Business Insider's Courtney Comstock has a great summary of former IMF chief economist Simon Johnson's evisceration of the giant banks' arguments regarding capital requirements:
[Johnson's] argument in a nutshell: bankers from the big 6 are outright lying so that they can continue to take on risk and keep their profitable trading operations running.
The issue: BASEL III regulations (originated in Switzerland, written by all of the world's Central Banks) require banks to have a capital requirement of 7% of equity, which is high enough as far as banks are concerned, but not high enough as far as U.S. regulators are concerned. U.S. regulators want to tack on an extra 3%. (Or maybe just 2% to 2.5%, according to a rumor on CNBC last week.)
Bankers do not want capital requirements to be too high for many reasons, a couple of which are laid out by a banker who emailed us here, and 4 others which Reuters detailed last week:
- “Holding capital hostage” will hurt the struggling economy because it will mean fewer loans at a time when lending is already depressed.
- Establishing huge capital buffers is an admission by regulators that last year’s Dodd-Frank financial overhaul does not accomplish its goal of reducing risk.
- If banks hold onto more capital and make fewer loans, borrowers will turn to the “shadow banking sector” – hedge funds, for example — which has little or no oversight.
- Tough standards in the United States would create a competitive disadvantage vis à vis other countries.
All of these are wrong, according to Simon Johnson, who blasted each of them using the following arguments:
- Capital requirements are a restriction on the liability side of the balance sheet — they have nothing to do with the asset side (in what you invest or to whom you lend).
- During the Dodd-Frank debates last year, [everyone] said it would be a bad idea for Congress to legislate capital requirements and should leave them to be set by regulators after Basel III... Now the banks want to say that this is not his job as authorized by Dodd-Frank. This argument will impress only lawmakers looking for any excuse to help the big banks.
- The “shadow banking sector” — hedge funds, for example — grew rapidly in large part because it was a popular way for very big banks to evade existing capital requirements before 2008, even though those standards were very low... It would be a disaster if this were to happen again.
- [Just because your friend says it's a good idea to jump off a bridge...] If China, India or any other country wants to produce electricity using a technology that severely damages local health, why would the United States want to do the same?
As government's policies discourage lending to Main Street and the little guy....
And Comstock goes on to note:
Making all of this more interesting is an op-ed written by a regional bank CEO a couple of days ago. Right now, regional banks are subject to the same regulations as the big 6, but they are totally different beasts.
Bob Wilmers, M&T Bank CEO, writes that the Big 6 should be subject to stricter regulations like higher capital requirements because they trade so much, and it's risky, but smaller banks, like his, should not be subject to such high capital requirements because they actually use the free capital on their balance sheets to lend to entrepreneurs, etc....I can think of a better rebuttal of point No 1 than Simon Johnson produces.
He claims that the liability side of banks’ balance sheet has “nothing to do” with the asset side. Strikes me that if banks are forced to hold more capital per dollar that they lend, that does raise the cost of lending as the banks rightly claim.
A better rebuttal is the point that borrowing from a bank is not the only way of funding a business or house purchase: equity is another way. I.e. if government clamps down on bank lending, that in itself slows economic growth as the banks rightly claim, but government can perfectly well make up that by channeling stimulus or “hard cash” in household pockets.
The beauty of equity finance is that there is practically zero chance of taxpayers having to come to the rescue when a business or set of businesses fail. So just to ensure we have a level playing field, the chance of a systemic bank collapse should be reduced to near zero. And that can be done via a stinking great increase in banks’ capital requirements....Plans to undermine American resistance are mostly in the form of economic warfare....?
These Nazi/banker/Communism revelations are nothing new, but they are nearly forgotten, since the former "conservative movement" abandoned their anti-Imperial educational efforts to inform their countrymen of this treason, in a huge compromise of their beliefs. They chose money over country and sided with the Rockefeller Republicans, whom they had formerly worked so hard to expose. This was the unholy alliance which gave us both Bushes. Before the Reagan Revolution, and during its initial stages, those patriotic Americans who called themselves "conservative" went all-out, to expose these nefarious bankers and their bankrolling of every "enemy" we have faced since the early Twentieth Century, but since then, they have abandoned the path of truth to become partners with the money-lenders and power-brokers, and their Imperial plans for world conquest, which are now unfolding around us.
The latest plans to undermine American resistance are mostly in the form of economic warfare, as they now secretly back Chinese and Asian competitors to the flat-on-its-back American economy, seeking to provoke violent reactions by the fading former Empire that will thin-out the Asian "useless eaters."
Professor Sutton led the way in exposing the treacherous duplicity of America's financial and political leaders. Never before in history has mankind produced national leadership in any country which allowed the financial powers to manufacture and strengthen enemies, to wage war against their own countrymen. Sutton documented this, producing detailed research which implicated the international bankers, especially those with American citizenship, even though he endured public charges of "anti-Semitism" for daring to expose powerful Ziocon Jewish interests.
Further investigations by Dr. Sutton into American secret societies like the Skull & Bones, and shadowy organizations like the Trilateralists shone light where none had been before, from his insider positions in academia. His work showed us that America's secret leaders have been sowing subversion and creating America's own enemies long before today's "Islamists" came along. We need more insiders like him to dig through the real records of the infinite crimes committed in their quest for a global empire....
THE WARREN REPORT: 'LIQUIDATE THE BANKS & FIRE THE EXECUTIVES'
By Mike Whitney
Apr 14, 2009
Last Tuesday, a congressional panel headed by ex-Harvard law
professor Elizabeth Warren released a report on Treasury Secretary
Timothy Geithner's handling of the Troubled Assets Relief Program
(TARP). Warren was appointed to lead the five-member Congressional
Oversight Panel (COP) in November by Senate majority leader Harry Reid.
From the opening paragraph on, the Warren report makes clear that
Congress is frustrated with Geithner's so-called "Financial Rescue Plan"
and doesn't have the foggiest idea of what he is trying to do.
Here are the first few lines of "Assessing Treasury's Strategy:
Six Months of TARP": "With this report, the Congressional Oversight
Panel examines Treasury's current strategy and evaluates the progress it
has achieved thus far. This report returns the Panel's inquiry to a
central question raised in its first report: What is Treasury's
strategy?" Six months and $1 trillion later, and Congress still cannot
figure out what Geithner is up to. It's a wonder the Treasury secretary
hasn't been fired already.<<<<<
From the report: "In addition to drawing on the $700 billion
allocated to Treasury under the Emergency Economic Stabilization Act
(EESA), economic stabilization efforts have depended heavily on the use
of the Federal Reserve Board's balance sheet. This approach has
permitted Treasury to leverage TARP funds well beyond the funds
appropriated by Congress. Thus, while Treasury has spent or committed
$590.4 billion of TARP funds, according to Panel estimates, the Federal
Reserve Board has expanded its balance sheet by more than $1.5 trillion
in loans and purchases of government-sponsored enterprise (GSE)
The total value of all direct spending, loans and guarantees
provided to date in conjunction with the federal government's financial
stability efforts (including those of the Federal Deposit Insurance
Corporation (FDIC) as well as Treasury and the Federal Reserve Board)
now exceeds $4 trillion."
So, while Congress approved a mere $700 billion in emergency
funding for the TARP, Geithner and Bernanke deftly sidestepped the
public opposition to more bailouts and shoveled another $3.3 trillion
through the back door via loans and leverage for crappy mortgage paper
that will never regain its value. Additionally, the Fed has made a deal
with Treasury that when the financial crisis finally subsides, Treasury
will assume the Fed's obligations vis-a-vis the "lending facilities,"
which means the taxpayer will then be responsible for unknown trillions
in withering investments.
From the report: "To deal with a troubled financial system, three
fundamentally different policy alternatives are possible: liquidation,
receivership, or subsidization.
To place these alternatives in context, the report evaluates historical
and contemporary efforts to confront financial crises and their relative
The Panel focused on six historical experiences:
(1) the U.S. Depression of the 1930s;
(2) the bank run on and subsequent government seizure of
Continental Illinois in 1984;
(3) the savings and loan crisis of the late 1980s and
establishment of the Resolution Trust Corporation;
(4) the recapitalization of the FDIC bank insurance fund in 1991;
(5) Sweden's financial crisis of the early 1990s;
and (6) what has become known as Japan's "Lost Decade" of the
1990s. The report also surveys the approaches currently employed by
Iceland, Ireland, the United Kingdom, and other European countries."
This statement shows that the congressional committee understands
that Geithner's lunatic plan has no historic precedent and no prospect
Geithner's circuitous Public-Private Investment Program (PPIP) -- which
is designed to remove toxic assets from bank balance sheets -- is an
end-run around "tried-and-true" methods for fixing the banking system.
In the most restrained and diplomatic language, Warren is telling
Geithner that she knows that he's up to no good.
From the report: "Liquidation avoids the uncertainty and
open-ended commitment that accompany subsidization. It can restore
market confidence in the surviving banks, and it can potentially
accelerate recovery by offering decisive and clear statements about the
government's evaluation of financial conditions and institutions." The
committee agrees with the vast majority of reputable economists who
think the banks should be taken over (liquidated) and the bad assets put
up for auction.
This is the committee's number one recommendation. The committee
also explores the pros and cons of conservatorship (which entails a
reorganization in which bad assets are removed, failed managers are
replaced, and parts of the business are spun off) and government
subsidization, which involves capital infusions or the purchasing of
Subsidization, however, carries the risk of distorting the market
(by keeping assets artificially high) and creating a constant drain on
government resources. Subsidization tends to create hobbled banks that
continue to languish as wards of the state. Liquidation, conservatorship
and government subsidization; these are the three ways to fix the
There is no fourth way. Geithner's plan is not a plan at all; it's
mumbo-jumbo dignified with an acronym, PPIP.
The Treasury secretary is being as opaque as possible to stall for
time while he diverts trillions in public revenue to his scamster
friends at the big banks through capital injections and nutty-sounding
money laundering programs like the PPIP.
From the report: "Treasury's approach fails to acknowledge the
depth of the current downturn and the degree to which the low valuation
of troubled assets accurately reflects their worth. The actions
undertaken by Treasury, the Federal Reserve Board and the FDIC are
unprecedented. But if the economic crisis is deeper than anticipated, it
is possible that Treasury will need to take very different actions in
order to restore financial stability."
This is a crucial point; the toxic assets are not going to regain
their value because their current market price -- 30 cents on the dollar
for AAA mortgage-backed securities -- accurately reflects the amount of
risk they bear. The market is right and Geithner is wrong; it's that
simple. Many of these securities are comprised of loans that were issued
to people without sufficient income to make the payments.
These "liar's loans" were bundled together with good loans into
mortgage-backed securities. No one can say with any certainty what they
are really worth. Naturally, there is a premium for uncertainty, which
is why the assets are fetching a mere 30 cents on the dollar. This won't
change no matter how much Geithner tries to prop up the market. The well
has been already poisoned. Also, according to this month's Case-Schiller
report, housing prices are falling at the fastest pace since their peak
That means that the market for mortgage-backed securities (MBS)
will continue to plunge and the losses at the banks will continue to
grow. The IMF recently increased its estimate of how much toxic
mortgage-backed paper the banks are holding to $4 trillion. The banking
system is underwater and needs to be resolved quickly before another
Lehman-type crisis arises, sending the economy into a protracted
Depression. Geithner is clearly the wrong man for the job.
His PPIP is nothing more than a stealth rip-off of public funds
which uses confusing rules and guidelines to conceal the true objective,
which is to shift toxic garbage onto the public's balance sheet while
recapitalizing bankrupt financial institutions.
So, why is Geithner being kept on at Treasury when his plan has
already been thoroughly discredited and his only goal is to bail out the
banks through underhanded means?
That question was best answered by the former chief economist of
the IMF, Simon Johnson, in an article which appeared in The Atlantic
Monthly: "The crash has laid bare many unpleasant truths about the
United States. One of the most alarming . . is that the finance
industry has effectively captured our government -- a state of affairs
that more typically describes emerging markets, and is at the center of
many emerging-market crises.
If the IMF's staff could speak freely about the U.S., it would
tell us what it tells all countries in this situation; recovery will
fail unless we break the financial oligarchy that is blocking essential
reform. And if we are to prevent a true depression we're running out of
time." (The Atlantic Monthly, May 2009, by Simon Johnson)
The banks have a stranglehold on the political process. Many of
their foot soldiers now occupy the highest offices in government. It's
up to people like Elizabeth Warren to draw attention to the silent coup
that has taken place and do whatever needs to be done to purge the
moneylenders from the seat of power and restore representative
government. It's a tall order and time is running out.....
The Money Masters - How International Bankers Gained Control of America
Money As Debt