Too Big to Fail = Too Big to Keep

Convict Them
and
Cut Them Up or Close Them Down
 

Apparently there's a significant caveat to the old English proverb, "You can't have your cake and eat it too."  A financial glutton need only gobble up other companies until it becomes Too Big To Fail.  This may be old news, but:

1)      ANOTHER malfeasance of Big Bank-sized proportions just came through

2)      The meager Dodd-Frank regulations are just coming out now and being furiously fought and whittled down by the industry's lobbyists

3)      These guys are just going to hose us again someday unless something is done

Sure, you can trust us...we've been reformed

As to the first point, in the wake of the real estate derivatives debacle, LIBOR manipulation, sanctions violations, Jabba-sized banks have been flagrantly coordinating to artificially influence foreign currency values while siphoning money off everybody else's losses.  Evidence shows they were pursuing this for a decade or so, and as late as a year AFTER the LIBOR scandal came to light.  We don't even have to say "allegedly." 

Per the Wall Street Journal:

“Citigroup Inc. and J.P. Morgan Chase & Co. agreed to pay more than $1 billion each to resolve allegations that they tried for years to manipulate the foreign-currencymarket, the biggest fines wrung from a group of six banks by regulators in the U.S., U.K. and Switzerland.”

“The pacts, totaling about $4.3 billion, indicate that the banks were engaged in activities designed to boost their profits by moving one of the world’s largest and most interconnected markets, sometimes at the expense of clients. Some bank employees blew the whistle on the behavior years ago, but the misconduct persisted until 2013, after banks were punished for trying to manipulate other financial benchmarks.”

It seems one has to cause a worldwide recession with elaborate swindles, cheat clients, brag about it in financial chatrooms, AND scam everyone else by screwing with a few more of the sacrosanct financial numbers before officials will raise their eyebrows.

Some notable quotables from the actual colluding traders include:

• Calling themselves, "the A-Team," "the cooperative," or "the players"
• Sharing private info on clients but cautioning: "Don't want other numpty's in market to know"
• Pulling together orders to enter just before the 1:15pm fix, "Tell you what, let's double team it.  how much you got"?
• And hundreds more along these lines

"The banks didn't dispute the regulators' findings."

The case was a little too cut and dried for even the corporate lawyers to drag it out for decades, but no individual convictions or even cases were announced, although they are "leaving the door open."


CONVICT THEM

Fines won't cut it - they can never be proportional to the damage or big enough to dissuade them because they are negotiated - you wouldn't want to cause TBTF banks to fail.  Nor will low level convictions - it's not the occasional "bad apple" trader that consistently breeds this corrupt culture.  The main player in the LIBOR rigging, former Citigroup and UBS trader Tom Hayes told the Wall Street Journal, "this goes much, much higher than me."  Heads have to roll at the top or there's no fear; fines and lower level losses are just a cost of doing business.
 

Now that it's finally here, financial reform could use a little bite...

CUT THEM UP or CLOSE THEM DOWN

I am not advocating increased regulation.  In fact, I would have preferred, had we been able to, to treat ALL the banks equally back in 2008 and let them each fail according to their transgressions.  Hell, the federal government stood by as over 365 small banks and some large number of thrifts ceased operations - wouldn't it have been just if the same could have happened to the nice TBTF boys who brought us the Great Recession?** 

So, forget about regulating them.  Since we couldn't close them then, we should break them up now, before they do any more harm.


Almost seven years after the Great Recession, generally, it can be said:

• No "Big Bank" paid for their colossal miscalculations and outright deceit
• Nobody went to jail
• And everybody still got their bonuses

Financial reform in the guise of Dodd-Frank regulations has been slow in coming/activation (six years?) with much of it still unwritten, and most of it backwards-looking.  It was originally watered down by Congress, primarily Republicans and those representatives with big TBTF constituencies like NYC and Charlotte, and now the lawyers are busy de-toothing it.  As a measure of this, just the world's largest banks still have up to an $870B shortfall in a pretend crisis of our own test design. 

Frankly, it's going to be too complicated and retrospective to be effective.  The Savings and Loan crisis of the 1980's wasn't followed by another S&L issue 30 years later, but by the much costlier Sub-prime Mortgage fiasco.  The successor will likely be a whole new and more complex creation from the charlatans that brought you collateralized mortgage obligations.   

Consider an analogy:  The brilliant minds at TSA are now all secure against shoe-bombers and underwear explosives AFTER we caught Richard the Arab Brit and his 'nadless buddy trying multiple times to light their clothes on fire while on board full airliners.  That's not the time to learn the terrorists have come up with something new.  Other measures are necessary.

In the end we don't know how the world's next financial crisis will occur, but it's a strong short position that it will derive from an unexpected source and be prohibitively more expensive.  Cracking apart Too Big To Fail financial institutions until they are Marginally Uncomfortable To Fail gets us past the unknown price tag. 

The question we really have to ask ourselves is:  Will it even be financial firms that the taxpayer has to prop up again, or some brand new institution currently in the making?


**Instead, we gave billions from the emergency TARP fund to the banks directly, folded seven more major institutions that were failing into these banks, christened struggling investment firms Goldman Sachs and Morgan Stanley as banks, and shoveled $184 billion through the totally screwed up AIG to divvy up amongst the biggest offenders.  There was a statement about using TARP to help actual people struggling with mortgages, but that was conveniently forgotten after it was approved by Congress.