 127, 179, 188 Industrial Revolution, 26, 29, 33, 35 inequality: between countries, 2–3, 5, 7, 9, 16–19, 23, 33, 36, 38– 39, 42–45, 47, 53, 58, 68, 90– 91, 107, 117–19, 123, 128, 153; efficiency and, 1, 4, 6, 8, 36, 78, 94, 96, 105, 108, 111, 116, 118– 19, 129–35, 140–45, 157–58, 164, 167, 170–71, 175, 180–81, 188; Gini coefficient and, 18 (see Index also Gini coefficient); income, 2, 4, 41, 48–50, 56–64, 68, 70, 72–73, 83, 98, 102–3, 107–8, 114, 125, 132–34, 137, 140–41, 143–44, 163; international, 17; inverted U curve and, 54, 113; measurement of, 18; negative consequences of, 131–42; non-­ monetary, 49, 60–70; perceptions of, 69–73; social tensions and, 188; standard of living and, 18 (see also standard of living); Theil coefficient and, 18–19, 37–38, 42; wealth, 58–60; within countries, 2, 5–7, 9, 16, 30, 33, 37–45, 47, 113–14, 118, 124–29, 184–85, 189 infant mortality, 150 inflation, 50, 95, 102, 110 inheritance: fairer globalization and, 170–73; globalization and, 144–45; rise in inequality and, 93 institutions: deregulation and, 91– 112 (see also deregulation); disinflation and, 95, 102, 110; emerging economies and, 109– 12; evolution of inequality and, 55, 69; fairer globalization and, 151, 168, 174–75; global inequality and, 36; globalization and, 124; markets and, 91–92; privatization and, 94–109; reform and, 91–112; rise in inequality and, 91–112, 114; structural adjustment and, 109– 12; taxes and, 92–94; “too big to fail” concept and, 174–75; Washington consensus and, 109–10, 153 International Development Association, 149 Index201 international income scale, 17–18, 23, 30 International Labor Organization, 51 International Monetary Fund (IMF), 54, 57, 84, 90, 109–10 international trade: capital mobility and, 74; China and, 75; de­ industrialization and, 75–76, 78–79; effect of new players, 75–76; Heckscher-­Ohlin model and, 76; India and, 75; offshoring and, 81–82; rise in inequality and, 75–76, 78–79, 83, 112, 114; Soviet Union and, 75; theory of, 76; wage ladder effects and, 78–79 inverted U curve, 54, 113 investment: direct, 76, 79; evolution of inequality and, 56; fairer globalization and, 150, 155, 157, 160, 170, 174, 179; foreign, 83, 85, 112, 155, 157, 160, 179; globalization and, 119, 130, 134– 35, 143; production and, 119; public services and, 143; re-­ investment and, 56; rise in inequality and, 76, 79, 82–83, 85, 92, 97–98, 112; taxes and, 92 Ivory Coast, 54 Japan, 34, 46t, 51f, 103 job training, 34, 181, 187 Kenya, 46t, 54 kidnapping, 133 Kuznets, Simon, 113, 126 labor: agriculture and, 12, 82, 84, 122–23, 127–28, 132, 155; artists and, 86–87; bonuses and, 87, 174; capital and, 3–4, 55– 58, 60, 158, 161n7, 185; capital mobility and, 3; cheap, 77, 117; costs of, 81, 100, 104–5, 117, 176, 187; decline in share of national income and, 73; deindustrialization and, 75–82; demand for, 168; deregulation and, 99– 109; discrimination and, 64–66, 69, 132, 142, 180–81; distribution of income and, 175 (see also distribution); education and, 168, 180; efficiency and, 96–97, 175; emerging economies and, 77; entrepreneurs and, 83, 92, 96, 131–32, 135, 143, 170–71, 188; evolution of inequality and, 55–58, 60; excess, 81, 83; executives and, 73, 88–89, 97, 174; goods and services sector and, 13, 73, 80, 85, 91, 102, 127, 130, 180; growth and, 154, 179; immigrant, 64, 66, 127; increased mobility and, 90–91; industrialization and, 1, 26, 29, 33, 35, 54, 80, 82, 84, 102, 113, 120, 127, 179, 188; inflation and, 50, 95, 102, 110; International Labor Organization and, 51; job training and, 34, 181, 187; manufacturing and, 57, 80–82, 84, 123, 154–55, 157; median wage and, 49, 71, 102– 3, 106; minimum wage and, 52– 53, 100, 102–8, 175, 177; mobility of, 185; offshoring and, 81–82; payroll and, 53, 93, 100, 104, 107, 175; pension systems and, 167; portfolios and, 88; poverty and, 1, 11, 15n6, 19– 20, 22–25, 28–29, 32, 44t, 109, 117, 123, 126–27, 134, 144, 147–52, 164, 166, 175; 202 labor (cont.) privatization and, 99–109; productivity and, 63, 79, 81–82, 89, 100, 102, 104, 114, 120, 125, 127, 144, 155, 177–78; protectionism and, 7, 147, 154, 157, 176–79; real earnings loss and, 78; reserve, 84; security and, 133; skilled, 76–78, 82–83, 86, 90, 114, 117, 126, 176; standard of living and, 69 (see also standard of living); superstars and, 85, 87, 89–90; supply of, 130– 31, 164; taxes and, 159–60, 171; technology and, 85–91 (see also technology); unemployment and, 37, 39, 53, 62–63, 66, 69, 77, 94, 100–108, 164, 175–76; unions and, 100–106, 108, 156, 179; unskilled, 3, 76–77, 79, 83, 105, 117, 154; wage inequality and, 51–53, 79, 101–3, 106, 108; wage ladder effects and, 78–79; women and, 64–65, 103, 114; writers and, 86–87 Lady Gaga, 5–6 laissez-­faire approach, 118, 129 Latin America, 9, 34, 36, 54–55, 58, 109–11, 155, 165–66, 168, 180 lawyers, 89–90 liberalization: capital and, 96; customs, 156; deregulation and, 96–99, 108–9, 112 (see also deregulation); fairer globalization and, 156, 179; mobility of capital and, 115; policy effects of, 97–99; Reagan administration and, 91; recession and, 6, 31, 99, 120; rise in inequality and, 76, 91, 93, 96–99, 108–9, 112, 115; tax rates and, 93 Luxembourg, 16, 19 Index Madonna, 71 Malaysia, 127 manufacturing: deindustrialization and, 75–82, 84, 123; emerging economies and, 57, 84; fairer globalization and, 154–55, 157; France and, 81; offshoring and, 81–82; United Kingdom and, 80; United States and, 80 markets: competition and, 76–77, 79–82, 84, 86, 94–98, 102, 104, 115–18, 130, 155, 169, 173, 176–79, 182, 186–88; credit, 131; deindustrialization and, 1, 75–82, 102, 120, 188; deregulation and, 91–92, 99–109 (see also deregulation); development gap and, 34–35, 83; Economic Partnership Agreements (EPAs) and, 156; effect of new players, 75–76; emerging economies and, 120 (see also emerging economies); entrepreneurs and, 83, 92, 96, 131–32, 135, 143, 170–71, 188; evolution of inequality and, 48–50, 53–54, 64, 69; exports and, 76, 82–84, 124, 128, 147, 154–55, 176, 178; fairer globalization and, 147–48, 154–58, 168, 173–75, 178–81; GDP measurement and, 13–15, 20–21, 23, 26, 27f, 29–30, 39, 41–45, 56–57, 94, 123, 127, 165–66, 176; globalization and, 35, 118, 120–21, 124–37, 140, 143–44; Heckscher-­Ohlin model and, 76; housing, 12, 61, 137; imports and, 1, 34, 80, 119, 124, 154, 177–78, 180; institutions and, 91–112; international trade and, 3, 75–76, 78–79, 83, 112, 114, 176–77; labor and, Index203 144 (see also labor); liberalization and, 112 (see also liberalization); monopolies and, 94, 111, 127, 136; offshoring and, 81– 82; protectionism and, 7, 147, 154, 157, 176–79; purchasing power and, 11, 13, 19–24, 27f, 28, 50, 80, 144, 158, 178; reform and, 54 (see also reform); regulation and, 74 (see also regulation); rise in inequality and, 74, 76– 79, 83, 86, 90–112, 114; shocks and, 38, 55, 91–92, 175; single market and, 76; South-­South exchange and, 35; TRIPS and, 156 median wage, 49, 71, 102–3, 106 Mexico, 46t, 57, 59, 109–10, 133, 166, 172 middle class, 51, 71, 93, 109, 133– 34, 136, 140 Milanovic, Branko, 4–5, 17n8, 29n16 Millennium Development Goals, 149–50, 185 minerals, 84, 127 minimum wage, 52–53, 100, 102– 8, 175, 177 monopolies, 94, 111, 127, 136 Morocco, 173 Morrisson, Christian, 28 movies, 87 Murtin, Fabrice, 28 national inequality, 2–4; correcting, 158–80; education and, 167–73; fairer globalization and, 147, 158; Gini coefficient and, 27 (see also Gini coefficient); globalization and, 119; market regulation and, 173–75; protectionism and, 147, 157, 176–79; redistribution and, 158–73, 175, 178; rise in, 6, 48– 52, 115, 204; taxes and, 158–73, 175, 181–83 natural resources, 84–85, 92, 122, 126–28, 127, 151 Netherlands, 46t, 50, 66, 70, 102 Nigeria, 9, 46t, 54, 127, 151 non-­monetary inequalities: access and, 61, 67–68; capability and, 61; differences in environment and, 66–68; discrimination and, 64–66, 69; employment precariousness and, 63–64; evolution of inequality and, 49, 60–70; intergenerational mobility and, 68; opportunities and, 49, 60– 70; social justice and, 60, 70; unemployment and, 62–63 normalization: evolution of inequality and, 41, 43–44; GDP measurement and, 29, 41, 43– 45; global inequality and, 13, 15, 22–23, 26, 29 Occupy Wall Street movement, 6, 135 OECD countries, 27t; evolution of inequality and, 42t, 43, 44t, 50– 52, 64, 65n13; fairer globalization and, 149, 159, 162, 164– 65; Gini coefficient and, 51; income distribution and, 51; relaxation of regulation and, 99; restrictive, 64; rise in inequality and, 50–51, 94, 99, 102, 106n18, 107; social programs and, 94; standard of living and, 11–12, 43, 50–52, 64, 94, 99, 102, 107, 120, 149, 159, 162, 164–65; U-­shaped curve on income and, 50 OECD Database on Household 204 Income Distribution and Poverty, 11–12 offshoring, 81–82 oil, 92, 127 opportunity, 5; African Growth Opportunity Act (AGOA) and, 155; as capability, 61; efficiency and, 142–45; evolution of inequality and, 61–62, 68, 70–71; fairer globalization and, 155, 167, 170, 172; globalization and, 133–34, 139, 142–44; redistribution and, 142–45; rise in inequality and, 102 Pakistan, 46t, 111 Pareto efficiency, 130n5 Pavarotti, Luciano, 86–87 payroll, 53, 93, 100, 104, 107, 175 Pearson Commission, 149 pension systems, 167 Perotti, Roberto, 134 Philippines, 46t, 111 Pickett, Kate, 140 Piketty, Thomas, 4, 48, 59n8, 60, 89n10, 125, 160n4 PISA survey, 169–70 policy, 4; adjustment, 109, 153; Cold War and, 149, 153; convergence and, 147–48; development aid and, 148–53; distributive, 26, 72, 135, 188; educational, 149, 152, 167–73; evolution of inequality and, 55, 72; fairer globalization and, 147–53, 157–58, 167–73, 175–83; Glass-­Steagall Act and, 174n15; global inequality and, 185–89; globalization and, 118–19, 124, 126, 128–31, 139, 143–44; globalizing equality and, 184–89; import substi- Index tution and, 34; Millennium Development Goals and, 149– 50, 185; poverty reduction and, 147–48; protectionist, 7, 99– 100, 107–8, 147, 154, 157, 176–79; reform and, 74 (see also reform); rise in inequality and, 34, 74–75, 85, 94, 97, 99– 100, 104, 106–11, 114–16; social, 7; standard of living and, 147–48 population growth, 28–29, 110, 183 portfolios, 88 Povcal database, 10, 12, 42t, 43, 44t poverty, 1, 44t, 109; Collier on, 23; convergence and, 147–48; criminal activity and, 133–34; definition of, 24; development aid and, 147–52; fairer globalization and, 147–52, 164, 166, 175; ghettos and, 66–67; global inequality and, 11, 15n6, 19–20, 22–25, 28–29, 32; globalization and, 117, 123, 126–27, 134, 144; growth and, 28–29; measurement of, 23–24; Millennium Development Goals and, 149– 50, 185; OECD Database on Household Income Distribution and Poverty and, 11–12; reduction policies for, 147–48; traps of, 144, 150, 164 prices: commodity, 84, 182; exports and, 178; factor, 74, 126; fairer globalization and, 147–48, 176, 178, 182; global inequality and, 27–28, 74, 80, 84, 91–92, 94, 97, 110; globalization and, 118, 122, 126, 136–38; imports and, 80; international compari- Index205 sons of, 11; lower, 94, 137; oil, 92; rise in inequality and, 74, 80, 84, 91–92, 94, 97, 110; rising, 110, 122, 178; shocks and, 38, 55, 91–92, 175; statistics on, 11, 27; subsidies and, 109–10, 175 primary income: evolution of inequality and, 48–50, 58; fairer globalization and, 158, 163n10, 167, 173; globalization and, 135, 143–44 privatization: deregulation and, 94–112; efficiency and, 94, 96, 105, 108; globalization of finance and, 95–99; institutions and, 94–109; labor market and, 99–109; reform and, 94–109; telecommunications and, 111 production: deindustrialization and, 75–82; evolution of inequality and, 57; fairer globalization and, 155–57, 167, 176, 178–79; globalization and, 119, 124, 126, 129, 131, 133, 137; growth and, 3, 34–35, 57, 74, 76–81, 84–86, 119, 124, 126, 129, 131, 133, 137, 155–57, 167, 176, 178–79; material investment and, 119; North vs.


Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Savings and loan crisis, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

the regulatory response The regulatory experience in the wake of the Great Recession has been rather different than that following the Great Depression. The ultimate effect of the bank bailouts during the Great Recession has been to introduce an essential and oft-discussed question: have banks become too big to fail? The concept of too big to fail is problematic for two reasons. The first is that if true, moral hazard may arise whereby exceptionally large institutions take on more risk than is prudent, thinking there will be a bailout in case the risk taking results in outsized losses. In particular, has the offering of bank bailouts to exceptionally large institutions altered their behavior in a way that has created moral hazard?

,” accessed January 2015, http://www.treasury.gov/initiatives/fsoc/about /council/Pages/default.aspx. Board of Governors of the Federal Reserve System, “Press Release,” October 23, 2014, http://www.federalreserve.gov/newsevents/press /bcreg/20141023a.htm. Simon Johnson, “Sadly, Too Big to Fail Is Not Over,” Economix (blog), New York Times, August 1, 2013, http://economix.blogs.nytimes .com/2013/08/01/sadly-too-big-to-fail-is-not-over. James B. Stewart, “Volcker Rule, Once Simple, Now Boggles,” New York Times, October 21, 2011, http://www.nytimes.com/2011/10/22 /business/volcker-rule-grows-from-simple-to-complex.html. Ibid.; Dan Kedmey, “2 Years and 900 Pages Later, the Volcker Rule Gets the Green Light,” TIME.com, December 11, 2013, http://business.time .com/2013/12/11/2-years-and-900-pages-later-the-volcker-rule-gets -the-green-light.

March 20, 2009. http://www.pbs.org/wnet/religionandethics/2009/03/20 /march-20-2009-jewish-reaction-to-madoff-scandal/2474. Johnson, Philip McBride, and Thomas Lee Hazen. Derivatives Regulation. Vol. 3. New York: Aspen, 2004. Johnson, Simon. “Sadly, Too Big to Fail Is Not Over.” Economix (blog), New York Times, August 1, 2013. http://economix.blogs.nytimes .com/2013/08/01/sadly-too-big-to-fail-is-not-over. Jones, Chris. Hedge Funds of Funds: A Guide for Investors. Hoboken, NJ: Wiley, 2007. Jones, Norman. “Usury.” In Encyclopedia of Economic and Business History, ed. Robert Whaples. Economic History Association. February 10, 2008. http://eh.net/encyclopedia/usury.


pages: 339 words: 99,674

Pay Any Price: Greed, Power, and Endless War by James Risen

air freight, airport security, banking crisis, clean water, drone strike, Edward Snowden, greed is good, illegal immigration, income inequality, independent contractor, large denomination, Occupy movement, pattern recognition, pre–internet, RAND corporation, Seymour Hersh, Silicon Valley, Stanford prison experiment, Stuxnet, too big to fail, WikiLeaks

That includes the most infamous catch phrase of the global financial crisis—“too big to fail.” When applied to banks, “too big to fail” referred to financial institutions that were so large and critical to the economy that they had to be bailed out by the government, no matter how execrable their past behavior or how badly they had been mismanaged. Letting them fail, refusing to bail them out, would only sink the American economy. In the global war on terror as well, Washington has treated some of its biggest military and intelligence contractors as if they are too big to fail. The American enterprise in the Middle East has been so heavily outsourced, and the Pentagon, CIA, and other agencies have become so dependent on a handful of large corporations, that the government has been reluctant to ever hold those firms accountable for their actions.

Table of Contents Title Page Table of Contents Copyright Dedication Epigraph A Note on Sources Prologue GREED Pallets of Cash The Emperor of the War on Terror The New Oligarchs POWER Rosetta Alarbus Too Big to Fail ENDLESS WAR The War on Decency The War on Normalcy The War on Truth Afterword Index About the Author Footnotes Copyright © 2014 by James Risen All rights reserved For information about permission to reproduce selections from this book, write to Permissions, Houghton Mifflin Harcourt Publishing Company, 215 Park Avenue South, New York, New York 10003.

One Pentagon official contacted me while I was doing reporting on Alarbus/JACO and confided that my reporting was “making people at SOCOM nervous.” Asimos declined to discuss the operation other than to warn that writing about him would put him and his family at risk. His New York lawyer, Kelly Moore, also declined repeated requests to respond to questions. 6 Too Big to Fail Far more than any other conflict in American history, the global war on terror has been waged along free-market principles. In Iraq and Afghanistan, American soldiers actually on the payroll of the U.S. Army were outnumbered by independent contractors working for private companies hired to provide services from meals to base security.


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SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bear Stearns, Bernie Sanders, Black Swan, Blythe Masters, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, eat what you kill, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, longitudinal study, Mark Zuckerberg, mass immigration, McMansion, mittelstand, Money creation, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, social intelligence, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, The Rise and Fall of American Growth, too big to fail, women in the workforce, young professional

Hammond, “Systemic Risk in the Financial System: Insights from Network Science,” Pew Charitable Trust, Financial Reform Project, Briefing Paper No. 12, 2009, http://www.brookings.edu/research/papers/2009/10/23-network-science-hammond. 35. Haldane, “Rethinking the Financial Network.” 36. Meadows, Thinking in Systems, 155. 37. Neel Kashkari, “Lessons from the Crisis: Ending Too Big to Fail,” speech at the Brookings Institution, Washington, D.C., February 16, 2016, https://www.minne-apolisfed.org/news-and-events/presidents-speeches/lessons-from-the-crisis-ending-too-big-to-fail. 38. Kelly Shue, “Executive Networks and Firm Policies: Evidence from the Random Assignment of MBA Peers,” University of Chicago, Booth School of Business, January 12, 2013, http://rfs.oxfordjournals.org/content/26/6/1401.abstract. 39.

All their reports have one theme in common: the crucial role that personal relationships played in solving problems too large for any individual to tackle alone. For instance, Hank Paulson, President Bush’s “war general” during the crisis, repeatedly stressed the significance of deep relationships in his book On the Brink, an account that was mirrored in Andrew Ross Sorkin’s book Too Big to Fail.15 While Paulson may come across as aloof and somewhat dry, he is actually the embodiment of a master networker. Prior to serving as secretary of the treasury, he was CEO of Goldman Sachs and forged relationships with leaders all over the world, particularly with the Chinese elite. His connections in China were said to have been better than even those of the U.S. administration and would later become an important asset during the financial crisis.

Systems with unchecked reinforcing loops, however, ultimately destroy themselves.36 Through feedback loops and power-laws, superhubs and their networks have significantly contributed to skewing the system. Potentially corrective shocks like the financial crisis have failed to rebalance it because the overly influential superhub networks have blocked fundamental changes to protect their vested interests. An example of this is the persistence of systemically important “too big to fail” banks, which still present a risk to taxpayers. Wall Street CEOs have put up a fabulous fight against measures threatening the size of their institutions, and, thus, their financial interests. Even Neel Kashkari, who as assistant secretary of the treasury was instrumental in orchestrating the bank bailouts, is now spearheading efforts to decrease the size of banks to minimize the risks for taxpayers.37 “Executive Contagion”: Executives Becoming Super-Spreaders of Risk The formation of hubs and superhubs follows the laws of nature, so that the same type of network topology will always form, be it among tradespeople in a city, students at a university, or movie stars on the global stage.


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Keeping at It: The Quest for Sound Money and Good Government by Paul Volcker, Christine Harper

anti-communist, Ayatollah Khomeini, banking crisis, Bear Stearns, Bretton Woods, business cycle, central bank independence, corporate governance, Credit Default Swap, Donald Trump, fiat currency, financial innovation, fixed income, floating exchange rates, forensic accounting, full employment, global reserve currency, income per capita, inflation targeting, liquidationism / Banker’s doctrine / the Treasury view, margin call, money market fund, Nixon shock, oil-for-food scandal, Paul Samuelson, price stability, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Ronald Reagan, Rosa Parks, Savings and loan crisis, secular stagnation, Sharpe ratio, Silicon Valley, special drawing rights, too big to fail, traveling salesman, urban planning

Encouraged by the Fed, which was providing emergency lending, the FDIC and a group of a couple dozen banks provided a $1.5 billion rescue made up of loans and a line of credit. They also received twenty million warrants to purchase common stock—enough to provide a controlling majority. It would prove to be an important model. Continental Illinois: Too Big to Fail? The failure of two minor government securities dealers over the next year or two could be handled without setting off alarm bells. The story was different with respect to the July 1982 bankruptcy of a seemingly innocuous Oklahoma bank called Penn Square with under $500 million in deposits, about half covered by FDIC insurance.

In July the FDIC negotiated a second rescue that gave it effective control of the company and installed new management. Continental Illinois survived for a while but, amid management turmoil, lost its competitive position. Shareholders never recovered their losses. This episode has often been credited with popularizing the phrase “too big to fail.” Any ambiguity about the willingness of the government to bail out the big banks seemed to be lost when the comptroller of the currency, the supervisor of most of the big banks, went beyond his authority, seeming to commit to such support for the eleven largest in his later congressional testimony.

The Independent Community Bankers of America, representing thousands of small banks (including, for instance, the Penn Square Bank) argued that its constituents were placed at a competitive disadvantage: depositors, perhaps all creditors, of “systematically important” lenders would be protected from losses. In practice, most depositors of small banks tended themselves to be small and had the full protection of FDIC insurance. And it seemed to me, then and now, that Continental Illinois, its management, and its stockholders, did, by any reasonable definition, “fail.” The too-big-to-fail debate resumed loudly during the 2008 financial crisis. It continues to roil the politics of banking legislation and regulation to this day. In my view, the Dodd-Frank legislation signed by President Barack Obama in 2010 goes a long way toward creating an effective resolution process for failing banks.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, Tax Reform Act of 1986, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

Actively playing the role of lender of last resort—through 1974 the Federal Reserve Bank of New York lent Franklin $1.7 billion—US regulators delayed closing Franklin as long as they could out of “concern that a failure of a bank of Franklin’s size might cause a general scramble for liquidity.”84 What was especially significant was that, even by the mid 1970s, the concern that certain banks were “too big to fail” was not confined to what the effect of their failure would be in US financial markets. Much of the Fed’s intervention involved purchasing foreign currencies on Franklin’s behalf, assuring foreign creditors they would be paid—and even extending its lender-of-last-resort function to Franklin’s London office, on the grounds that “the failure of Franklin to perform on such a volume of international commitments would lead to a crisis of confidence in foreign exchange markets and possibly to an international banking crisis.”85 The grounds for such fears were real enough.

Besides mandating greater regulatory cooperation between the Federal Reserve, the Treasury’s Office of the Controller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), the Act—“the most massive change in banking laws since the Depression”—widened the state’s regulatory remit over the whole banking system.38 All deposit institutions were now required to hold reserves with the Fed, and new rules were established for more uniform reporting to regulators, and for extended federal deposit insurance coverage. And it was this joint supervisory capacity that allowed the Fed, working more and more closely with the OCC and the FDIC, to sustain the Volcker shock by undertaking selective bailouts of those banks that were deemed “too big to fail.” This included the largest bailout in US history to that point, that of First Philadelphia Bank (whose roots went back two centuries to the first private bank in the US). The regulators feared that if the bank “collapsed slowly, in the manner of Franklin National [in 1973–74], it might provoke a crisis of confidence in the banking system.”39 The Fed’s autonomy with respect to the financial system, and the detailed information it had about its precise workings that was unavailable to anyone else, was decisive in terms of the flexibility and persistence it needed to act.

Troubled small banks which could not be safely merged with larger ones were closed by the Fed and the Treasury, and their depositors paid off by the FDIC, while the large banks were bailed out—thanks to their importance not only for the US economy but also for the international clearing-house system, whose hundreds of billions of dollars of daily interbank payments greased the wheels of global capitalism. The pattern of letting banks that were too small to matter go under, while acting as lender of last resort to save the ones that were “too big to fail” was set in 1982, when Volcker bluntly told the Federal Open Market Committee (FOMC): “If it gets bad enough, we can’t stay on the side or we’ll have a major liquidity crisis. It’s a matter of judgment as to when and how strongly to react. We are not here to see the economy destroyed in the interest of not bailing somebody out.”78 The “moral hazard” tightrope that the state had to walk in this respect was nothing compared with the practical hazard involved in figuring out whether allowing even a small bank to collapse might have systemic effects.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Black Swan, Black-Scholes formula, bonus culture, break the buck, buy and hold, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk free rate, risk tolerance, risk/return, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, statistical model, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

Morgan and other big commercial banks had also been in the dark about trading derivatives, but they got over those qualms and poured money into this new market. In March 1994, rumors were circulating that Corrigan’s nightmare was about to become reality. Bankers Trust had supposedly been wiped out by the rise in federal funds rates, and its stock would be suspended. In a phrase that Corrigan had recently invented, Bankers Trust was “too big to fail”—the Fed would have to bail it out. Peter Fisher, one of the few New York Fed staffers who knew about the new derivatives markets, called up Steve Thieke, a former New York Fed colleague who now worked at J.P. Morgan. Hearing the worry in his voice, Thieke let Fisher in on the secret. He and a handful of executives at Bankers Trust and Citibank had decided to look at the problem scientifically.

Toward the end of the month, Goldman Sachs and Morgan Stanley got new equity investments and became bank holding companies. Making the Fed the primary regulator and taking the SEC out of the picture, the switch formalized their status as banks that were, in the cruelly paradoxical phrase of that season, “too big to fail.” A month later, the New York Fed created a pair of financial androids. Maiden Lane II would buy the distressed mortgage bonds from AIG’s securities lending program. Maiden Lane III would do what Goldman’s Dan Sparks had suggested nine months earlier: buy the underlying CDOs behind the AIGFP deals and tear up the default swap contracts with the two dozen or so counterparty banks.

Morgan margin call.31 On October 3, Congress passed a revised TARP bill that made $700 billion of taxpayer funds available to prop up the system and permitted the government to directly invest in troubled banks. The contagion had spread worldwide. On October 6, Wells Fargo scooped up troubled Wachovia while Germany, Belgium, and Holland announced bailouts for some of the “too big to fail” banks (including the pioneering CDO investor LB Kiel, by now part of a larger institution called HSH Nordbank). On October 8, the Federal Reserve and international central banks imposed coordinated emergency interest rate cuts, hoping to restart the frozen interbank lending markets. The next day, Iceland’s biggest banks collapsed and were nationalized.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

"Robert Solow", Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, bond market vigilante , Bretton Woods, Brownian motion, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, disinformation, do-ocracy, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, Post-Keynesian economics, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Savings and loan crisis, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, tail risk, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

They have also funded their own Hayekian critiques of the economics profession: see Frydman and Goldberg, Beyond Mechanical Markets, which was distributed gratis to participants at the 2011 meeting of INET at Bretton Woods. 119 This section is joint work with Edward Nik-Khah. 120 Swagel, “The Financial Crisis”; Sorkin, Too Big to Fail; “Break the Glass Bank Recapitalization Plan,” dated 4/15/2008, available at www.scribd.com/doc/21266810/Too-Big-To-Fail-Confidential-Break-the-Glass-Plan-from-Treasury (accessed 2/21/2012). 121 “Secretary Paulson’s intent to use TARP to purchase assets reflected a philosophical concern with having the government buy equity stakes in banks: he saw it as fundamentally a bad idea to have the government involved in bank ownership” (Swagel, “The Financial Crisis,” p. 50). 122 Oliver Armantier and James Vickery of the N.Y.

Surprisingly, the financial crisis did not receive much attention at the conference. Many of the sessions on macroeconomics and finance didn’t mention it at all, and when it was finally discussed, the reasons cited for the financial meltdown were all over the map. It was the banks, the Fed, too much regulation, too little regulation, Fannie and Freddie, moral hazard from too-big-to-fail banks, bad and intentionally misleading accounting, irrational exuberance, faulty models, and the ratings agencies. In addition, factors I view as important contributors to the crisis, such as the conditions that allowed troublesome runs on the shadow banking system after regulators let Lehman fail, were hardly mentioned.9 Public disputations on the crisis had begun to take on the air of a bad Rodney Dangerfield film.

Bernanke insists upon the prodigious intellectual capacity of the Fed to regulate the postcrisis financial sector and the shadow banking sphere, even though he and his former lieutenant at the New York Fed Timothy Geithner had been asleep at the wheel in the run-up to the crisis, and then outsourced much of the bailout. Bernanke has stood in the way of most attempts to restructure the U.S. financial sector, from opposing the Volcker Rule to blocking attempts to break up “too big to fail” firms. Bernanke resisted most attempts to financially penalize banks or hedge funds, with the excuse that they were too fragile to face the music. The Fed’s ability to even anticipate contractions had been persistently addled, dating from the onset of the crisis, as demonstrated in Figure 4.5.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

It was the taxpayer who ended up picking up the bill for counterparty insolvencies, and the sums involved were and are huge. As chance would have it, it was insurance against those very counterparty insolvencies which was to destroy AIG. This is a gigantic insurance company, worth $200 billion at its peak and definitely “too big to fail.” It was AIG which was, in effect, the Joneses. It was the company which underwrote all the insurance: it was the single biggest player in the CDS market. Entertainingly for fans of financial acronyms, AIG was done in by CDSs on CDOs. That’s to say, it took part in credit default swaps on collateralized debt obligations, the pools of subprime mortgages whose dramatic collapse in value in 2008 was the proximate cause of the financial crisis.

If the Joneses don’t have that kind of money immediately at hand, they will have to borrow it. If they can’t borrow it, they’re toast. And that’s exactly what happened to AIG. When it had to increase its collateral cover, it couldn’t, because the credit markets had tightened up. For the Joneses, that would be end of story: they’d be bankrupt. But because AIG was “too big to fail,” the U.S. government stepped in with a bailout on September 16 worth $85 billion, in return for 79.9 percent of the company. (This bailout—they come in different varieties—was in the form of a twenty-four-month credit facility. To adopt an analogy to personal finances, that meant AIG could draw on the government’s bank account.)

Treasury statement accompanying the fourth bailout, “Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high.” To stabilize AIG would “take time and possibly further government support.” That’s what “too big to fail” means. You could put it like this: AIG + CDS + CDO + TBTF= $173,000,000,000. In Britain, we had our entertaining but essentially distracting row over Sir Fred “Knighted for Services to Banking” Goodwin’s pension; it’s the similar outcry over bonuses paid to senior AIG executives after the bailouts.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, mass immigration, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, Nixon triggered the end of the Bretton Woods system, private sector deleveraging, quantitative easing, reserve currency, risk free rate, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

It is unclear how much damage would be caused by the bankruptcy of a financial institution with a derivatives exposure equivalent to one year’s worth of global economic output. It can only be imagined that the damage would range between catastrophic and cataclysmic. That is what is meant by too big to fail. Regarding their size, there is another possibility that warrants consideration. Banks may have been allowed to remain too big to fail because they are too bankrupt to split apart. Due to the size and opacity of the derivatives market, there is at least some risk that the sum of the banks’ parts could add up to a multitrillion dollar negative number. Were that the case, it would explain why the government did not nationalize at least some banks when injecting large amounts of capital into the financial system in 2009: it had no desire to consolidate massive bank losses onto its own balance sheet.

Quantitative Easing: Round Two Monetizing the Debt The Role of the Trade Deficit Diminishing Returns The Other Money Makers Notes Chapter 6: Where Are We Now? How Bad so Far? Credit Growth Drove Economic Growth So, Where Does that Leave Us? Why Can’t TCMD Grow? The Banking Industry: Why Still Too Big to Fail? Global Imbalances: Still Unresolved Vision and Leadership Are Still Lacking Notes Chapter 7: How It Plays Out The Business Cycle Debt: Public and Private 2011: The Starting Point 2012: Expect QE3 Impact on Asset Prices 2013–2014: Three Scenarios Impact on Asset Prices Conclusion Notes Chapter 8: Disaster Scenarios The Last Great Depression And This Time?

Every boom busts. And the bust occurs when credit ceases to expand. This chapter considers why the debt of the private sector in the United States cannot expand further. Next, this chapter looks at the overconcentrated and underregulated U.S. banking sector in order to clarify exactly what is meant by “too big to fail.” The chapter concludes with a discussion of the global imbalances that continue to destabilize the world. Global supply greatly exceeds sustainable demand. The gap between the two has been filled with U.S. demand, financed by debt. If credit in the United States now ceases to expand, there is a real danger that this 40-year boom will break down into a New Great Depression.


Termites of the State: Why Complexity Leads to Inequality by Vito Tanzi

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Andrei Shleifer, Andrew Keen, Asian financial crisis, asset allocation, barriers to entry, basic income, bitcoin, Black Swan, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, clean water, crony capitalism, David Graeber, David Ricardo: comparative advantage, deindustrialization, Donald Trump, Double Irish / Dutch Sandwich, experimental economics, financial repression, full employment, George Akerlof, Gini coefficient, Gunnar Myrdal, high net worth, hiring and firing, illegal immigration, income inequality, indoor plumbing, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jean Tirole, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labor-force participation, libertarian paternalism, Long Term Capital Management, market fundamentalism, means of production, moral hazard, Naomi Klein, New Urbanism, obamacare, offshore financial centre, open economy, Pareto efficiency, Paul Samuelson, price stability, principal–agent problem, profit maximization, pushing on a string, quantitative easing, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The Market for Lemons, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, Tyler Cowen: Great Stagnation, universal basic income, unorthodox policies, urban planning, very high income, Vilfredo Pareto, War on Poverty, Washington Consensus, women in the workforce

Furthermore, in increasingly common, real-life settings, some market operators may acquire so much space in the economy, and implicit monopoly power, that they may come to believe that, if things go badly in 80 Termites of the State some of their market operations, the government will be forced to come to their rescue. This belief may encourage them to take more risks than they would or should have taken otherwise. This is now believed to happen when some financial institutions, and especially some banks, become “too big to fail” (see Shiller, 2000; Lowenstein, 2000). Some operators may simply not be as well informed as they believe they are when they make investments, and these errors may not be completely random. Some may underestimate the risks they are taking, or believe that they are nimble enough to outrun potential bad events.

As the justifiers might put it, when a house is on fire, firefighters cannot worry about the moral hazard consequences of putting out the fire! Of course, these interpretations of what might have happened might be right or wrong, and we shall never know. The same argument will be offered in probable future crises, as long as the banks and the other financial institutions remain “too big to fail.” See Bernanke (2015) and Geithner (2014) for a defense of the rescue operations in 2008–2009. See King (2016) for a more skeptical view. Market capitalism was replaced, at least in some areas, by what some have called “casino capitalism” (see Sinn, 2010). In casino capitalism the government would allow gamblers to bet any amount, but it would assist them in case of losses, to prevent potentially bad social outcomes.

This second alternative would require the removal, or at least the reduction, of illegitimate or undesirable market power from some individuals and enterprises, or from some economic activities, especially, but not only, Growth of Termites 119 when that power comes, directly or indirectly, from governmental actions or often inactions. It also requires better rules and more efficient institutions, which may not be easy to provide. For example, financial institutions that are “too big to fail” or are too much in the shadow would need to be reduced in size and made more transparent; enterprises that have acquired too much power would need to be made truly competitive; positions that, because of difficulties to enter provide too much market power and generate rents to some individuals, would need to lose their monopoly power; and some protection now justified on grounds of “intellectual property” for some individuals and enterprises would need to be reduced.


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, Savings and loan crisis, savings glut, selection bias, short selling, sovereign wealth fund, tail risk, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

These changes—along with the new limits on concentration, the stronger shock absorbers across the system, and the “systemic surcharge” imposing higher capital requirements on the largest banks—are quietly reducing the risks of too-big-to-fail. As the FDIC has formalized its rules for resolution authority, the rating agencies have reduced their “ratings uplift” for the unsecured debt of larger banks; they’re no longer considered negligible default risks regardless of their financial condition, because markets are less confident the government would step in to save them if they fail. Today, many small and midsize institutions pay less to borrow than the supposedly too-big-to-fail banks. On a less positive note, Dodd-Frank’s elimination of the broader FDIC guarantee authority, together with the loss of the Fed’s power to lend to individual nonbanks, leaves the financial system weaker and more exposed to future panics.

But while the century-old insurer had become a three-letter symbol of excessive risk, AIG also had tens of millions of innocent policyholders and pensioners who depended on it, plus tens of thousands of derivatives contracts with businesses around the world. A default on its debts or even a downgrade of its credit rating would reignite the panic. Citi and Bank of America were the biggest of the bombs, Exhibits A and B for the outrage over “too big to fail” banks; my aides called them the Financial Death Stars. But the world was so fragile, and they really were so big, that if we didn’t want a reprise of the Depression—an obliterated banking sector, 25 percent unemployment, thousands of businesses shuttered—we had to make sure they didn’t drag down the system, even if it looked like we were rewarding the reckless.

While the direct impact of Bear’s failure would be bad, the real danger was that it would spark runs or margin calls on other firms perceived to have similar vulnerabilities or exposure to counterparties with similar vulnerabilities, triggering a chain reaction of fear and uncertainty that could imperil the entire system. “Too big to fail” has become the catchphrase of the crisis, but that night, our fear was that Bear was “too interconnected to fail” without causing catastrophic damage. And it was impossible to guess the magnitude of that damage. There were too many other firms that looked like Bear in terms of their leverage, their dependence on short-term funding, and their exposure to devastating losses as the housing market dropped and recession fears mounted.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Betraying his fear of another Bear Stearns, Paulson declared, “We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm.” He stressed that he wanted to reduce the “perception” that the government considered some firms too big to fail. Yet he added, in somewhat contradictory fashion, that his first duty was ensuring market stability.12 The tension between stability and moral hazard had raged since Bear Stearns, and it was not going away. Investors in Fannie Mae and Freddie Mac were highly unsettled, and Fannie and Freddie—responsible for about half of America’s mortgages—were as close to “too big to fail” as any corporations in existence. On June 30, two days prior to Paulson’s speech, Fannie Mae’s stock had plunged by 6 percent and Freddie Mac’s by 8 percent.

Having won from the government a massive guarantee, Citi was hungrily, even greedily, attempting to extract from its partner every morsel of its remaining worth. Perhaps Pandit judged that he could dictate terms because, as he knew, the government was so invested in the agreement. Citigroup was seen as truly too big to fail, and any upset to it horrified the Fed. For the better part of the week, Pandit’s negotiators ploddingly pressed their case. On Thursday, the two CEOs met in New York again. With the deadline only twenty-four hours away, the rival teams were laboring under tremendous pressure, two of the execs frantically scribbling terms on a napkin.

In general, there was greater agreement that reform was necessary than over what it should entail. Legislative attention focused on four areas:1. Protecting consumers of financial products such as mortgages and credit cards 2. Regulating complex instruments such as derivatives 3. Obviating the need for future government bailouts, either by (a) keeping banks from becoming too big to fail or (b) ensuring that big banks did not assume too much risk 4. Limiting Wall Street bonuses The public embraced only the last of these. Early in 2009, after revelations of continued outsized bonus payments at AIG and Merrill Lynch, an uproar ensued. Astonishingly, Merrill had paid million-dollar bonuses to approximately seven hundred employees in 2008, a year in which the firm lost $27 billion and in which both it and its acquirer were rescued with federal TARP monies.


pages: 538 words: 121,670

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It by Lawrence Lessig

asset-backed security, banking crisis, carried interest, circulation of elites, cognitive dissonance, corporate personhood, correlation does not imply causation, crony capitalism, David Brooks, Edward Glaeser, Filter Bubble, financial deregulation, financial innovation, financial intermediation, invisible hand, jimmy wales, Martin Wolf, meta-analysis, Mikhail Gorbachev, moral hazard, Pareto efficiency, place-making, profit maximization, Ralph Nader, regulatory arbitrage, rent-seeking, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Silicon Valley, single-payer health, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, WikiLeaks, Yochai Benkler, Zipcar

Simon Johnson and James Kwak, 13 Bankers (New York: Pantheon Books, 2010), 151–52. The change was in the Federal Deposit Insurance Corporation Improvement Act of 1991. 42. Ibid., 180. In a later analysis, Kwak writes “that the [‘too big to fail’] subsidy exists, even after controlling for other factors that explain bank funding costs, and that it is in the range of 50 to 73 basis points.” James Kwak, “Who Is Too Big to Fail?” Presented at “New Ideas for Limiting Bank Size,” conference of the Fordham Corporate Law Center, Fordham Law School, New York, March 12, 2010, 26. 43. Financial Crisis Inquiry Commission, Financial Crisis Inquiry Report (2011), 58. 44.

“The obvious explanation,” Raghuram Rajan writes, “is that [they] did not think they would need to bear losses because the government would step in.”40 Simon Johnson and James Kwak point to at least one case in which the financial executives of one major bank calibrated the risk they would take based upon the government’s decision to expand the bailout capacity of the Federal Reserve.41 They and others have pointed to the discount the market gave big banks for their cost of capital as evidence that the market believed those banks “too big to fail”: “Large banks were able to borrow money at rates 0.78 percentage points more cheaply than smaller banks, up from an average of 0.29 percentage points from 2000 through 2007.”42 Harvey Miller, the bankruptcy counsel for Lehman Brothers, was even more explicit than this: As he told the Financial Crisis Inquiry Commission, hedge funds “expected the Fed to save Lehman, based on the Fed’s involvement in [previous crises].

As Simon Johnson and James Kwak calculated the advantage in 2009: “Large banks were able to borrow money at rates 0.78nsu mo percentage points more cheaply than smaller banks, up from an average of 0.29 percentage points from 2000 through 2007.”37 “In the period since” the crisis, as Oliver Hart and Luigi Zingales summarize a study by economists Dean Baker and Travis McArthur: “the spread had grown to 0.49 percentage points. This increased spread is the market’s estimate of the benefit of the implicit insurance offered to large banks by the ‘too big to fail’ policy. For the 18 American banks with more than $100 billion each in assets, this advantage corresponds to a roughly $34 billion total subsidy per year.”38 A $34 billion subsidy per year: that’s 500,000 elementary school teachers, or 600,000 firefighters, or 4.4 million slots for kids in Head Start programs, or coverage for 4 million veterans in VA hospitals.39 We don’t spend that money on those worthy causes in America.


pages: 351 words: 102,379

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves by Andrew Ross Sorkin

affirmative action, Andy Kessler, Asian financial crisis, Bear Stearns, Berlin Wall, break the buck, BRICs, business cycle, collapse of Lehman Brothers, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Emanuel Derman, Fall of the Berlin Wall, fear of failure, fixed income, Goldman Sachs: Vampire Squid, housing crisis, indoor plumbing, invisible hand, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Mikhail Gorbachev, money market fund, moral hazard, naked short selling, NetJets, Northern Rock, oil shock, paper trading, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, shareholder value, short selling, sovereign wealth fund, supply-chain management, too big to fail, value at risk, éminence grise

Too Big to Fail TOO BIG TO FAIL The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves Andrew Ross Sorkin VIKING VIKING Published by the Penguin Group Penguin Group (USA) Inc., 375 Hudson Street, New York, New York 10014, U.S.A. • Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) • Penguin Books Ltd, 80 Strand, London WC2R 0RL, England • Penguin Ireland, 25 St. Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd) • Penguin Books Australia Ltd, 250 Camberwell Road, Camberwell, Victoria 3124, Australia (a division of Pearson Australia Group Pty Ltd) • Penguin Books India Pvt Ltd, 11 Community Centre, Panchsheel Park, New Delhi–110 017, India • Penguin Group (NZ), 67 Apollo Drive, Rosedale, North Shore 0632, New Zealand (a division of Pearson New Zealand Ltd) • Penguin Books (South Africa) (Pty) Ltd, 24 Sturdee Avenue, Rosebank, Johannesburg 2196, South Africa Penguin Books Ltd, Registered Offices: 80 Strand, London WC2R 0RL, England First published in 2009 by Viking Penguin, a member of Penguin Group (USA) Inc.

Macchiaroli, associate director, Division of Trading and Markets Erik R. Sirri, director, Division of Market Regulation Linda Chatman Thomsen, director, Division of Enforcement White House Joshua B. Bolten, chief of staff, Office of the President George W. Bush, president of the United States Too Big to Fail PROLOGUE Standing in the kitchen of his Park Avenue apartment, Jamie Dimon poured himself a cup of coffee, hoping it might ease his headache. He was recovering from a slight hangover, but his head really hurt for a different reason: He knew too much. It was just past 7:00 a.m. on the morning of Saturday, September 13, 2008.

But never have I witnessed such fundamental and dramatic changes in business paradigms and the spectacular self-destruction of storied institutions. This extraordinary time has left us with a giant puzzle—a mystery, really—that still needs to be solved, so we can learn from our mistakes. This book is an effort to begin putting those pieces together. At its core Too Big to Fail is a chronicle of failure—a failure that brought the world to its knees and raised questions about the very nature of capitalism. It is an intimate portrait of the dedicated and often baffled individuals who struggled—often at great personal sacrifice but just as often for self-preservation—to spare the world and themselves an even more calamitous outcome.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bond market vigilante , Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, Post-Keynesian economics, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, Steve Bannon, structural adjustment programs, tail risk, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

Morgan did not need the money, and by agreeing to go along with the government’s efforts to stop the run, Dimon passed up the opportunity to predate any more of his weaker competitors. For critics of the bailout, like Sheila Bair of the FDIC, it seemed that the entire process was a smoke screen put up to hide a bailout of Citigroup.112 The Clinton-era network was still at work. Citi was not just too big to fail. It was too well connected. Whatever one thinks of this interpretation, it is undeniable that as soon as the extreme panic of early October had passed, the pretense of equal treatment was dropped. The October stabilization was not enough for Citigroup. In November it disclosed huge losses and announced fifty-two thousand layoffs.

When Geithner resisted bank nationalization it was to shield the monetary authorities as much as any individual bank. A comprehensive attack on Wall Street could all too easily spill over into an attack on the agencies that oversaw its business. In 2009 “audit the Fed” was a battle cry on both left and right. With Geithner at the helm, the Treasury’s response to the crisis was not to tackle “too big to fail” by breaking up the biggest banks. Nor was it to bring the interests of wider society to bear by way of politicized oversight. Instead, the Treasury’s solution was to increase the oversight and managerial capacities of the state’s regulatory agencies—the Treasury itself, the key regulators and the Fed.

Was it the breakdown of responsibility in the extended chains of mortgage securitization that poisoned the well? In which case securitizers should be required to have skin in the game (Title IX—Investor Protections). Was the sheer size of banks at the root of all the problems? Were they simply too big to fail? In which case the answer was to restrict bailouts and to make the industry pay for them (Title II—Orderly Liquidation Authority) and to cap banks’ further growth (Title VI, sections 622 and 623). Had investment banks used client money to gamble? If so, the thing to do was to reinstate 1930s-style divisions between commercial and investment banking by way of the so-called Volcker rule banning “proprietary trading” (Title VI, Volcker rule).


Undoing the Demos: Neoliberalism's Stealth Revolution by Wendy Brown

Affordable Care Act / Obamacare, bitcoin, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, corporate governance, credit crunch, crowdsourcing, David Brooks, Food sovereignty, haute couture, Herbert Marcuse, immigration reform, income inequality, invisible hand, labor-force participation, late capitalism, means of production, new economy, obamacare, occupational segregation, Philip Mirowski, Ronald Reagan, sexual politics, shareholder value, sharing economy, The Chicago School, the market place, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trickle-down economics, Washington Consensus, Wolfgang Streeck, young professional, zero-sum game

This is not true of strategic sacrifice in a game, such as chess, where one calculates the gains expected from the move. 35. According to many analysts, the “too big to fail” problem is far worse than it was in 2008. “The six largest banks in the nation now have 67% of all the assets in the U.S. financial system, according to bank research firm SNL Financial. That amounts to $9.6 trillion, up 37% from five years ago.” Stephen Gandel, “By Every Measure, the Big Banks are Bigger,” CNN Money, September 13, 2013, http://finance.fortune.cnn.com/2013/09/13/too-big-to-fail-banks. 36. Hubert and Mauss, Sacrifice, pp. 98–99. 37. Girard, “Violence and the Sacred,” p. 247. 38.

Financialization also spurs the state to develop derivative markets of its own in everything from terror prediction to student loans and mortgages. 6) The rise of “governance,” the meshing of political and business lexicons through which neoliberal reason is disseminated; the antipathy of governance to politics; and the displacement of the rule of law with instruments of governance such as benchmarks, guidelines, buyins, and best practices. 7) The transformation of economic actors and action by governance such that teamwork, responsibilization, and stakeholder consensus replace individual interest; the shift, in short from a neoliberal discourse of free subjects to a discourse featuring more explicitly governed, “responsibilized,” and managed subjects. 8) The way that governance integrates self-investing and responsibilized human capital into the project of a growing economy, further mitigating the importance of individual “interests” and freedom. 9) As elements of this governance, the combination of devolved authority and responsibilization of the subject, which together intensify the effect of “omnes et singulatim” — all and each — power exercised through massification and isolation. 10) The way these features of governance and human capital generate a citizen who is both integrated into and identified with the project C h a r t in g N eo l ib e r a l P o l i t i c a l R at i o n a l i t y 71 of the economic health of a nation, a citizen who can be legitimately shed or sacrificed when necessary, especially in the context of austerity politics. 11) The way that “too big to fail” has as its complement “too small to protect”: where there are only capitals and competition among them, not only will some win while others lose (inequality and competition unto death replaces equality and commitment to protect life), but some will be rescued and resuscitated, while others will be cast off or left to perish (owners of small farms and small businesses, those with underwater mortgages, indebted and unemployed college graduates).

Moreover, the addressee of sacrifice is not the nation, not the demos, but the spectacularly imbricated state and economy on which all life depends, but which also command destruction and deprivation. In the 2008 subprime mortgage crisis, for example, 700 billion taxpayer dollars and over five million homeowners were fed to banks “too big to fail.”35 Thus we are returned to the religious valence of sacrifice. In shared sacrifice for economic restoration, we sacrifice “to,” rather than “for,” and make an offering to a supreme power on which we are radically dependent, but that owes us nothing. We are called to offer life to propitiate and regenerate its life-giving capacities . . . but without any guarantee that the benefits of this sacrifice will redound to us.


pages: 387 words: 119,244

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

asset-backed security, bank run, Basel III, Bear Stearns, beat the dealer, Big bang: deregulation of the City of London, call centre, central bank independence, computer age, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, deindustrialization, deskilling, Edward Thorp, Etonian, Eugene Fama: efficient market hypothesis, eurozone crisis, falling living standards, financial deregulation, financial innovation, G4S, high net worth, interest rate swap, invisible hand, joint-stock company, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, long term incentive plan, moral hazard, negative equity, Neil Kinnock, Nick Leeson, North Sea oil, Northern Rock, old-boy network, pets.com, Red Clydeside, shareholder value, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, value at risk

Since the financial crisis that notion has been challenged, most notably in the UK by Andrew Haldane of the Bank of England. It is a well-established theory that some banks were so systematically important that when the crisis came they were ‘too big to fail’. Government felt it had no choice other than to rescue them. Haldane refers in addition to them being ‘too big to be efficient’ in the first place. Academics have explored the ‘implicit subsidy’ of ‘too big to fail’ banks, which suggests that they obtain lower funding costs from the markets because it is factored in that we, the taxpayer, will not let them go bust if it comes to it.4 So their apparent efficiencies of scale may well depend on us being there to foot the bill and bail them out.5 As Professor John Kay has pointed out, this is not a sustainable set-up in a democracy: ‘When the next crisis hits, and it will, that frustrated public is likely to turn, not just on politicians who have been negligently lavish with public funds, or on bankers, but on the market system.

He wrote: ‘Large global institutions have often proved more resilient than others because their diversified business model ensures that losses in one part of the enterprise can be cushioned by revenues in other parts.’ This seems not to have been the case in the collapse of RBS. 4 ‘The Social Costs and Benefits of Too-Big-To-Fail Banks: A “Bounding”Exercise’, John H. Boyd and Amanda Heitz, University of Minnesota, February 2012. 5 ‘The implicit subsidy of banks’, Joseph Noss and Rhiannon Sowerbutts, Financial Stability paper, 15 May 2012. Bank of England. 6 ‘“Too big to fail” is too dumb an idea to keep’, John Kay, Financial Times, 27 October 2009. 7 The credit for the development of the efficient market hypothesis is often given to Professor Eugene Fama, of the University of Chicago Booth School of Business.

Academics have explored the ‘implicit subsidy’ of ‘too big to fail’ banks, which suggests that they obtain lower funding costs from the markets because it is factored in that we, the taxpayer, will not let them go bust if it comes to it.4 So their apparent efficiencies of scale may well depend on us being there to foot the bill and bail them out.5 As Professor John Kay has pointed out, this is not a sustainable set-up in a democracy: ‘When the next crisis hits, and it will, that frustrated public is likely to turn, not just on politicians who have been negligently lavish with public funds, or on bankers, but on the market system. What is at stake now may not just be the future of finance, but the future of capitalism.’6 If they are too big to fail and too big to be efficient, then ultimately the mega-banks are too big to be useful. So far the UK government has been resistant to radical ideas of ordering the break-up of the banks, although it wants to encourage new entrants to the banking market and has done a little, not much, to encourage that.


pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

Airbus A320, Apple's 1984 Super Bowl advert, bank run, banking crisis, Bear Stearns, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, glass ceiling, high net worth, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Nelson Mandela, Plutocrats, plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, US Airways Flight 1549, yield curve

., p. 614. 9 Paulson declared that Lehman was in deep trouble: On the Brink, p. 192. 10 Thain’s driver took him to a restaurant: Too Big to Fail, pp. 305–306. CHAPTER 13. THE LONGEST DAY 1 Geithner reiterated his stance: Too Big to Fail, p. 311. 2 Before hanging up, Herlihy: Ibid., p. 314. 3 Sometime after 10:30, the group comprised: Ibid., p. 321. 4 “We have to figure out how to organize ourselves”: On the Brink, pp. 197–98. 5 The treasury secretary warned his former subordinate: Ibid., pp. 203–204. 6 After brief opening remarks from Thain: Too Big to Fail, p. 331. 7 Fleming said he was going to ask for a “three-handle,”: Ibid., p. 339.

PROLOGUE 1 Waccabuc: golf scores from Metropolitan Golf Association website. 2 Roanoke, grew up in Wedowee: “Shaking Up Merrill,” by Emily Thornton, with Anne Tergesen and David Welch, BusinessWeek, Nov. 12, 2001. 3 “The modest sums of the thrifty”: from an unpublished history of Merrill Lynch, by William Ecenbarger, obtained by the author. 4 “bullish on America”: Ibid. 5 “In 2001”: “Merrill Picks Heir Apparent to Top Job,” by Joseph Kahn, The New York Times, July 25, 2001; “Merrill Lynch Names O’Neal President,” by Charles Gasparino, The Wall Street Journal, July 25, 2001. 6 “O’Neal was about to meet with Ken Lewis”: Too Big to Fail, by Andrew Ross Sorkin, Viking, 2009, p. 314. 7 played golf almost every day: Metropolitan Golf Association website. 8 “Through a series of mergers”: The Story of NationsBank, by Howard E. Covington, Jr., and Marion A. Ellis. 9 “Curl and Lewis … exchanged glances as the moments ticked by”: Too Big to Fail, p. 315. CHAPTER 1. THE YOUNG TURK 1 “My name’s Tom Spinelli”: transcript of Stan O’Neal’s presentation at Merrill Lynch annual meeting in Princeton, New Jersey, April 27, 2007. 2 caused investors such as Merrill Lynch to seize some of the CDOs as collateral: The Sellout, by Charles Gasparino, Harper Business, 2009, p. 265. 3 Stan O’Neal was one of the best paid executives on Wall Street: O’Neal’s compensation figures taken from documents prepared on behalf of Rep.

THE ADVENTURES OF SUPER-THAIN 1 He was a star on his high school wrestling team … (and other details from Thain’s background in Illinois): “The Adventures of Super-Thain,” by Justin Schack, Institutional Investor, June 14, 2006. 2 That summer, he shipped off to Cincinnati: Ibid. 3 Thain’s move to the Exchange: “NYSE’s Steady Pilot,” by Joe Weber, BusinessWeek, Feb. 28, 2006. 4 When Thain called his first management committee meeting to order (and other details about Thain’s arrival at the Exchange): “The Exchange Faces Change,” by Julie Creswell, Fortune, Aug. 9, 2004. 5 Thain fires the barber at the NYSE: “The Taming of Merrill Lynch,” by Gary Weiss, Portfolio, April 14, 2008. 6 Then there was the special elevator: Sorkin, Too Big to Fail, p. 139. 7 Details about Thain’s office and the bill for individual items: “John Thain’s $87,000 Rug,” by Charlie Gasparino, the Daily Beast/CNBC, Jan. 22, 2009. 8 John Thain reached out to Stan O’Neal: Sorkin, Too Big to Fail, pp. 141–42. CHAPTER 7. THE SMARTEST GUY IN THE ROOM 1 Thain arrived the evening before his speech: “The Taming of Merrill Lynch,” by Gary Weiss, Portfolio. 2 “When you’re the smartest guy in the room”: “Merrill’s Repairman,” by Lisa Kassenaar and Yalman Onaran, Bloomberg Markets, February 2008. 3 In an interview with a French newspaper: Le Figaro, March 8, 2008. 4 That same month, he told a Spanish newspaper: El Pais, March 16, 2008. 5 “He is a very popular guy”: “Merrill’s Risk Manager—New Chief John Thain on What Led to the Losses and Why He’s Hiring Goldman Sachs Executives,” by Susanne Craig and Randall Smith, The Wall Street Journal, Jan. 18, 2008.


pages: 303 words: 100,516

Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork by Reeves Wiedeman

Adam Neumann (WeWork), Airbnb, barriers to entry, Burning Man, call centre, carbon footprint, coronavirus, corporate governance, Covid-19, COVID-19, cryptocurrency, Donald Trump, dumpster diving, East Village, eat what you kill, Elon Musk, fear of failure, Gordon Gekko, housing crisis, index fund, Jeff Bezos, Lyft, margin call, Mark Zuckerberg, Maui Hawaii, medical residency, Menlo Park, mortgage debt, Network effects, new economy, prosperity theology / prosperity gospel / gospel of success, ride hailing / ride sharing, Sand Hill Road, sharing economy, Silicon Valley, Silicon Valley startup, Skype, Snapchat, software as a service, sovereign wealth fund, starchitect, stealth mode startup, Steve Jobs, Steve Wozniak, the High Line, Tim Cook: Apple, too big to fail, Travis Kalanick, Uber for X, uber lyft, WeWork, zero-sum game

The company was on target to overtake JPMorgan as New York’s largest office tenant, just as Adam had promised it would, and he hoped to make a splash in doing so: WeWork was planning to lease a dozen floors in One World Trade Center, where the Twin Towers once stood, including space occupied by Condé Nast, the once-glamorous magazine publisher—another bastion of the old guard pushed out by Adam and Masa’s expansion. Andrew Ross Sorkin, the New York Times reporter who wrote the book Too Big to Fail, about the 2008 financial crisis, thought that the phrase Adam had long hoped would define his company might now realistically apply to WeWork. “The idea of ‘too big to fail’ has long applied to banks and whether the government would come to the rescue to prop them up,” Sorkin wrote. “In this case, landlords all over the world might find themselves in the uncomfortable position of having to help save a failing tenant simply because the tenant is so large.”

Neumann had been racing against time for the past decade, riding the longest economic expansion in American history while telling anyone who questioned his risky growth strategy that he wasn’t playing by traditional business rules: he had launched WeWork on the heels of the Great Recession, and his goal was to become the kind of institution deemed Too Big to Fail before the next one arrived. Now, in the decade’s final turn, he was racing to the finish line. WeWork was running out of money. Neumann had tapped out the world of private capital and racked up hundreds of millions of dollars in debt. He was preparing to take WeWork public: the only viable path to continue its growth, as well as an opportunity to cash in on what he and others at WeWork had built.

“We got out of coworking because the margins were so bad it didn’t seem like you were going to ever get there.” Later, Schwartz met Adam for lunch, during which he expressed his concern about Neumann’s industry. “I don’t have to worry about that,” Adam said, explaining that so long as the economy was humming along, he had only one goal. “My job is to keep growing until I’m too big to fail.” Adam wanted to become just as enmeshed in the real estate world as the big banks had become in the broader economy; if WeWork grew large enough, landlords would have to bend to its will. Adam’s focus on growth at the expense of profitability fit with an emerging business theory that it was best to acquire customers by any means necessary and then figure out how to make money later.


pages: 303 words: 100,516

Billion Dollar Loser: The Epic Rise and Spectacular Fall of Adam Neumann and WeWork by Reeves Wiedeman

Adam Neumann (WeWork), Airbnb, barriers to entry, Burning Man, call centre, carbon footprint, coronavirus, corporate governance, Covid-19, COVID-19, cryptocurrency, Donald Trump, dumpster diving, East Village, eat what you kill, Elon Musk, fear of failure, Gordon Gekko, housing crisis, index fund, Jeff Bezos, Lyft, margin call, Mark Zuckerberg, Maui Hawaii, medical residency, Menlo Park, mortgage debt, Network effects, new economy, prosperity theology / prosperity gospel / gospel of success, ride hailing / ride sharing, Sand Hill Road, sharing economy, Silicon Valley, Silicon Valley startup, Skype, Snapchat, software as a service, sovereign wealth fund, starchitect, stealth mode startup, Steve Jobs, Steve Wozniak, the High Line, Tim Cook: Apple, too big to fail, Travis Kalanick, Uber for X, uber lyft, WeWork, zero-sum game

The company was on target to overtake JPMorgan as New York’s largest office tenant, just as Adam had promised it would, and he hoped to make a splash in doing so: WeWork was planning to lease a dozen floors in One World Trade Center, where the Twin Towers once stood, including space occupied by Condé Nast, the once-glamorous magazine publisher—another bastion of the old guard pushed out by Adam and Masa’s expansion. Andrew Ross Sorkin, the New York Times reporter who wrote the book Too Big to Fail, about the 2008 financial crisis, thought that the phrase Adam had long hoped would define his company might now realistically apply to WeWork. “The idea of ‘too big to fail’ has long applied to banks and whether the government would come to the rescue to prop them up,” Sorkin wrote. “In this case, landlords all over the world might find themselves in the uncomfortable position of having to help save a failing tenant simply because the tenant is so large.”

Neumann had been racing against time for the past decade, riding the longest economic expansion in American history while telling anyone who questioned his risky growth strategy that he wasn’t playing by traditional business rules: he had launched WeWork on the heels of the Great Recession, and his goal was to become the kind of institution deemed Too Big to Fail before the next one arrived. Now, in the decade’s final turn, he was racing to the finish line. WeWork was running out of money. Neumann had tapped out the world of private capital and racked up hundreds of millions of dollars in debt. He was preparing to take WeWork public: the only viable path to continue its growth, as well as an opportunity to cash in on what he and others at WeWork had built.

“We got out of coworking because the margins were so bad it didn’t seem like you were going to ever get there.” Later, Schwartz met Adam for lunch, during which he expressed his concern about Neumann’s industry. “I don’t have to worry about that,” Adam said, explaining that so long as the economy was humming along, he had only one goal. “My job is to keep growing until I’m too big to fail.” Adam wanted to become just as enmeshed in the real estate world as the big banks had become in the broader economy; if WeWork grew large enough, landlords would have to bend to its will. Adam’s focus on growth at the expense of profitability fit with an emerging business theory that it was best to acquire customers by any means necessary and then figure out how to make money later.


pages: 549 words: 147,112

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Kirsten Grind

asset-backed security, bank run, banking crisis, Bear Stearns, big-box store, call centre, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, fixed income, housing crisis, Maui Hawaii, money market fund, mortgage debt, naked short selling, NetJets, Savings and loan crisis, shareholder value, short selling, Shoshana Zuboff, Skype, too big to fail, Y2K

After Reuters ran a story suggesting Continental would file for bankruptcy, the bank’s customers began withdrawing their money. Other banks stepped up with a $4.5 billion bailout package to help Continental, fearful of what its failure could mean to the industry. The money wasn’t enough. The federal government had to decide: Was Continental too big to fail? It was the first time the description arose. (An acronym was born: TBTF.) If too many other financial institutions and companies were tied up with it, the bank’s failure could spark an even bigger crisis. The government looked for another company to buy Continental but couldn’t find one. Finally, it cobbled together a bailout package that included buying some of the bank’s $400 million in bad loans and propping it up with capital.

The day after WaMu failed, when a reporter from The Seattle Times called, asking for a quote, he unleashed his anger.3 “That it comes to a demise like this is absolutely pathetic,” he said. “It was a great institution for 110 years or more, and to see it so mishandled that it would be the largest bank failure in the country is abominable, to put it mildly.” While the debate over whether banks had grown too large (“too big to fail”) had entered popular consciousness, Pepper didn’t think that was the problem at WaMu. “Big institutions can succeed,” he told the newspaper, “but they have to be run like little institutions. You have to give autonomy to the branches, and have people being nice to each other. You can’t have this monolith.”

On the roots of the financial crisis: All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera. On the early years at Long Beach Mortgage: The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America—and Spawned a Global Crisis by Michael W. Hudson. On the ticktock of the crucial months of the crisis in 2008: Too Big to Fail by Andrew Ross Sorkin. And on JPMorgan Chase: Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase by Duff McDonald. To research Long Beach Mortgage, I took a weeks-long road trip to Southern California, interviewing brokers and account executives at Long Beach and at other companies in the subprime industry.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The third and most striking aspect of market-negating regulation in the course of financialization, however, has been the gradual prevalence of the principle of ‘too big to fail’ among financial institutions. Banks considered ‘too big to fail’ have often been effectively (if tacitly) protected against failure on the grounds that failure would have severe externalities, including the possibility of generalized collapse of the financial system. Intervention has, therefore, focused on avoiding the putative ‘systemic’ risk by protecting the solvency of banks, rather than simply providing liquidity; public funds have frequently been made available to financial institutions for this purpose. The principle of ‘too big to fail’ clearly poses moral hazard problems since it protects bank shareholders and bondholders from the consequences of failure.

Acharya and Matthew Richardson, ’Causes of the Financial Crisis’, Critical Review 21:2, 2009; Darrell Darrell Duffie, How Big Banks Fail and What to Do About It, Princeton, NJ: Princeton University Press, 2011. Note that Gary Dymski has offered a critical perspective on ‘too big to fail’ banks, arguing that their emergence has placed a constraint on the ability of the authorities to adopt radical measures to resolve a crisis. ‘Megabanks’ have a hold on financial and regulatory policy, shaping it according to their own preferences. Gary Dymski, ‘Genie out of the Bottle: The Evolution of Too-Big-to-Fail Policy and Banking Strategy in the US’, 8 June 2011, at postkeynesian.net. 33 The following account of the crisis draws heavily on Costas Lapavitsas, ‘Financialised Capitalism: Crisis and Financial Expropriation’, Historical Materialism 17:2, 2009, pp. 114–48. 34 Markus Brunnermeier and Lasse Heje Pedersen have distinguished between ‘funding’ and ‘market’ liquidity in the context of the crisis (‘Market Liquidity and Funding Liquidity’, Review of Financial Studies 22:6, 2009).

The cause of the run was concern about the liquidity of the bonds used as collateral for repos, particularly when these bonds were related to the subprime market. The result was that the US financial system became insolvent since it could not service its debts. The causes of the US banking crisis have also been attributed to the emergence of banks that are ‘too big to fail’. This issue is directly related to the regulation of the financial system – and is thus discussed in Chapter 10 – but it also has a bearing on the unfolding of the crisis. Lisa DeFerrari and David Palmer recognized the dominant role of a few financial institutions already in the early 2000s, coining the term ‘large complex banking organizations’.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

Asian financial crisis, banking crisis, Bear Stearns, Bretton Woods, business cycle, buy and hold, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, Nixon triggered the end of the Bretton Woods system, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

During the heady days of 1999, for example, the magazine edi-torialized in “Breaking Glass-Steagall” against the “grossly misnamed ‘Financial Services Modernization Act,’” which would remove the Depression-era wall between commercial and in- ix vestment banks and thus pave the way for “future taxpayer bailouts of too-big-to-fail financial institutions.” As far back as 1990, Robert Sherrill discerned in the S&L crisis the early signs that something similar might be in store for the banking sector. At that time, Sherrill noted, the chorus calling for deregulation was recklessly demanding the repeal of laws that “protect the banking sector from its worst instincts by insisting that the banks remain banks, and not become gamblers, hucksters and hustlers in other lines as well.”

A photo op Obama arranged with his economic advisers a few weeks before the election tells the story. Arrayed on either side were policy leaders from the old order. Former Federal Reserve chair Paul Volcker collaborated in the initial deregulation of banking in 1980 and presided over the initial bail-outs of banks deemed “too big to fail.” Robert Rubin was the architect of Clinton’s center-right economic strategy and is now senior counselor at Citigroup, itself endangered and the recipient of $25 billion in public aid. Lawrence Summers, disgraced as president of Harvard, is now managing partner of D. E. Shaw, a $39 billion private-equity firm and hedge fund that specializes in es-oteric mathematical investing strategies.

Now the ban on common ownership has been lifted—and the wall separating banking and commerce is likely soon to be breached. The misnamed Financial Services Modernization Act will usher in another round of record-breaking mergers, as companies rush to combine into “one stop shopping” operations, concentrating financial power in trillion-dollar global giants and paving the way for future taxpayer bailouts of too-big-to-fail financial corporations. Regulation of this new universe will be minimal, with powers scattered among a half-dozen federal agencies and fifty state insurance departments—none with sufficient clout to do the job. The final two major debates over the bill’s provisions focused not on the core-questions of concentrated financial power and regulatory controls but on issues of privacy and lending practices.


pages: 316 words: 87,486

Listen, Liberal: Or, What Ever Happened to the Party of the People? by Thomas Frank

Affordable Care Act / Obamacare, Airbnb, Amazon Mechanical Turk, American ideology, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Burning Man, centre right, circulation of elites, Clayton Christensen, collective bargaining, Credit Default Swap, David Brooks, deindustrialization, disruptive innovation, Donald Trump, Edward Snowden, Fall of the Berlin Wall, financial innovation, Frank Gehry, full employment, George Gilder, gig economy, Gini coefficient, income inequality, independent contractor, Jaron Lanier, Jeff Bezos, knowledge economy, knowledge worker, Lean Startup, mandatory minimum, Marc Andreessen, Mark Zuckerberg, market bubble, mass immigration, mass incarceration, McMansion, microcredit, mobile money, moral panic, mortgage debt, Nelson Mandela, new economy, obamacare, payday loans, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, post-industrial society, postindustrial economy, pre–internet, profit maximization, profit motive, race to the bottom, Republic of Letters, Richard Florida, ride hailing / ride sharing, Ronald Reagan, Savings and loan crisis, sharing economy, Silicon Valley, Steve Jobs, Steven Levy, TaskRabbit, Thorstein Veblen, too big to fail, Travis Kalanick, Uber for X, union organizing, urban decay, WeWork, women in the workforce, Works Progress Administration, young professional

The smaller banks Clinton was pushing toward extinction (i.e., “the weak”) tended to be much more prudent lenders than their giant cousins (“the strong”), which before long were issuing mortgages to anyone who wanted one. After the orgy of insane lending climaxed in catastrophe a decade later, of course, “the strong” had to be bailed out. They were “too big to fail” by then.32 Let us continue down the list of Democratic achievements of the 1990s. Telecom deregulation turned out to encourage monopoly building, not innovation; its main effects were the extinction of locally controlled radio stations and the bidding up of telecom shares in the great stock market bubble that burst during Clinton’s last year in office.

For fear of frightening the men of lower Manhattan, the Obama team dared undertake none of the serious measures the times obviously called for. No big Wall Street institutions were put into receivership or cut down to size. No important Wall Street bankers were terminated in the manner of the unfortunate chairman of General Motors. As a result, the situation continued as follows: The Wall Street banks, being “too big to fail,” enjoyed a more-or-less explicit government guarantee against bankruptcy, but in order to enjoy that protection they were not required to stop doing the risky things that had got them in so much trouble in the first place. It was the perfect outcome for them, with the taxpayers of an entire nation essentially staking them to endless turns at the roulette wheel.* Writing of this awful period, Elizabeth Warren (who worked then as a bailout oversight official) concluded that “the president chose his team, and when there was only so much time and so much money to go around, the president’s team chose Wall Street.”7 The classic and most direct solution to an epidemic of corrupt bank management and fraudulent bank lending is to use the authority that comes with rescuing failed banks to close those banks down or to fire those banks’ top managers.

Another landmark Thirties policy option—requiring banks to separate their investment operations from their commercial banking services—was ultimately taken up by Democrats, and a version of it was even written into the Dodd-Frank bank reform measure. Whether and how it will actually be enforced is unknown as of this writing, since the law’s provisions and loopholes are still being written and hollowed out by lawyers and regulators. We do know this: the too-big-to-fail banks are bigger than they were before the crisis, having swallowed up other banks as part of the rescue scheme. We also know that people who work in securities still make far more than those who toil in other industries—the average salary for people in that line of work in New York City was $404,000 in 2014—and their bonuses have almost returned to the levels achieved in the days before the crash.


pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

Airbnb, altcoin, bank run, banking crisis, bitcoin, Bitcoin Ponzi scheme, blockchain, Bretton Woods, buy and hold, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cryptocurrency, David Graeber, disinformation, disintermediation, Dogecoin, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Joi Ito, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, Money creation, money: store of value / unit of account / medium of exchange, Nelson Mandela, Network effects, new economy, new new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Ross Ulbricht, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, uber lyft, underbanked, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

However, the freelance journalist: Ryan Selkis, “Dark Wallets Are a Regulatory Nightmare for Bitcoin,” TwoBitIdiot blog, May 1, 2014, http://two-bit-idiot.tumblr.com/post/84454892629/dark-wallets-are-a-regulatory-nightmare-for-bitcoin. 11. A New New Economy has by many measures only got more intense since that crisis: Luke Johnson, “Elizabeth Warren: ‘Too Big to Fail Is Worse Than Before Financial Crisis,” Huffington Post, November 12, 2013, http://www.huffingtonpost.com/2013/11/12/elizabeth-warren-too-big-to-fail_n_4260871.html. the widest wealth gap since the Great Depression: Scott Neuman, “Study Says America’s Income Gap Widest Since Great Depression,” NPR, September 10, 2013, http://www.npr.org/blogs/thetwo-way/2013/09/10/221124533/study-says-americas-income-gap-widest-since-great-depression.

It also created huge new opportunities for Wall Street to develop foreign-exchange trading. Now that the dollar was no longer pegged to gold, banks could take their credit-creation business global, setting the stage for the globalization of the world economy. It also paved the way to the multinational megabanks that would become too big to fail … and all the problems these would create. The happy experience of American manufacturing’s post-1971 revival was quickly marred by a new, entirely predictable scourge. Coupled with the oil blockade imposed by petroleum-exporting nations in 1973, the weaker and unhinged dollar immediately generated inflation; as the value of the world’s most important currency sank, the price of all the goods and services it bought rose.

The Fed’s zero-interest-rate policies and more than $3 trillion in bond-buying, along with similar actions from its counterparts in Europe and Japan, have forestalled disaster. But little has been done to resolve the long-term fiscal imbalances in the United States or to restructure a financial system dominated by the same TBTF (too big to fail) banks. The structural flaws of the European monetary system, with its untenable split between its political and monetary functions, are still firmly in place even after having been exposed when Greece, Ireland, Portugal, Spain, and then Italy all plunged into crisis from 2010 on. Meanwhile, in an entirely globalized economy in which the dollar is the currency of the world, not merely that of the United States, the limitations of a monetary policy dictated by domestic political imperatives have also been exposed.


pages: 429 words: 120,332

Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens by Nicholas Shaxson

Asian financial crisis, asset-backed security, bank run, battle of ideas, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, collapse of Lehman Brothers, computerized trading, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, Double Irish / Dutch Sandwich, failed state, financial deregulation, financial innovation, Fractional reserve banking, full employment, high net worth, income inequality, Kenneth Rogoff, laissez-faire capitalism, land reform, land value tax, light touch regulation, Long Term Capital Management, Martin Wolf, Money creation, money market fund, New Journalism, Northern Rock, offshore financial centre, oil shock, old-boy network, out of africa, passive income, Plutocrats, plutocrats, Ponzi scheme, race to the bottom, regulatory arbitrage, reserve currency, Ronald Reagan, shareholder value, The Spirit Level, too big to fail, transfer pricing, Washington Consensus

The inflows have made matters worse still for ordinary U.S. taxpayers, let alone for foreigners being stiffed by their own wealthy and unaccountable elites. As the following chapters will show, the inflows delivered massive rewards to a small financial elite, while helping Wall Street to gain its too-big-to-fail stranglehold on the U.S. economy and the politicians in Washington. “Tax havens are engaged in economic warfare against the United States, and honest, hardworking Americans,” says Senator Carl Levin. He is quite right—but we should add that the United States in its role as a tax haven is conducting economic warfare against honest, hardworking people at home and around the world.

The offshore system provided Wall Street with a “get out of regulation free” card that enabled it to rebuild its powers overseas and then, as the United States turned itself in stages into a tax haven in its own right, at home. The end result was that the biggest banks were able to grow large enough to attain “too big to fail” status—which helped them in turn to become increasingly influential in the bastions of political power in Washington, eventually getting a grip on both main political parties, Democrat and Republican—a grip that is so strong that it amounts to political capture. Part of this process has involved a constant race to the bottom between jurisdictions.

In particular, the London-based Euromarkets, then the wider offshore world, provided the platform for U.S. banks in particular to escape tight domestic constraints and grow larger again, setting the stage for the political capture of Washington by the financial services industry, and the emergence of too-big-to-fail banking giants, fed by the implicit subsidies of taxpayer guarantees, plus the explicit subsidies of offshore tax avoidance, that continue to hold western economies in their stranglehold today. The emergence of the United States as an offshore jurisdiction in its own right attracted vast financial flows into the country, bolstering bankers’ powers even further.


pages: 291 words: 91,783

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

addicted to oil, affirmative action, Affordable Care Act / Obamacare, Bear Stearns, Bernie Sanders, Bretton Woods, buy and hold, carried interest, clean water, collateralized debt obligation, collective bargaining, computerized trading, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, money market fund, moral hazard, mortgage debt, Nixon triggered the end of the Bretton Woods system, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Savings and loan crisis, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

At this writing, Tea Partiers in Tennessee have just launched protests against Republican senator Bob Corker for announcing his willingness to work with outgoing Democrat Chris Dodd on the Consumer Financial Protection Agency Act, a bill that is pitifully weak in its specifics but at least addresses some of the major causes of the financial crisis—including mandating a new resolution authority section that would help prevent companies from becoming too big to fail and would force banks to pay for their own bailouts in the future. The same Tea Partiers who initially rallied against bailouts of individual homeowners now find themselves protesting against new laws that would force irresponsible banks in the future to bail themselves out. How was this accomplished?

The merger was frankly and openly illegal, precisely the sort of thing that Glass-Steagall had been designed to prevent—the dangerous concentration of capital in the hands of a single megacompany, creating potential conflicts of interest in which insurers and investment banks might be pressed to promote stocks or policies that benefit banks, not customers. Moreover, Glass-Steagall had helped prevent exactly the sort of situation we found ourselves subject to in 2008, when a handful of companies that were “too big to fail” went belly up thanks to their own arrogance and stupidity, and the government was left with no choice but to bail them out. But Weill was determined to do this deal, and he had the backing of Bill Clinton, Clinton’s Treasury secretary Bob Rubin (who would go on to earn $100-plus million at postmerger Citigroup), and, crucially, Alan Greenspan.

They have been pulling this same stunt for decades, and they’re preparing to do it again. If you want to understand how we got into this crisis, you first have to understand where all the money went—and in order to understand that, you first need to understand what Goldman has already gotten away with, a history exactly three bubbles long. Goldman wasn’t always a too-big-to-fail Wall Street behemoth and the ruthless, bluntly unapologetic face of kill-or-be-killed capitalism on steroids—just almost always. The bank was actually founded in 1882 by a German Jewish immigrant named Marcus Goldman, who built it up with his son-in-law, Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to small-time vendors in downtown Manhattan.


pages: 261 words: 64,977

Pity the Billionaire: The Unexpected Resurgence of the American Right by Thomas Frank

Affordable Care Act / Obamacare, bank run, Bear Stearns, big-box store, bonus culture, business cycle, collateralized debt obligation, collective bargaining, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Deng Xiaoping, financial innovation, housing crisis, invisible hand, Kickstarter, money market fund, Naomi Klein, obamacare, payday loans, profit maximization, profit motive, road to serfdom, Robert Bork, Ronald Reagan, shareholder value, strikebreaker, The Chicago School, The Myth of the Rational Market, Thorstein Veblen, too big to fail, union organizing, Washington Consensus, white flight, Works Progress Administration

It could have put the “zombie banks” into receivership and commenced an orderly bankruptcy process, with no one allowed to get out of it by gimmicking their accounting. It could have broken up the banking industry and brought back strict regulation, along with a policy of zero tolerance for financial entities that are “too big to fail,” so that the temptation to rescue such institutions would disappear. Instead, our leaders allowed the biggest banks to get even bigger. They offered the banks an open-ended guarantee against failing without really restricting their activities—a guarantee that might well encourage them to bet on the riskiest propositions available, secure in the knowledge that the taxpayer would make good their losses.

Similarly, the movement’s reverence for an imaginary past, for “taking our country back,” is merely a displaced longing for the distant days when small-business people were men of preeminence in their community. The conservative revival’s single-minded focus on bailouts stems from small business’s historic hostility toward monster banks, now reincarnated as “too big to fail” institutions and locked in an unholy union with monster government.* (“Congress spent billions of dollars in stimulus money to bail out big banks and financial institutions,” declared Congressman-to-be Pat Meehan of Pennsylvania in 2010. “But your average small business owner simply has not seen the benefits.”)

John Lippert, “Friedman Would Be Roiled as Chicago Disciples Rue Repudiation,” Bloomberg, December 23, 2008. 5. Gary Becker, quoted in John Cassidy, “After the Blowup,” New Yorker, January 11, 2010. His colleagues, Becker further confessed, had not fully understood derivatives, deregulation, or the problem of banks that were “too big to fail.” Becker also admitted that federal intervention had spared the nation a much greater disaster. 6. Richard Posner, A Failure of Capitalism: The Crisis of ’08 and the Descent into Depression (Cambridge, MA: Harvard University Press, 2009), p. 306. The crash was the result, Posner wrote, of “innate limitations of the free market—limitations rooted in individuals’ incentives, in irresponsible monetary policy adopted and executed by conservative officials inspired by conservative economists … and in excessive, ideologically motivated deregulation of banking and finance compounded by lax enforcement of the remaining regulations.”


pages: 519 words: 155,332

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It by Steven Brill

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, airport security, American Society of Civil Engineers: Report Card, asset allocation, Bernie Madoff, Bernie Sanders, Blythe Masters, Bretton Woods, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, carried interest, clean water, collapse of Lehman Brothers, collective bargaining, computerized trading, corporate governance, corporate raider, corporate social responsibility, Credit Default Swap, currency manipulation / currency intervention, Donald Trump, ending welfare as we know it, failed state, financial deregulation, financial innovation, future of work, ghettoisation, Gordon Gekko, hiring and firing, Home mortgage interest deduction, immigration reform, income inequality, invention of radio, job automation, knowledge economy, knowledge worker, labor-force participation, laissez-faire capitalism, Mahatma Gandhi, Mark Zuckerberg, mortgage tax deduction, new economy, Nixon triggered the end of the Bretton Woods system, obamacare, old-boy network, paper trading, performance metric, post-work, Potemkin village, Powell Memorandum, quantitative hedge fund, Ralph Nader, ride hailing / ride sharing, Robert Bork, Robert Gordon, Robert Mercer, Ronald Reagan, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, Tax Reform Act of 1986, telemarketer, too big to fail, trade liberalization, union organizing, Unsafe at Any Speed, War on Poverty, women in the workforce, working poor

In 2013, that previously unspoken rationale was actually spoken when then–Attorney General Eric Holder told the Senate Judiciary Committee that he was “concerned that the size of some of these [financial] institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” In other words, if banks had to be bailed out because they were too big to fail, prosecuting them fully had to be avoided because they were also too big to jail. As with the bailout dilemma, that would seem like an argument for breaking up the giant banks. Instead, it has become, like too big to fail, yet another moat for America’s most powerful businesses, allowing even recidivists like JPMorgan to escape effective accountability. Again, these kinds of moats eat away at the fabric of the American community, reminding average Americans that the basic rules of responsibility and accountability do not apply to those at the top.

When the Obama administration arrived in 2009, there was broad sentiment on both sides of the aisle, at least rhetorically, that these rescued financial institutions now had to be reined in. That way, the country would never again be whipsawed into having to bail out the Wall Street gamblers because they were, in a phrase that had quickly become a cliché, “too big to fail.” The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, named for Democratic co-sponsors Senator Chris Dodd of Connecticut and Congressman Barney Frank of Massachusetts, was supposed to create that protection. The usual imbalance of passion and resources between special interests and the public that so often blocks change in Washington can occasionally be erased when the population at large is focused and angry.

The real work for us starts now, with the regs. With the press gone and the [C-Span] cameras [that televised the joint committee deliberations] gone, now we go to work.” A bedrock goal of the Obama administration and Dodd-Frank’s congressional sponsors, of course, had been to eliminate the risk of banks being too big to fail. From the beginning, the lobbyists succeeded in blocking the obvious solution: No banks were broken into smaller entities. In fact, by 2016 the share of all banking assets (in essence their market share) held by the top five banks was slightly higher than it was the day Dodd-Frank passed. Each had grown bigger in revenue, profit, and their grip on the economy.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

"Robert Solow", Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Bretton Woods, British Empire, business cycle, buy and hold, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, margin call, market bubble, McMansion, Menlo Park, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

He lent money to brokers, bought the largest insurance company in the world (AIG), allowed overleveraged investment banks to convert themselves into commercial banks, thus permitting them to snuggle underneath the Fed’s too-big-to-fail umbrella. When the commercial paper market floundered, the Federal Reserve decided it would lend to corporations. (Commercial paper is used by large corporations to fund short term obligations.) Thus, General Electric, General Motors Acceptance Corporation, and American Express were among the companies fortunate enough to sell their paper to the Fed. Bernanke opened more borrowing facilities (at last count there were 16). Even when the credit markets heal, the precedent has been established, just as Continental Illinois was the precursor, in 1984, to too-big-to-fail-banks.

Continental Illinois was the nation’s sixth-largest bank and was overloaded with oil and gas loans and neck deep in sovereign loans.23 On May 17, 1984, a new era of financial collectivism was ushered into being. The Federal Deposit Insurance Corporation (FDIC) decided that the nation’s (by now) ninth-largest bank was “too big to fail.” The FDIC announced a $2 billion capital injection into the holding company. The government followed with other initiatives that are all too familiar today, including $3.4 billion borrowed from the Fed’s discount window.24 The government committed itself to insuring all deposits, not merely the $100,000 deposit limit.25 In addition, it also protected creditors of the holding company.26 This and other wrinkles of the bailout are interesting precedents, too involved to discuss here.

During the late housing boom, the Fed chairman gave many speeches extolling Americans’ rising wealth (house prices) while not addressing the fixed debt “which obviously does not decline” that home buyers acquired when buying those houses. 9 Dialogue between Greenspan and Proxmire about Greenspan’s record: Senate Committee on Banking, Housing and Urban Affairs transcript, July 21, 1987, pp. 41–42. The Leveraged Too-Big-to-Fail Megabank Foretold Dismal as Greenspan’s forecasting record was, Proxmire seemed more concerned about another topic: the growing concentration in banking. Greenspan was testifying during the great deregulation of banking. Initiatives, other than those mentioned in previous chapters, included authorization for commercial banks to cross state lines, to enter the brokerage business, and to change themselves into conglomerates offering all of the above services and more.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, Post-Keynesian economics, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, very high income

An empirical study by Philippon and Reshef shows that in the past two decades workers in the financial industry have enjoyed a huge ‘pay-premium’ with respect to similar sectors, which cannot be explained by the usual proxies for productivity (such as the level of education or unobserved ability). According to their estimates, financial sector compensations have been about 40 per cent higher than the level that would have been expected under perfect competition.30 It is also well documented that banks deemed ‘too big to fail’ enjoy a rent due to an implicit state guarantee. Investors know that these large financial institutions can count, in effect, on a government guarantee, and thus they are willing to provide them funds at lower interest rates. The big banks can thus prosper not because they are more efficient or provide better service but because they are in effect subsidised by taxpayers.

Stiglitz, Rewriting the Rules, Hyde Park, NY, The Roosevelt Institute, May 2015. 30 T. Philippon and A. Reshef, ‘Wages and human capital in the US financial industry: 1909–2006’, The Quarterly Journal of Economics, vol. 127, no. 4, 2012, pp. 1551–609. 31 D. Baker and T. McArthur, The Value of the ‘Too Big to Fail’ Big Bank Subsidy, Center for Economic and Policy Social Research Issue Brief, September 2009. For a different view, see United States Government Accountability Office, Large Bank Holding Companies: Expectations of Government Support, 2014, GAO-14-621, Washington, DC, United States General Accounting Office, which argues that funding advantages existed before the recent financial crash but disappeared afterwards. 32 See L.

Large firms threaten to relocate to another country unless they are permitted to negotiate the amount of tax they will pay. These actions distort the level playing field that the market requires, usually privileging very large firms against smaller ones. Rather different, but with similar outcomes, are the sectors that are ‘too big to fail’, those that are both dominated by a small number of firms and strategically important for a national (or the global) economy, such that the collapse of a small number of them could provoke a massive shock to the whole system. This was notoriously the case with the banking industry and to a lesser extent the motor industry after the 2008 crash, and some other industries, for example energy, fit this model too.2 These firms have managed to become defined as a collective good, and therefore as requiring protection from the market, just as much as did the national champions of the protectionist age.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

Asian financial crisis, bank run, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, buy and hold, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, John Meriwether, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, Network effects, New Journalism, Nixon shock, Nixon triggered the end of the Bretton Woods system, offshore financial centre, oil shock, one-China policy, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus, zero-sum game

Now we had a war game rulebook, but this would go quite differently. I wanted to break as many rules as I could to help the Pentagon understand how capital markets really work in an age of greed, deregulation and bad intent. Wall Street was like the Wild West in the best of times, but with globalization and too-big-to-fail government backing, it was now even more out of control. After a few hours of instruction, orientation and snap training on the groupware, we broke out to our separate capitals to work on move one. This broadly involved a long-term trade agreement between Russia and Japan that would reduce the availability of Russian oil and natural gas to the rest of the world.

Federal Reserve System is the most powerful central bank in history and the dominant force in the U.S. economy today. The Fed is often described as possessing a dual mandate to provide price stability and to reduce unemployment. The Fed is also expected to act as a lender of last resort in a financial panic and is required to regulate banks, especially those deemed “too big to fail.” In addition, the Fed represents the United States at multilateral central-bank meeting venues such as the G20 and the Bank for International Settlements, and conducts transactions using the Treasury’s gold hoard. The Fed has been given new mandates under the Dodd-Frank reform legislation of 2010 as well.

The destructive legacy of financial economics, with its false assumptions about randomness, efficiency and normal risk distributions, is hard to quantify, but $60 trillion in destroyed wealth in the months following the Panic of 2008 is a good estimate. Derivatives contracts did not shift risk to strong hands; instead derivatives concentrated risk in the hands of those too big to fail. VaR did not measure risk; it buried it behind a wall of equations that intimidated regulators who should have known better. Human nature and all its quirks were studiously ignored by the banks and regulators. When the financial economy was wrecked and its ability to aid commerce was well and truly destroyed, the growth engine went into low gear and has remained there ever since.


pages: 348 words: 97,277

The Truth Machine: The Blockchain and the Future of Everything by Paul Vigna, Michael J. Casey

3D printing, additive manufacturing, Airbnb, altcoin, Amazon Web Services, barriers to entry, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, blood diamonds, Blythe Masters, business process, buy and hold, carbon footprint, cashless society, cloud computing, computer age, computerized trading, conceptual framework, Credit Default Swap, crowdsourcing, cryptocurrency, cyber-physical system, dematerialisation, disinformation, disintermediation, distributed ledger, Donald Trump, double entry bookkeeping, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, failed state, fault tolerance, fiat currency, financial innovation, financial intermediation, Garrett Hardin, global supply chain, Hernando de Soto, hive mind, informal economy, intangible asset, Internet of things, Joi Ito, Kickstarter, linked data, litecoin, longitudinal study, Lyft, M-Pesa, Marc Andreessen, market clearing, mobile money, money: store of value / unit of account / medium of exchange, Network effects, off grid, pets.com, prediction markets, pre–internet, price mechanism, profit maximization, profit motive, ransomware, rent-seeking, RFID, ride hailing / ride sharing, Ross Ulbricht, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, smart contracts, smart meter, Snapchat, social web, software is eating the world, supply-chain management, Ted Nelson, the market place, too big to fail, trade route, Tragedy of the Commons, transaction costs, Travis Kalanick, Turing complete, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, universal basic income, web of trust, zero-sum game

But that doesn’t mean that other companies don’t have a clear interest in reviewing how these permissioned networks are set up. Would a distributed ledger system that’s controlled by a consortium of the world’s biggest banking institutions be incentivized to act in the interests of the general public it serves? One can imagine the dangers of a “too-big-to-fail blockchain”: massive institutions could once again hold us hostage to bailouts because of failures in the combined accounting system. Perhaps that could be prevented with strict regulation; perhaps there needs to be public oversight of such systems. Either way, it’s incumbent upon us to ensure that the control over the blockchains of the future is sufficiently representative of broad-based interests and needs so that they don’t just become vehicles for collusion and oligopolistic power by the old guard of finance.

Not only would that company gain an unprecedented, privileged window onto the entire world of material things and human activity, but it would, in effect, put those centrally controlled companies in charge of what will be billions of machine-to-machine transactions of tokens and digital currencies. That would give a new meaning to the phrase “too big to fail.” One alternative is for governments to act as gatekeepers—but if you think Edward Snowden’s NSA snooping allegations were bad, just imagine the Feds intermediating all the personally revealing data flowing from your gadgets. No thanks. “The Internet was originally built on trust,” write the authors of the IBM paper, Veena Pureswaran and Paul Brody.

The nine founding members were Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street, and UBS. All but two—BBVA and Commonwealth—were listed in the Financial Stability Board’s 2016 list of G-SIBs, global systemically important banks. They weren’t just plain-vanilla, “too-big-to-fail” banks whose gargantuan balance sheets posed problems for their domestic markets; they were part of a special category whose loan books were so large they could pose a danger to the global economy. And many were on the receiving end of billions of dollars in fines. To followers of trends in financial technology, this looked familiar.


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

"Robert Solow", air freight, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Berlin Wall, Bretton Woods, BRICs, business cycle, butterfly effect, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, failed state, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, global pandemic, global supply chain, global value chain, global village, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, risk free rate, Silicon Valley, six sigma, Stuxnet, supply-chain management, tail risk, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, Tragedy of the Commons, transaction costs, uranium enrichment

Consequently, national intervention in financial institutions became increasingly difficult as banks grew more powerful and more influential. At the same time that regulators were stumbling, the collapse of the U.S.-based hedge fund Long-Term Capital Management following the 1997–98 financial crisis signaled that banks deemed “too big to fail” could expect to be bailed out by national governments. Together with the widespread use of value-at-risk models (which underestimated tail risks), this expectation obscured risk managers’ incentives and effectively eliminated the downside risk for those large financial institutions that were systemically the most relevant.

Systemic analysis must examine nodes, pathways, and the relationships between them, because “catastrophic changes in the overall state of a system can ultimately derive from how it is organized—from feedback mechanisms within it, and from linkages that are latent and often unrecognised.”86 All banks should be required to map their interdependencies in terms of the volume and frequency of their trade, and their net and gross exposures to their counterparties, not least in trading, should be fully understood by their audit and risk committees. Similarly, national and global regulators need to be able to map the evolving financial landscape to ensure that no one particular trading house or institution—or, over time, one geographic location—is systemically becoming too big to fail. They also need to use a combination of the soft power of persuasion and the hard power of regulation and competition policy to ensure the stability of the system. Reforms like these necessarily imply a major renewal of the mandate, resources, skills, and executive capabilities of the regulators at the national and the international levels.

Lesson 5: Competition policy needs to address the geographical risks that emanate from the concentration of industry in specific localities Competition policy can play a key role in improving certain dimensions of system stability. In particular, such policy can seek to guard against the risk that any one firm or supplier will be too big to fail in terms of the consequences for society. In competition policy, more attention needs to be paid to geography. For example, competition policy that allowed many firms to co-locate in one place that was prone to flooding or might be overwhelmed by a pandemic or terror attack would not provide comfort.


pages: 279 words: 76,796

The Unbanking of America: How the New Middle Class Survives by Lisa Servon

Affordable Care Act / Obamacare, Airbnb, basic income, Build a better mousetrap, business cycle, Cass Sunstein, choice architecture, creative destruction, Credit Default Swap, employer provided health coverage, financial exclusion, financial independence, financial innovation, gender pay gap, George Akerlof, gig economy, income inequality, independent contractor, informal economy, Jane Jacobs, Joseph Schumpeter, late fees, Lyft, M-Pesa, medical bankruptcy, microcredit, Occupy movement, payday loans, peer-to-peer lending, precariat, Ralph Nader, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, sharing economy, too big to fail, transaction costs, unbanked and underbanked, underbanked, universal basic income, Unsafe at Any Speed, We are the 99%, white flight, working poor, Zipcar

The idea that banks have become “too big to fail” has a longer history than many of us realize. The Connecticut congressman Stewart McKinney coined that term in 1984, justifying the government bailout of Continental Illinois, the nation’s seventh-largest bank, twenty-four years before the recent financial crisis that made it a common catchphrase. The situation has only worsened since then. When Washington Mutual went under during the financial crisis in 2008, the bank was seven times larger than Continental Illinois had been. But because banks know they’re “too big to fail” and that the government will bail them out, they continue to engage in risky behavior with “other people’s money”—our money.

The big banks are complaining about the increased scrutiny they’ve experienced since the crisis. But others, like Marla Blow, who heads Fenway Summer’s credit card division, doesn’t have much sympathy for these banks: “They will say that they get regulatory scrutiny because now they’re deemed to be too big to fail,” she said, “meaning that they go through extra exams and people are looking at them even more closely. And I pretty openly said to people, ‘So cry me a river. Because you’re a gigantic financial institution and somebody’s looking at you? Hard, huh? Hard to live on the billions and billions of dollars you’re making every quarter, and the price you pay is you’ve got a little bit of extra scrutiny?’”

The government has allowed banks to focus too narrowly on profits, creating no incentive for them to provide safe, affordable services for everyone. The market is now rigged in favor of the wealthy and in favor of large financial institutions. Banks benefit from government in all kinds of ways. The FDIC insures consumer deposits. Loan guarantees and direct injection of public funds into banks, especially those deemed “too big to fail,” enable them to borrow at lower rates and take bigger risks. A recent study found that the biggest banks have been among the top recipients of government subsidies, grants, loans, and tax credits over the past fifteen years. And banks continue to operate with the knowledge that the government will rescue them should anything go wrong.


pages: 283 words: 77,272

With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful by Glenn Greenwald

Ayatollah Khomeini, banking crisis, Bear Stearns, Bernie Madoff, Clive Stafford Smith, collateralized debt obligation, Corrections Corporation of America, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, deskilling, financial deregulation, full employment, high net worth, income inequality, Julian Assange, mandatory minimum, nuremberg principles, Ponzi scheme, Project for a New American Century, rolodex, Ronald Reagan, Seymour Hersh, too big to fail, Washington Consensus, WikiLeaks

No matter how much Obama talks about his “tough” new financial regulatory reforms or offers rote condemnations of Wall Street greed, few believe there’s been real change. That’s not just because so many have lost their jobs, their savings and their homes. It’s also because so many know that the loftiest perpetrators of this national devastation got get-out-of-jail-free cards, that too-big-to-fail banks have grown bigger and that the rich are still the only Americans getting richer. Those responsible have plundered with impunity and kept their ill-gotten gains. Inside Job examined numerous Wall Street executives who, as the film put it, “destroyed their own companies and plunged the world into crisis” only to “walk away from the wreckage with their fortunes intact.”

In January 2010, the Treasury Department’s independent watchdog over the Wall Street bailout, Neil Barofsky, issued a scathing report documenting that many of the factors behind the financial crisis are still with us, and that in some respects the situation has actually worsened. “It is hard to see how any of the fundamental problems in the system have been addressed to date,” Barofsky wrote. Banks that were said to be “too big to fail” are now “even larger,” and Wall Street is “more convinced than ever” that it will be saved from failure by the government, thus increasing the motivation to take enormous risks. Wall Street bonuses in the year immediately after the crisis reveal “little fundamental change” in troublesome compensation schemes, while federal efforts to support the housing market “risk reinflating that bubble.”

Wall Street bonuses in the year immediately after the crisis reveal “little fundamental change” in troublesome compensation schemes, while federal efforts to support the housing market “risk reinflating that bubble.” Moreover, the so-called financial regulation legislation enacted by Congress in the summer of 2010 was so diluted by lobbyists and donors from the very industry it purported to regulate that the primary causes of the crisis—including the “too-big-to-fail” quandary and unregulated derivatives markets—went almost entirely unaddressed. Indeed, the government’s ties to Wall Street are stronger than ever. In September 2010, the Huffington Post reviewed Geithner’s calendars as treasury secretary—just as the New York Times had done for his calendars as New York Fed chair—and found the same pattern: Geithner still spends most of his time speaking with the very banking executives whom he’s supposedly regulating.


pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

asset-backed security, bank run, banking crisis, Bernie Madoff, bond market vigilante , bonus culture, Bretton Woods, business cycle, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, George Santayana, global reserve currency, Home mortgage interest deduction, Isaac Newton, joint-stock company, Kickstarter, liquidity trap, London Interbank Offered Rate, long peace, margin call, market clearing, mass immigration, Money creation, money market fund, moral hazard, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, Plutocrats, plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, tail risk, The Great Moderation, the new new thing, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

These mega-banks enjoyed vast scale and market share in everything from consumer finance to corporate lending. They were, as recent events prove, almost too big to be managed safely and effectively but they were too certainly too big to be allowed to fail without risking national economic calamity. Too big to fail continues to undermine efforts at effective and equitable regulation, however what motivated the banks was earnings growth. Market cap was the key to survival and buying earnings was far easier than growing them in highly competitive markets, Banks not only grew earnings by buying up bread and butter banking businesses but by expanding their securities businesses.

In 1994 the largest New York bank, much weakened by market mishaps, was purchased by a financial conglomerate that included insurance and investment banking interests under a Fed waiver. In 1999 Congress finally bit the bullet and passed the Gramm-Leach-Bliley Act driving the last nail into the coffin of New Deal banking laws. Soon almost all the major commercial banks were bulking up their investment banking businesses and in several cases becoming global players. TOO BIG TO FAIL Wall Street soon discovered that having a big balance sheet to lend gave their less accomplished commercial bank rivals an inside track in attracting corporate business. The most venerable Wall Street partnership, Goldman Sachs, became a public company in 1999 the last of the broker dealers to do so.

The public seems to hate the idea of putting tax dollars into banks or keeping them there. That might prove decisive in preventing long-term government takeover of the financial economy. Second, how should the banks be governed? Here, public outrage is really only justified when banks that depend on being ‘‘too big to fail’’ push their luck too far. Even among the largest banks, some managed themselves far more responsibly than others. The problem is that many of the largest banks became too large to manage but are too big to let fail. We cannot remain their hostages, however, and the public understands this. Thus far, the handling of the crisis has caused the industry to become more consolidated into a few hands.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

"Robert Solow", bank run, banking crisis, Bear Stearns, Benoit Mandelbrot, Berlin Wall, Black Swan, bond market vigilante , bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, eat what you kill, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

As Mervyn King said six months later:16 “The world economy changed after the events of Lehman, but it wasn’t the failure of Lehman’s as such. What changed everything was the complete collapse of confidence in the financial system around the world [after Lehman].” Why did this happen? After all, Lehman was only a middle-sized bank with no customer deposits. It was not, by any normal definition, “too big to fail.” Investment banks of comparable size had failed in the past with no catastrophic damage, most notably Drexel Burnham Lambert in 1989. In the end, the total losses from Lehman’s bankruptcy came to about $75 billion.17 This was a lot of money by the standards of normal business bankruptcies, but modest in comparison with the multitrillion dollar write-downs already suffered by banks around the world before Lehman went down.

When governments left any doubt about which bank liabilities were protected, they usually ended up offering guarantees to all creditors, no matter how junior, in all banks, no matter how small. Constructive ambiguity, far from saving taxpayer money, has turned out to be the greatest source of moral hazard. This experience also refutes suggestions that moral hazard can be overcome by breaking up banks that are too big to fail. Breaking up some banking dinosaurs may well be sensible, for reasons of competition and managerial efficiency. But it is misleading to believe that any bank, however small, will be allowed to renege on its depositors or senior creditors in a period of systemic financial turmoil. Situations are bound to arise from time to time—perhaps only once every generation—when governments simply cannot allow any bank to fail.

It was a colossal error and many people said so at the time.” See David Wessel, In Fed We Trust, 23. Tim Geithner reportedly shared this view: “Geithner thought that publicly drawing a ‘line in the sand’ during a financial crisis was lunacy.” Geithner quoted in Wessel, 15-16. 5 Andrew Ross Sorkin, Too Big to Fail, and Wessel, In Fed We Trust. 6 Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960. 7 Mellon’s role in the decision to liquidate the U.S. banking system was emphasized by Milton Friedman and also by President Hoover in his memoirs. Herbert Hoover, The Memoirs of Herbert Hoover: Vol. 3, The Great Depression, 28-30.


pages: 457 words: 143,967

The Bank That Lived a Little: Barclays in the Age of the Very Free Market by Philip Augar

activist fund / activist shareholder / activist investor, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, break the buck, call centre, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, family office, financial deregulation, financial innovation, fixed income, foreign exchange controls, high net worth, hiring and firing, index card, index fund, interest rate derivative, light touch regulation, loadsamoney, Long Term Capital Management, long term incentive plan, Martin Wolf, money market fund, moral hazard, Nick Leeson, Northern Rock, offshore financial centre, old-boy network, out of africa, prediction markets, quantitative easing, risk free rate, Ronald Reagan, shareholder value, short selling, Sloane Ranger, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, too big to fail, wikimedia commons, yield curve

Linkedin, Carol, Corporate Risk Manager 28. Darling, Back from the Brink, p. 326 14. Twilight of the Gods, 2008 1. Tom Junod, ‘The deal of the century’, Esquire, 11 September 2009 2. Andrew Ross Sorkin, Too Big to Fail: Inside the Battle to Save Wall Street, Penguin, London and New York, 2009, p. 127 3. Philip Augar, The Greed Merchants, Penguin, London, 2006, pp. 40–41 4. Sorkin, Too Big to Fail, p. 128 5. ‘Barclays announces share issue to raise approximately £4.5 billion’, 25 June 2008, barclays.com 6. Project Long Island Discussion Document, July 2008, Barclays Capital, jenner.com/lehman/docs/barclays 7.

., para 15 23. Ibid., para 20 24. Paulson, On the Brink, p. 162 25. Darling, Back from the Brink, p. 121 26. Sorkin, Too Big to Fail, p. 357 27. Darling, Back from the Brink, p. 121 28. Ibid. 29. FSA Statement, 20 January 2010, para 26 30. Email from Heidi Smith to Bob Diamond, 12 September 2008, jenner.com/lehman/docs/barclays 31. Barclays, Internal Presentation, Long Island key exposures – key due diligence findings, jenner.com/lehman/docs/barclays 32. Sorkin, Too Big to Fail, pp. 357–8 33. Paulson, On the Brink, p. 164 34. Ibid., p. 169 35. Ibid., p. 175 36. Ibid., pp. 169, 174 37. Ibid., p. 177 38.

Paulson, On the Brink, p. 178 45. Sorkin, Too Big to Fail, p. 420; Paulson, On the Brink, p. 178 46. FSA Statement, 20 January 2010, paras 46–9 47. Geithner, Stress Test, p. 229 48. FSA Statement, 20 January 2010, para 54 49. Paulson, On the Brink, p. 179 50. Ibid., p. 180; Darling, Back from the Brink, p. 123; Geithner, Stress Test, pp. 186–8 51. Email from Bob Diamond to Rich Ricci and Jerry del Missier, 15 September 2008, jenner.com/lehman/barclays 52. Email from Bob Diamond to John Varley and Chris Lucas, 15 September 2008, jenner.com/lehman/barclays 53. Sorkin, Too Big to Fail, p. 552; ‘The deal of the century’, Esquire, 11 September 2009 54.


pages: 372 words: 107,587

The End of Growth: Adapting to Our New Economic Reality by Richard Heinberg

3D printing, agricultural Revolution, back-to-the-land, banking crisis, banks create money, Bear Stearns, Bretton Woods, business cycle, carbon footprint, Carmen Reinhart, clean water, cloud computing, collateralized debt obligation, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, dematerialisation, demographic dividend, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy transition, falling living standards, financial deregulation, financial innovation, Fractional reserve banking, full employment, Gini coefficient, global village, happiness index / gross national happiness, I think there is a world market for maybe five computers, income inequality, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Kenneth Rogoff, late fees, liberal capitalism, mega-rich, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, naked short selling, Naomi Klein, Negawatt, new economy, Nixon shock, offshore financial centre, oil shale / tar sands, oil shock, peak oil, Ponzi scheme, price stability, private military company, quantitative easing, reserve currency, ride hailing / ride sharing, Ronald Reagan, short selling, special drawing rights, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, tulip mania, WikiLeaks, working poor, zero-sum game

• A commodities boom (which drove up gasoline and food prices) and temporarily rising interest rates (especially on adjustable-rate mortgages) ultimately undermined consumer spending and confidence, helping to burst the housing bubble — which, once it started to deflate, set in motion a chain reaction of defaults and bankruptcies. Each element of that brief description has been unpacked at great length in books like Andrew Ross Sorkin’s Too Big to Fail and Bethany McLean’s and Joe Nocera’s All the Devils Are Here, and in the documentary film “Inside Job.”1 It’s old, sad news now, though many parts of the story are still controversial (e.g., was the problem deregulation or bad regulation?). And yet, many analyses overlook the fact that these events were manifestations of a deeper trend toward dramatically and unsustainably increasing debt, credit, and leverage.

Attorneys General in 50 states are investigating banks’ foreclosure processes. Many observers are questioning whether the banks actually technically own hundreds of billions of dollars’ worth of securitized mortgage assets on their balance sheets. If further court rulings go against the banks, the result could be fatal for several “too-big-to-fail” institutions. Investors who bought MBSs are filing fraud claims against the banks, arguing that these securities were never properly collateralized. Their claims against the banks could amount to trillions of dollars. The Federal government is implicated as well. Fannie Mae and Freddie Mac now face much higher losses on their portfolios of trillions of dollars’ worth of home mortgages, and will therefore likely have to turn to the government for further capital infusions.

Governments and central banks will be acting under the assumption that they are merely priming the pump of the economy until conventional consumer-driven growth resumes. But as growth fails to revive, one intervention after another will be required — propping up major banks, guaranteeing hundreds of billions of dollars’ worth of mortgages, or bailing out “too-big-to-fail” businesses. The result will be an incremental government takeover of large swaths of national economies, with central banks assuming more of the functions of commercial banking, and national governments underwriting production and even consumption. In the US, this process will be enormously complicated by politics.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Bear Stearns, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business cycle, business process, buy and hold, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, compensation consultant, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, disruptive innovation, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, Ida Tarbell, income inequality, independent contractor, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, Money creation, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, Plutocrats, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, prosperity theology / prosperity gospel / gospel of success, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, Silicon Valley, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

It’s called corporate socialism.68 Handelsbatt reporter Olaf Storbeck in February 2011 explained the new banking industry incentive structure created by deregulation and the Greenspan Put: “State protection is also so attractive that banks have systematically attempted to reach the ‘too big to fail’ status—the implied government guarantees were a key engine for the many mergers and acquisitions in the industry since the 1990s.”69 The rest, as they say, is history. To seize perpetual life, quick-witted entrepreneurs on Wall Street created Red Queens. They paid premiums estimated by economists at $14 to $17 billion apiece for mid-sized banks in order to become behemoths impervious to the existential dangers normally posed by competition.70 The acquiring bank can afford to pay higher prices because attaining “too-big-to-fail” stature translates to lower deposit costs and adds an average $4.7 billion to their return annually, according to research by economists Priyank Gandhi and Hanno Lustig at the University of California, Los Angeles.71 Like investing in lobbying, any banking executive would be foolish indeed not to exploit Reaganomics to become an immortal behemoth—which is about as bizarre a concept as an economist can imagine occurring in Schumpeterian capitalism.

Rajan, “Illiquid Banks, Financial Stability, and Interest Rate Policy,” University of Chicago, May 2012, http://faculty.chicagobooth.edu/douglas.diamond/research/Illiquidty%20JPE%20May%2010%20%202012%20with%20refs.pdf. 69 Olaf Storbeck, “Too Big to Fail,” Handelsblatt, Feb. 7, 2011. 70 Elijah Brewer III and Julapa Jagtiani, “How Much Would Banks Be Willing to Pay to Become ‘Too-Big-To-Fail’ and to Capture Other Benefits?,” Federal Reserve Bank of Kansas City, July 2007, research working paper, 07-05. 71 Priyank Gandhi and Hanno Lustig, “Size Anomalies in US Bank Stock Returns: A Fiscal Explanation,” National Bureau of Economic Research, working paper no. 16553, November 2010.

Problem was, the big audit firms alone held the cost data. We asked them for those data, which they declined to provide.”60 Regulatory Capture Reduced Antitrust Enforcement Antitrust enforcement was dialed down significantly during the Reagan era. This is most evident in the case of banks grown too big to fail. But the problem is general. When combined with deregulation, lax antitrust enforcement is an invitation to collusion. It’s as though control over bed nets, mosquito repellant, and antimalarial medicines in Africa was abruptly turned over to malaria parasites. As Washington Post columnist Steven Pearlstein summarized: “For years now, the courts and regulators have turned a blind eye as industry after industry consolidates into two or three dominant firms.”61 The need for vigorous antitrust enforcement was one of the clearest lessons drawn by economists from the early days of capitalism.


pages: 165 words: 48,594

Democracy at Work: A Cure for Capitalism by Richard D. Wolff

asset-backed security, Bear Stearns, Bernie Madoff, business cycle, collective bargaining, Credit Default Swap, declining real wages, feminist movement, financial intermediation, Howard Zinn, income inequality, John Maynard Keynes: technological unemployment, laissez-faire capitalism, means of production, moral hazard, mortgage debt, Occupy movement, Ponzi scheme, profit maximization, quantitative easing, race to the bottom, Ronald Reagan, too big to fail, trickle-down economics, wage slave, women in the workforce, Works Progress Administration

Large banks and major corporations had generally changed political conditions in their favor. They had learned how to devote more resources in better ways to influence legislative outcomes. At the height of the post-2007 crisis, major banks demanded and received massive government help on the basis of a threat. They were, they insisted, “too big to fail.” The idea seemed to be that letting them collapse or default would have such devastating consequences for the larger economy that the government had to help them “in the national interest.” The fallout from the collapse of the Lehman Brothers investment bank was used as the perfect example of why such a “colossal mistake” could not be replicated.

If there was a “moral hazard” that bailing out big banks during and after 2008 might weaken their resolve to avoid excess risk thereafter, then allowing big banks to become bigger accelerated the moral hazard involved. The second implication that had to be repressed was this: if big banks and other financial enterprises were too big to fail, then perhaps the solution was to nationalize them. Making their assets and liabilities fully transparent and publicly available would minimize the chance of behaviors that placed society at risk. Officials of government banking agencies would be subject to political scrutiny and to elections, thereby making them more accountable.

The dependence of enterprises and the public on electricity, water, postal service, the broadcast spectrum, and other such services has led governments in many countries to either regulate or nationalize the private enterprises producing those services. When regulation proves inadequate or insufficient, nationalization is often a logical next step. However, neoliberal ideology effectively enforced a taboo against recognizing this implication of the “too big to fail” arguments. In the end, the last century of capitalism teaches a profound truth by means of repeated, specific lessons regarding government economic interventions that regulate, limit, or constrain capitalists’ goals. Such economic interventions are resisted by major capitalist enterprises. If they pass into law, corporations use their expanding resources (rising net incomes) to evade, weaken, and eliminate those restrictions, as we saw with the successful campaign to repeal Glass-Steagall.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

"Robert Solow", banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, Everybody Ought to Be Rich, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, job polarisation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

‘It is hard to see how any of the fundamental problems in the (financial) system have been addressed to date’ said Neil Barofsky, the independent inspector general for the US bank bailout, in his official report to Congress in February 2010.398 Barofsky claimed that the financial system had become more dangerous because the banks still have an incentive to take excessive risks, knowing that the government would step in again when their speculative bets go wrong rather than bring down global finance. Even if the bailout ‘saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.’ In his quarterly report issued a year later, he warned that the ‘too big to fail issue’ had not been resolved. The big financial institutions ‘and their leaders are incentivised to engage in precisely the sort of behaviour that could trigger the next financial crisis, thus perpetuating a doomsday cycle of booms, busts and bailouts.’399 Much of this failure to impose tougher regulation is down to the continuing power of finance to block reform.

Hands, who lost $2 billion buying EMI for an inflated price, had learned the hard way. ‘And in my 30 years of investing, whenever I have seen deals done just to get the money out of the door, it does not end well.’408 Despite widespread calls for the shrinking of the finance sector, the banks not only remain ‘too big to fail’. As shown earlier, they grew even larger through the downturn. ‘We are sowing the seeds for the next crisis,” said David Lascelles, senior fellow at the London-based research group, the Centre for the Study of Financial Innovation. ‘What we have been doing in the last two years is making banks much bigger.

Fourthly, a number of finance-specific measures are needed which remove current perverse incentives to risk and ensure finance carries out its primary function—of providing the level of credit and liquidity needed to finance world trade and productive investment. As has been widely recognised by a number of commentators, including Meryyn King, the new global rules on capital ratios do not go nearly far enough to solve the ‘too big to fail’ problem. One radical proposal would be to impose a statutory limit on the size of bank assets in relation to GDP. 428 Another would be to internalise the risk either by holding top executives legally responsible for bank failures with heavy penalties, or by making directors hold a minimum proportion of the banks’ capital.


Hopes and Prospects by Noam Chomsky

"Robert Solow", Albert Einstein, banking crisis, Bear Stearns, Berlin Wall, Bretton Woods, British Empire, capital controls, colonial rule, corporate personhood, Credit Default Swap, cuban missile crisis, David Ricardo: comparative advantage, deskilling, en.wikipedia.org, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, Howard Zinn, Hyman Minsky, invisible hand, liberation theology, market fundamentalism, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, moral hazard, Nelson Mandela, new economy, nuremberg principles, one-state solution, open borders, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ralph Waldo Emerson, RAND corporation, Ronald Reagan, Savings and loan crisis, Seymour Hersh, structural adjustment programs, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, trade liberalization, uranium enrichment, Washington Consensus

In the United States, the share of the financial sector in corporate profit rose from a few percent in the 1960s to over 30 percent in 2004. Concentration also sharply increased, thanks substantially to the deregulatory zeal of the Clinton administration, which set the stage for the doubling of the share of banking industry assets held by the twenty largest institutions to 70 percent from 1990 to 2009, helping create the “too big to fail” disaster of 2007–8. Financialization of the economy had a direct effect on the dismantling of the manufacturing sector, along with other policy decisions, such as the “trade agreements” that were designed to set manufacturing workers in competition with low-wage workers without benefits and protections elsewhere, while evading the “free trade” principle of competition in the case of highly educated professionals.24 The business press sometimes recognizes the dilemmas of the state-corporate economic policies—and also has few illusions about “free markets.”

But for the West in 2008–9, the phrase “the crisis” refers unambiguously to the financial crisis that has its deeper roots in inherent market inefficiencies, neoliberal doctrines about the alleged value of financial liberalization, dogmas about “efficient markets” and “rational expectations,”6 deregulation, exotic financial instruments that yielded profits beyond the dreams of avarice for a few—all brought to a head by an $8 trillion housing bubble that somehow regulators and economists did not perceive, portending ultimate disaster, as a few warned all along, notably economist Dean Baker. The costs of underpricing of risk are magnified by the perverse incentives designed by policy makers, primary among them the government insurance policy called “too big to fail.” After the bursting of the housing bubble in 2007, Fed chairman Alan Greenspan was criticized because he hadn’t followed through on his brief warning about “irrational exuberance” at the height of the late ’90s tech bubble. But that is the wrong criticism: it was quite rational exuberance, when the taxpayer is there to bail you out under the operative principles of state capitalism.

And of course the major corporate brigands, like those ripping off billions of dollars for “reconstructing Iraq,” are exempt even from censure.11 No less impressive is the assault of the financial institutions on regulation of the practices that led to the near-collapse of the international economy in 2007–8, and are now even better placed for the next chapter of “rational exuberance,” with the world’s ten largest banks, all “deemed ‘too big to fail,’” having increased their share of assets from 18 percent of the top 1,500 banks at the end of 2008 to 26 percent a year later. The measures by which they ensured that the “moderate Democrats”—that is, the “pro-business Democrats” whose “ties to Wall Street are strong”—would join the Republicans in blocking any serious regulation at the behest of the major business lobbies are spelled out in a Business Week cover story, aptly entitled “In Wall Street’s Pocket: The Inside Story of Who’s Really Running Financial Regulation.”12 No one answerable to the public, surely.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, low earth orbit, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, tail risk, too big to fail, trickle-down economics, value at risk, yield curve

Naturally, if you move at that speed, there are legal niceties which are going to be trampled underfoot. That’s too bad. Those legal niceties benefit lawyers and accountants and absolutely nobody else. Fast, decisive bankruptcies are essential to a well-functioning financial system. That also means that no firm will ever again be ‘too big to fail.’ If a firm fails, it fails. Too big to fail is too big to exist. Creditors who lent their money to a failing firm will get the most appropriate possible reminder about why credit analysis matters. And in the meantime, taxpayers will be able to watch the whole drama unfolding on the weekend news, knowing that they themselves won’t contribute a single dime.

Given the scale of leverage at the firm‌—‌its capital represented just 3% of assets‌—‌there was no return from that misjudgment. A bailout, organized by the New York Fed, saw the firm’s creditors take control. The $1.9 billion which the firm’s principals had invested in it was wiped out.6 The story contains another moral. The Fed organized a bailout of the fund because it was deemed too big to fail, because it was seen as being of systemic importance. That was a crazy decision. Lenders who make bad credit decisions should lose money. That’s the only mechanism which will force them to improve their decisionmaking. The Fed chose to send precisely the opposite message: lenders who lend money to large, well-connected Wall Street firms will never lose money, because the government will protect them.

It also means that regulations need to be enforced properly, so that miscreants know they will be sent to jail if caught. The process of adjustment may be brutal, but it won’t last for long‌—‌and once it’s over, we’ll have a global economy ready to march forwards once again. Part of that rebuilding effort will need to involve the dismantling of the over-large, ‘too big to fail’ institutions that dominate both investment and retail banking. As rumors spread earlier this year of huge losses emerging on its proprietary trading book, JP Morgan’s chief executive, Jamie Dimon, dismissed those concerns as a ‘tempest in a teapot’. That tempest was later estimated to have cost the bank some $2 billion‌…‌except that as the final numbers were crunched, it turned out that the actual cost was closer to $7 billion.


pages: 354 words: 118,970

Transaction Man: The Rise of the Deal and the Decline of the American Dream by Nicholas Lemann

Affordable Care Act / Obamacare, Airbnb, airline deregulation, Albert Einstein, augmented reality, basic income, Bear Stearns, Bernie Sanders, Black-Scholes formula, buy and hold, capital controls, computerized trading, corporate governance, cryptocurrency, Daniel Kahneman / Amos Tversky, dematerialisation, diversified portfolio, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, fixed income, future of work, George Akerlof, gig economy, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, Ida Tarbell, index fund, information asymmetry, invisible hand, Irwin Jacobs, Joi Ito, Joseph Schumpeter, Kenneth Arrow, Kickstarter, life extension, Long Term Capital Management, Mark Zuckerberg, mass immigration, means of production, Metcalfe’s law, money market fund, Mont Pelerin Society, moral hazard, Myron Scholes, new economy, Norman Mailer, obamacare, Paul Samuelson, Performance of Mutual Funds in the Period, Peter Thiel, price mechanism, principal–agent problem, profit maximization, quantitative trading / quantitative finance, Ralph Nader, Richard Thaler, road to serfdom, Robert Bork, Robert Metcalfe, rolodex, Ronald Coase, Ronald Reagan, Sand Hill Road, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, TaskRabbit, The Nature of the Firm, the payments system, the strength of weak ties, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, too big to fail, transaction costs, universal basic income, War on Poverty, white flight, working poor

The notes of one Treasury conference call have one of its top officials saying, “The firm can’t survive because of liquidity problems—the firm was very successful in getting a huge book on such little capital … Could it cause a broker-dealer [meaning an investment bank] to fail?… Are some hedge funds too big to fail?” After last-minute attempts to save the firm were unsuccessful, the Fed decided it had to organize a rescue: it would extend credit to a group of big banks that would enable them in turn to buy low-priced ownership stakes in Long-Term Capital Management. This worked in the sense that, although it didn’t save Long-Term Capital Management, it did save the banks that were its major lenders.

Elmendorf wrote: One specific effect of asymmetric information [meaning that in over-the-counter derivatives markets, no party to a transaction knew the underlying economic condition of the other parties] is to increase the risk of a general financial panic (“systemic risk”). Because market participants cannot judge the financial health of institutions they deal with, bad news about one institution has a contagion effect on other institutions, reducing their access to capital as well. The doctrine of “too big to fail” is based on this point … Financial innovation has worsened this problem. Institutions have many new avenues for taking risk that are difficult for even sophisticated market participants to fully understand, and the interrelationships are even more complex … In the case of banks, the existence of deposit insurance coupled with access to the payments system [operated by the Federal Reserve] creates moral hazard with a clear incentive for excessive risk-taking.

Institutions have many new avenues for taking risk that are difficult for even sophisticated market participants to fully understand, and the interrelationships are even more complex … In the case of banks, the existence of deposit insurance coupled with access to the payments system [operated by the Federal Reserve] creates moral hazard with a clear incentive for excessive risk-taking. This is, after all, the rationale for regulating and supervising banks. In the case of other financial intermediaries there may be implicit but not explicit guarantees because many are too big to fail—a recognition that the failure of such entities also creates a systemic risk. A couple of weeks later, Elmendorf wrote Yellen to say that he was going to tell one of Rubin’s deputies that her view was that “on balance, more regulation could, and probably should, occur.” But in the spring of 1999, when the Working Group on Financial Markets issued its report on the collapse of Long-Term Capital Management, it called only for what Rubin, in a memo to Clinton describing the report, described as “indirect regulation”—mostly requirements that hedge funds disclose more information to their lenders.


pages: 209 words: 53,236

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, bank run, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, Home mortgage interest deduction, impact investing, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jeff Bezos, John Bogle, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, Marc Andreessen, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, obamacare, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, smart grid, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

Declaring that the Internet has passed beyond its entrepreneurial phase, a bureaucracy of lawyers and accountants at the Federal Communications Commission is taking it over, putting the net in “neutral,” where the government can follow it better, probing all its nodes and prices as a public utility under Title II of the Communications Act of 1934, like an old telephone or railroad monopoly. The Dodd-Frank Act is an invitation to nationalize the large banks as too big to fail and to marginalize the small ones as too little to succeed. Free of all legislative constraint, the federal Consumer Financial Protection Bureau is regulating all consumer finance, from investment advisors to pawn shops. Obamacare (also known as the Affordable Care Act) is extending its web of taxation and control over all healthcare, requiring sixteen thousand new Internal Revenue Service agents to make it all work.

Once associated with research, analysis, and support for the independent enterprises of America, the new Wall Street simply means giant banks informally nationalized by Washington. Deutsche Bank, Goldman Sachs, Morgan Stanley, UBS, Citibank, JPMorgan Chase, and the rest, eminent institutions all, are full of dazzling financial prestidigitators. But they are too big to fail and too dependent on government to succeed. Their horizons are too short to foster entrepreneurial wealth and growth. The bulk of financial profits now comes from “proprietary trading,” with a time horizon measured in minutes and weeks rather than years and decades. They impart liquidity but not learning.

Dwarfing all positive investment by “inside traders” and knowledge brokers are the financial power brokers in the major banks. Thriving through leverage and arbitrage, fast trading and risk shuffling, they have long had access to virtually unlimited funds at near-zero interest rates, while the government has anointed most of them as too big to fail. In effect, the federal government, through the Federal Reserve and scores of other regulators, has socialized the downside of these institutions, enabling them to carry on what they call “creative risk taking.” But what in fact they do is cockeyed extension of ever more cantilevered loans and compound securities with only tiny slivers of actual equity at risk.


pages: 482 words: 149,351

The Finance Curse: How Global Finance Is Making Us All Poorer by Nicholas Shaxson

activist fund / activist shareholder / activist investor, Airbnb, airline deregulation, anti-communist, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, Bretton Woods, British Empire, business climate, business cycle, capital controls, carried interest, Cass Sunstein, Celtic Tiger, central bank independence, centre right, Clayton Christensen, cloud computing, corporate governance, corporate raider, creative destruction, Credit Default Swap, cross-subsidies, David Ricardo: comparative advantage, demographic dividend, Deng Xiaoping, desegregation, Donald Trump, Etonian, failed state, falling living standards, family office, financial deregulation, financial innovation, forensic accounting, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global supply chain, high net worth, Ida Tarbell, income inequality, index fund, invisible hand, Jeff Bezos, Kickstarter, land value tax, late capitalism, light touch regulation, London Whale, Long Term Capital Management, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Money creation, Mont Pelerin Society, moral hazard, neoliberal agenda, Network effects, new economy, Northern Rock, offshore financial centre, old-boy network, out of africa, Paul Samuelson, Plutocrats, plutocrats, Ponzi scheme, price mechanism, purchasing power parity, pushing on a string, race to the bottom, regulatory arbitrage, rent-seeking, road to serfdom, Robert Bork, Ronald Coase, Ronald Reagan, Savings and loan crisis, shareholder value, sharing economy, Silicon Valley, Skype, smart grid, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, special economic zone, Steve Ballmer, Steve Jobs, The Chicago School, Thorstein Veblen, too big to fail, Tragedy of the Commons, transfer pricing, two and twenty, wealth creators, white picket fence, women in the workforce, zero-sum game

Different but also familiar are too-big-to-fail monopolies. Large institutions, usually banks, become so systemically important that a collapse would trigger mayhem, which is what happened in the global financial crisis of 2007–8. They milk markets by making profits from risky business, then get taxpayers to bail them out when the risks crystallise in a crisis. There is actually an official list of these monsters published by the Financial Stability Board, an international body based in Switzerland. There were thirty too-big-to-fail banks at the last count in 2017, plus nine too-big-to-fail insurers, including Barclays, HSBC, Deutsche Bank, Prudential, JP Morgan Chase and Citigroup.19 This is not just a matter for financial regulators; it is an antitrust issue, but in Britain, Europe and the United States the antitrust regulators are asleep.

This capture is mostly a subtle, networked thing, backed up by dollops of well-aimed sponsorship as banks, insurance firms and hedge funds hurl funding at opinion-forming think tanks, throw banquets for visiting dignitaries, or organise drunken grouse-hunting expeditions for politicians or distinguished members of the metropolitan punditry. I call it ‘country capture’ because it goes far beyond the political system, penetrating deep into our economy, our culture and our society. This widely accepted story about the pressing need to preserve the City’s ‘competitiveness’ goes a long way towards explaining why our banks are too big to fail and our bankers too important to jail, why our hospitals aren’t getting funded, why your favourite local bookshop closed down, and why tax havens seem to be so hard to tackle. The concept of ‘national competitiveness’ is a complex, tricky area, whose history and meaning I will explore throughout this book.

Or, once again, making Europe more ‘competitive’ by allowing less competition in Europe. These ideas are not just confused; history shows us that they can be dangerous. When Germany’s monopolies commission warned in 2004 that plans to nurture a national banking champion (Deutsche Bank, in other words) would lead to ‘too big to fail’ banks and a financial crisis, and that a similar policy in 1931 had contributed to the conditions that fed the rise of the Nazi Party, the government told it to get lost. Bank regulation was excellent, they said.30 Deutsche Bank’s shaky finances remain a source of concern to Germany and to the European economy today.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , Branko Milanovic, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, mega-rich, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

The straining of our historic linkage to a hard reserve also mirrors a gradual shift in cultural norms from individual responsibility for failure and immediate financial correction to socialization of risk, redistribution of wealth, and statist economic intervention. The decentralized banking structure of the early 19th century kept moral hazard in check, as no institution was too big to fail, including national banks that would arise. By the 1920s restraining people and countries from converting cash to specie may have postponed the cleansing process of economic cycles, leading to a new height of speculation and the Great Depression. Later in this work the role cultural norms play in the selection of monetary systems will be explored.

This injection, which was partly made to accommodate a 122 ENDLESS MONEY federal government budget deficit of $3 billion, failed to discourage the destruction of some $3.2 billion of deposits, and a similar contraction of the money supply to $65 billion. In 2008, the Fed would explicitly espouse a “too big to fail” policy, having been blamed for causing the crisis by not saving Lehman Brothers. Although Bear Stearns was “saved” and Lehman Brothers was not, in reality the Fed’s reserve injections were widely disbursed, and later would be augmented by direct Treasury assistance through the Troubled Asset Relief Program (TARP).

Over 50 percent of loans made are real estate related, including commercial real estate.2 The cottage industry of doom-and-gloom prognosticators has long predicted the end, but a more humble opinion might be that in this cycle we may be institutionalizing socialization of assets and debts as a priority, and that its cost will be less control over dilution of currency value (inflation), greater seigniorage (a tax that degrades incentives and therefore erodes capitalistic growth), and the concentration of risk into large institutions that are “too big to fail,” producing de-facto nationalization of banking. With the unanimous prescription of even greater regulation H 209 210 ENDLESS MONEY and oversight, our largest banking institutions may have become quasigovernment entities well before the federal government made a direct investment in the nation’s nine largest banks in October 2008.


pages: 261 words: 57,595

China's Future by David Shambaugh

Berlin Wall, capital controls, demographic dividend, demographic transition, Deng Xiaoping, facts on the ground, financial intermediation, financial repression, Gini coefficient, high net worth, Kickstarter, knowledge economy, low skilled workers, market bubble, megacity, Mikhail Gorbachev, New Urbanism, offshore financial centre, open economy, Pearl River Delta, rent-seeking, secular stagnation, short selling, South China Sea, special drawing rights, too big to fail, urban planning, Washington Consensus, working-age population, young professional

Contents Cover Dedication Title Page Copyright Acknowledgments Preface 1 Pathways to China’s Future China Today: Paying the Price for a Path Already Taken Is China Too Big to Fail? Variables and Questions Shaping China’s Future Notes 2 China’s Economy Where Do They Want to Go? The Third Plenum Revisited Rebalancing Growth Rates Worrying Sectoral Signs The Financial System Personal Consumption and Spending State-Owned Enterprise Reform The Key to Success: Innovation Pathways to China’s Economic Future Prospects Notes 3 China’s Society China’s Shifting Class Composition The Volatile Periphery Civil Society Urbanization Migration and the Labor Market Demographic Transition Provision of Public Goods Pathways to China’s Social Future Notes 4 China’s Polity China’s Recent Political Evolution Pathways to China’s Political Future Notes 5 China’s Future and the World Rising Tensions on China’s Periphery China’s Relations with Other Powers The Global South: Fraternity or Neo-Colonialism?

The US-China Business Council, for example, maintains a running online tracker of its implementation—by 2015 it reported a dismal implementation rate of less than 10 percent.7 The European Chamber of Commerce in China released a similarly downbeat assessment entitled “Third Plenum Reality Check.”8 Most other economists and China watchers are similarly unimpressed with the progress to date. Is China Too Big to Fail? China’s reforms thus seem stuck in a trap, or series of traps. The situation today (2015) combines the hardened political repression evident since 2009 (but intensified since Xi Jinping took office in 2012) with very marginal economic reforms and increasingly acute social problems. This is precisely the new juncture China currently faces.

Some analysts, such as Andy Rothman of Matthews Asia, dismiss the potential for local government defaults on debts (on the basis that the party-state will always step in to prevent this from occurring). See Andy Rothman, “Diagnosing China’s Debt Disease” (San Francisco: Matthews Asia, May 14, 2015). Another leading research company (and Rothman’s former employer), CLSA, has a more bearish take in their report China Banks: Not Too Big to Fail (Hong Kong: CLSA Ltd., 2015). 34. Tyler Durden, “The $8 Trillion Black Swan: Is China’s Shadow Banking System About to Collapse?”: http://www.zerohedge.com/news/2015-08-18/8-trillion-black-swan-chinas-shadow-banking-system-about-collapse. 35. Paul Krugman, “China’s Naked Emperors,” New York Times, July 31, 2015. 36.


pages: 309 words: 91,581

The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It by Timothy Noah

assortative mating, autonomous vehicles, Bear Stearns, blue-collar work, Bonfire of the Vanities, Branko Milanovic, business cycle, call centre, collective bargaining, compensation consultant, computer age, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, Deng Xiaoping, easy for humans, difficult for computers, Erik Brynjolfsson, Everybody Ought to Be Rich, feminist movement, Frank Levy and Richard Murnane: The New Division of Labor, Gini coefficient, Gunnar Myrdal, income inequality, independent contractor, industrial robot, invisible hand, job automation, Joseph Schumpeter, longitudinal study, low skilled workers, lump of labour, manufacturing employment, moral hazard, oil shock, pattern recognition, Paul Samuelson, performance metric, positional goods, post-industrial society, postindustrial economy, purchasing power parity, refrigerator car, rent control, Richard Feynman, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, Stephen Hawking, Steve Jobs, The Spirit Level, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, union organizing, upwardly mobile, very high income, Vilfredo Pareto, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, Yom Kippur War

The perfect is the enemy of the good, and the good can be improved in the long term. The next step in banking reform ought to be more radical. The too-big-to-fail banks must be broken up. This is yet another left-wing-sounding idea that has been promoted (though more tentatively) by former Fed chairman Alan Greenspan. “If they’re too big to fail, they’re too big,” Greenspan said in a 2009 speech. “In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole. Maybe that’s what we need.”11 If the too-big-to-fail banks are allowed to remain as large as they are now, they will continue to pose what bankers call a “moral hazard,” a market distortion in which decisions are made with no consideration of risk because the decision-makers themselves are protected from any possible downside.

“Despite the widespread assumption in both New York and Washington that big banks provide societal benefits,” Simon Johnson and James Kwak wrote in 13 Bankers, “there is no proof that these benefits exist and no quantification of their size—certainly no quantification sufficient to show that they outweigh the very obvious costs of having banks that are too big to fail.” Breaking up the big banks ought to reduce compensation levels by introducing greater competition in the banking sector. That wouldn’t be the purpose—the purpose would be to prevent catastrophic banking failures that require government bailouts—but it would be a beneficial side effect. Elect Democratic Presidents This sounds glibly partisan, but as I noted in chapter 7, the Vanderbilt political scientist Larry Bartels has pretty convincingly demonstrated that for the bottom 95 percent of the income distribution, Democratic administrations have since 1948 presided over income gains that diminish as you move up the income scale, while Republican administrations have presided over income gains that diminish as you move down the income scale.


pages: 312 words: 93,836

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, foreign exchange controls, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, Post-Keynesian economics, price stability, profit maximization, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, Y2K

In fact, the arguments used back then were surprisingly similar to some of those used during and after the financial crisis of 2007–08. Banks were seen as having lent recklessly. Banks had created financial instruments that hardly anybody understood. The deregulation process had gone too far. Many banks had become too big to fail. Central banks had to resort to extraordinary measures to save the global financial system from collapse. And so on … *** On 12 December 2012, the United States of America charged two of my former trading counterparties, Tom Hayes and Roger Darin, with conspiracy, wire fraud and price fixing in relation to LIBOR.11 In a bid to dismiss the charges (which he lost), Roger and his lawyer argued that the US authorities had no jurisdiction over his actions.

Likewise, despite the differences in size (ranging from just five members in the STIBOR club to 43 in the EURIBOR club), they also tended to increasingly include international banks that were not under the direct jurisdiction of the central bank issuing the underlying currency for that particular benchmark. In other words, they were either typical so-called too-big-to-fail banks within a country, or international banks of gigantic proportions. For instance, 14 of the 18 members of the US dollar LIBOR club were classified as ‘global systematically important banks’.13 The clubs, in turn, appointed an organisation to govern and supervise both themselves and the process.

The LIBOR definition remains exactly the same as it used to be, and the new rules hardly challenge its existence. On the contrary, making the process more formal and robust will probably only serve to justify and encourage its further use. In a sense, LIBOR, like the large banks that are part of the panels setting it, has been deemed ‘too big to fail’. Overall, these measures should be seen as steps in the right direction – but only as long as the process is moving towards greater transparency. A pair of 3D glasses might make a film more realistic. However, it will not make it real. *** The perception of the industry has also changed at a more micro level.


pages: 433 words: 125,031

Brazillionaires: The Godfathers of Modern Brazil by Alex Cuadros

affirmative action, Asian financial crisis, big-box store, BRICs, buy the rumour, sell the news, cognitive dissonance, creative destruction, crony capitalism, Deng Xiaoping, Donald Trump, Elon Musk, facts on the ground, family office, high net worth, index fund, invisible hand, Jeff Bezos, Mark Zuckerberg, NetJets, offshore financial centre, profit motive, prosperity theology / prosperity gospel / gospel of success, rent-seeking, risk/return, Rubik’s Cube, savings glut, short selling, Silicon Valley, sovereign wealth fund, stem cell, The Wealth of Nations by Adam Smith, too big to fail, transatlantic slave trade, We are the 99%, William Langewiesche

William Grossman) Contents PROLOGUE: THE CRASH PART ONE: ROOTS OF WEALTH CHAPTER 1: GOD IS BRAZILIAN CHAPTER 2: THE PRICE OF PROGRESS CHAPTER 3: MANIFEST DESTINY CHAPTER 4: NATION BUILDING CHAPTER 5: PROSPERITY GOSPEL PART TWO: THE BRAZILIAN DREAM CHAPTER 6: VISIONARY CHAPTER 7: HELPING HANDS CHAPTER 8: THE PROFIT MOTIVE CHAPTER 9: THE BACKLASH CHAPTER 10: TOO BIG TO FAIL EPILOGUE: AFTER THE CRASH ACKNOWLEDGMENTS NOTES GLOSSARY INDEX PROLOGUE THE CRASH ON A STRETCH OF HIGHWAY NOT FAR FROM RIO DE JANEIRO, a silver SLR McLaren idled on the shoulder, its futuristic door hinged open at the top like a wing extended toward the evening sky. The warning lights blinked yellow.

It would be the first time someone had ever served time for financial crimes in Brazil—though of course, insider trading became a crime here only in 2001, a fitting delay in the land of the cordial man. As with his son, few believed someone like Eike could ever go to jail. But the case against him was much better than the one against Thor for manslaughter. And Brazilians wanted to see someone rich and powerful get his due. CHAPTER 10 TOO BIG TO FAIL DEBT, CRISIS, AND A COMEBACK “When you’ve done the right thing, you just keep on going.” —EIKE BATISTA (NEGATIVE $1 BILLION) WHEN I FIRST STARTED REPORTING ON BILLIONAIRES, I assumed I’d speak to Eike all the time. It was only later that I realized I didn’t fully believe my own skepticism of him, and some large part of me imagined he’d just stay on top forever.

After Judge Moro ordered the arrest of Marcelo Odebrecht, the heir who now led the family empire, one well-known blogger even wrote that tycoons like him deserved to be treated not just as citizens but as national institutions. An antitrust official compared Dilma’s Faustian logic to the one that prevailed in the United States in 2008, according to which some banks were “too big to fail,” regardless of what they’d done wrong. Brazil’s “bribe club” was responsible for the country’s most important public works—including the projects for the Olympic Games in Rio. If Camargo Corrêa and Odebrecht went under, the country could face international embarrassment in 2016, and the economy truly would suffer.


pages: 505 words: 142,118

A Man for All Markets by Edward O. Thorp

3Com Palm IPO, Albert Einstein, asset allocation, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, Black-Scholes formula, Brownian motion, buy and hold, buy low sell high, caloric restriction, caloric restriction, carried interest, Chuck Templeton: OpenTable:, Claude Shannon: information theory, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Edward Thorp, Erdős number, Eugene Fama: efficient market hypothesis, financial innovation, Garrett Hardin, George Santayana, German hyperinflation, Henri Poincaré, high net worth, High speed trading, index arbitrage, index fund, interest rate swap, invisible hand, Jarndyce and Jarndyce, Jeff Bezos, John Bogle, John Meriwether, John Nash: game theory, Kenneth Arrow, Livingstone, I presume, Long Term Capital Management, Louis Bachelier, margin call, Mason jar, merger arbitrage, Murray Gell-Mann, Myron Scholes, NetJets, Norbert Wiener, passive investing, Paul Erdős, Paul Samuelson, Pluto: dwarf planet, Ponzi scheme, price anchoring, publish or perish, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, RFID, Richard Feynman, risk-adjusted returns, Robert Shiller, Robert Shiller, rolodex, Sharpe ratio, short selling, Silicon Valley, Stanford marshmallow experiment, statistical arbitrage, stem cell, stocks for the long run, survivorship bias, tail risk, The Myth of the Rational Market, The Predators' Ball, the rule of 72, The Wisdom of Crowds, too big to fail, Tragedy of the Commons, Upton Sinclair, value at risk, Vanguard fund, Vilfredo Pareto, Works Progress Administration

That’s what is done on regulated futures exchanges, where contracts are also standardized. This model has worked well for decades, is easy to regulate, mostly by the exchanges themselves, and has had few problems. Institutions that are “too big to fail,” and have a significant risk of doing so, should be broken into pieces that are small enough to fail without jeopardizing the financial system. As Alan Greenspan finally admitted, “Too big to fail is too big.” This is a catchy sound bite but it misstates the real problem. It’s not the mere size of an institution that creates the danger. It is the size of the risk to the financial system from a failure.

In August 1998, the hedge fund Long-Term Capital Management (LTCM), a pool of $4 billion, lost nearly all its money. Highly leveraged, it threatened to default on something like $100 billion in contracts. Some claimed that the world financial system itself was threatened. The Federal Reserve decided LTCM was “too big to fail” and brokered a bailout by a consortium of brokers and banks, each of whom had a financial self-interest in saving LTCM. At about the same time several Asian economies got sick, and Russia defaulted on its debt. The combination of events greatly increased volatility in the financial markets.

They expanded to $7 billion in capital before giving back $2.7 billion, which increased both the risk and the return on the remaining capital. Later, when adverse market conditions created fairly small losses in percentage terms, the leverage magnified the impact and nearly wiped them out. After losing 90 percent of their capital in weeks, and with total ruin imminent, the fact that they were “too big to fail” led to a rescue effort encouraged by the Federal Reserve. The fund was liquidated in an orderly fashion and investors recovered a small percentage of their stake. Not long after, Meriwether and four others of the sixteen partners started a new hedge fund similar to LTCM, but using less leverage.


pages: 503 words: 131,064

Liars and Outliers: How Security Holds Society Together by Bruce Schneier

airport security, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Sanders, Brian Krebs, Broken windows theory, carried interest, Cass Sunstein, Chelsea Manning, commoditize, corporate governance, crack epidemic, credit crunch, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, David Graeber, desegregation, don't be evil, Double Irish / Dutch Sandwich, Douglas Hofstadter, experimental economics, Fall of the Berlin Wall, financial deregulation, Garrett Hardin, George Akerlof, hydraulic fracturing, impulse control, income inequality, invention of agriculture, invention of gunpowder, iterative process, Jean Tirole, John Bogle, John Nash: game theory, joint-stock company, Julian Assange, longitudinal study, mass incarceration, meta-analysis, microcredit, moral hazard, mutually assured destruction, Nate Silver, Network effects, Nick Leeson, offshore financial centre, patent troll, phenotype, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, profit motive, race to the bottom, Ralph Waldo Emerson, RAND corporation, rent-seeking, RFID, Richard Thaler, risk tolerance, Ronald Coase, security theater, shareholder value, slashdot, statistical model, Steven Pinker, Stuxnet, technological singularity, The Market for Lemons, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, too big to fail, traffic fines, Tragedy of the Commons, transaction costs, ultimatum game, UNCLOS, union organizing, Vernor Vinge, WikiLeaks, World Values Survey, Y2K, Yochai Benkler, zero-sum game

But as long as the maximum possible penalty to the corporation is bankruptcy, there will be illegal activities that are perfectly rational to undertake as long as the probability of penalty is small enough.20 Any company that is too big to fail—that the government will bail out rather than let fail—is the beneficiary of a free insurance policy underwritten by taxpayers. So while a normal-sized company would evaluate both the costs and benefits of defecting, a too-big-to-fail company knows that someone else will pick up the costs. This is a moral hazard that radically changes the risk trade-off, and limits the effectiveness of institutional pressure.

Until recently, Amazon.com used its large national footprint and lack of physical stores to avoid having to charge sales tax in most states. Punishing a large corporation might result in so much cost or damage to society that it makes sense to let them get away with their wrongdoing. The ultimate expression of this is when a company is “too big to fail”: when the government is so afraid of the secondary effects of a company going under that they will bail the company out in order to prevent it.17 Individuals within large corporations can be emotionally further away from the individuals they're affecting when they make decisions about whether to cooperate or defect.

Technology aids in both of those: travel technology to allow people to move around, communications technology to allow better coordination and cooperation, and information technology to allow information to move around the organization. The fact that all of these technologies have vastly improved in the past few decades is why organizations are growing in size. (17) Senator Bernie Sanders actually had a reasonable point when he said that any company that is too big to fail is also too big to exist. (18) The people who use sites like Google and Facebook are not those companies’ customers. They are the products that those companies sell to their customers. In general: if you're not paying for it, then you're the product. Sometimes you're the product even if you are paying for it.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

This, in turn, is a consequence of institutional and market imperfections (for example, rules about knowing your customer, designed to curb money laundering), which, interestingly, the neoclassical model underlying much of Europe’s policy agenda ignored. There is far less of a single market than is widely thought to exist. 11 There are similar distortions within countries. Because the likelihood of a government bailout is greater for big banks—especially the banks that are viewed to be too big to fail—such banks can acquire funds at a lower rate than small banks. They can thus expand, not based on their relative competency or efficiency, but on the basis of the relative size of the implicit subsidy that they receive from the government. But the system is again divergent: as the large banks get larger, the likelihood of a bailout increases, and thus the difference in the implicit subsidy gets larger. 12 This would not fully fix the problem: given that banks in weak countries would, in any case be weaker and perceive the risks they face as higher, lenders to these banks would demand higher interest rates, and the banks in turn would charge higher interest rates, putting firms in their country at a disadvantage.

But whether that is so is not the point: the government lent money to the banks at far below the market interest rate, and that in itself is a major gift. There were many other ways that central banks (sometimes working in conjunction with government, sometimes seemingly independently) provided hidden subsidies to the banks. They perpetuated the prevalence of too-big-to-fail (too-correlated-to-fail, and too-interconnected-to-fail) banks; indeed, on both sides of the Atlantic, governments encouraged mergers, exacerbating the problem. The lower interest rates that such banks can obtain acts as a hidden subsidy. Quantitative easing itself represented in part a hidden recapitalization of the banks, much as the policies pursued in the Clinton administration had done after the savings and loan (S&L) crisis.

Galbraith, Inequality and Instability: A Study of the World Economy Just before the Great Crisis (New York: Oxford University Press, 2012); and Stiglitz, Price of Inequality. 15 For a further development of this critique, see my book Freefall. 16 This is especially so, through the privatization of gains and the socialization of losses that has become a regular feature in economies with too-big-to-fail banks. (See Freefall.) 17 The system is symmetric. The central bank may decide that there is too much money in the economic system—that is, the banks are lending too much, using “money” that they receive in repayment. In that case, the government can buy back rights to issue credit: they buy back the money that they have allowed the banks to effectively manage on their behalf.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

"Robert Solow", accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Madoff, British Empire, buy and hold, central bank independence, collective bargaining, commodity trading advisor, compensation consultant, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, Money creation, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Savings and loan crisis, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tragedy of the Commons, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

Interestingly, in both the UK and Switzerland, steps to force primary loss-absorbing capacity for “too big to fail” banks to more than twice that required by Basel III (to around 15–20 percent), and the separation of deposit operations from all other kinds of banking as the sole kind protected by government guarantee, are well under way – and up to the time of writing the dire warnings from bankers that banks would relocate in response have been ignored by policymakers. Unfortunately, the Fed has elected to implement the minimum required by Basel III for most banks, and is still deciding what capacity will apply to the eight largest “too big to fail” banks. It seems unlikely that they will be as principled and erudite as the British or Swiss.

The goal of the operation was usually cast as improving the international competitiveness of the banks of the respective nations or as increasing the attractiveness of the respect