Break 'Em Up

Former Federal Reserve chairman Paul Volcker says do it.

So does former Federal Reserve chairman Alan Greenspan.

Two big banks in England are doing it now.

But the U.S. still won’t.

To stop the ‘too big to fail psychosis,’ break up the banks.

Break them up. Now.

As the U.S. still struggles with its own too-big-to-fail issues, banks are once again a sore spot in Europe. The U.K. and the European Commission are breaking up Royal Bank of Scotland and Lloyds Banking Group in deals to prop up both banks.

Essentially, European banking regulators there are telling their banks if you want more taxpayer money, you've got to sell off units and Kryptonite assets. The UK Treasury says the forced restructuring moves carried out by the two banks would cut the risk to the public by more than $490 B.

The U.S. government and the banking sector are moving in the opposite direction, even though the massive problems are beyond the tipping point. The banks are getting taxpayer money first, and then are breaking themselves up after the fact.

U.S. banks are essentially giant black boxes, holding notional exposures to derivatives amounting to $203 T, or more than three times the size of the planet’s GDP, estimated at $65.6 T in 2007 by the CIA World Factbook.

And banks continue to paper over losses with accounting machinations, tossing a coat of paint on bad balance sheets rotted out by predatory securitizations manufactured during the speculative bender that would have had Wall Street securitizing even the issuance from a fire hydrant, if it could.

Citigroup and Bank of America each have balance sheets roughly 10 times the size of ExxonMobil’s, analysts note, and their disarray proves that a $2 T balance sheet is beyond the realm of mere mortals. Officials are so submerged in problems there that they need scuba gear to get out.

Administration officials have balked at restricting the size of U.S. banks and instead have waited to fix the problems, engaging in costly after-the fact refereeing and blame games, showing one of Washington's inconvenient economic truths is “never put off tomorrow what you can do the day after tomorrow,” to quote Mark Twain. "Blame Bush" is a nice bumper sticker, but fixing the crisis is now this Administration’s problem.

Instead, the focus has been on massive taxpayer bailouts, a crackdown on bank pay by the Fed and a pay czar, never confirmed by the Senate, as well as fees and other penalties to discourage banks from growing too complicated.

Bailouts instead of bankruptcies, even though nothing so concentrates a bank CEO’s mind like a bankruptcy in the morning, nothing stops risk-taking cold than the fear of bankruptcy.

A government-distorted housing market continues to get a government bailout, showing Washington has no more sense than a flock of pheasants. Do all TARP-ed, too big to fail banks now have the implicit backing of the U.S. government, just as Freddie Mac and Fannie Mae have?   

The U.S. government is now attempting to re-affix a regulatory antenna to the roof of the government that fell off long ago. Meanwhile, regulators in the little Office of Thrift Supervision apparently didn’t realize they could have gotten rid of the macaroni noodles in their spine and sued AIG, or merely threatened to, and stopped its lethal financial products division in its tracks.

“Any regulator can threaten any of these banks or big companies to knock it off or they’ll pull their operating charter, and that puts the fear of God in them,” says a former government official.

Recently, Treasury Secretary Geithner testified that the administration is keen on the idea that the government should have pre-emptive authority to break up a large company even when it doesn't face imminent collapse.

But the bill says the government won’t name the systemically important banks, fearing the markets will charge them more for their capital — likely because the U.S. government is essentially backing their borrowing, so naming them would cost the U.S. taxpayer even more.

The banks should break up on their own, or the U.S. will continue to suffer more banking crisis, virtually one every three to five years since the ‘80s. And investors and taxpayers worldwide will continue to suffer.

From the start of 2008 to the spring of this year the economic crisis knocked $30 T off the value of global shares and $11 T off the value of homes, according to Goldman Sachs, an investment bank.

The IMF’s latest World Economic Outlook says the cost of 88 banking crises over the past four decades show that, on average, seven years after a bust an economy’s level of output is almost 10% below where it would have been without the crisis.

The TARP inspector general, Neil Barofsky, calculates the U.S.’s gross exposure to the bailouts is $23.9 T, to which the Treasury took umbrage saying that is an Armageddon number and will never be realized.

Still, it’s gut-clenching to see trillions of dollars blowing out the government’s back door. It’s stomach churning to hear the president of the China Investment Corp., Gao Xiqing, say he’s seeing “socialism with American characteristics.”

Like Japan, which had eight stimulus plans to resurface from its zombie decade, the U.S. is deep into stimulus plans to revive the economy. But instead of breaking up the banks, regulators have been pushing healthy banks to buy sicker ones. The result has been consolidation, potentially creating an even more dangerous situation:

●By the end of 2007, 15 institutions with combined shareholder equity of $857 B had total assets of $13.6 T and off-balance-sheet commitments of $5.8 T, analysts note, with a total leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $203 T to date;

●Five of the biggest U.S. banks fund two-thirds of the mortgage market;

●Four banks -- Citigroup, JPMorgan Chase, BofA and Wells Fargo -- control two-thirds of the credit card market;

●39% of U.S. deposits sit at four banks -- Citigroup, JPMorgan Chase, BofA and Wells Fargo;

●19 banks and companies that were part of the government’s stress tests last Spring hold two-thirds of the assets and more than half of the loans in the U.S. banking system, according to a Federal Reserve study released April 24;

●More than half of the 19 U.S. banks failed the "stress test." The 10 banks needed to raise just under $75 B by the end of 2010, a figure based on an assumption that the economy will get worse, according to the formally named Supervisory Capital Assessment Program (SCAP);

●The SCAP report said that if the economy follows the adverse scenario, losses at the 19 banks could be $600 B in 2009 and 2010, mostly from residential mortages and other consumer loans;

●Total financial industry profits, in the six decades from 1929 through 1988, averaged 1.2% of gross domestic product — and never went above 1.7%, Floyd Norris of the New York Times reports;

●Then they shot up in the 1990s and went up further in the current decade, peaking at 3.3 % in 2005. Even now, the figure is higher than it ever was before 1990, Norris says;

●"In 1990, the 10 largest financial institutions had 10% of the financial assets in the United States,” Henry Kaufman, an economist and author of a new book, “The Road to Financial Reformation,” tells Norris. Kaufman adds: “Last year, the figure went over 60%.";

●JPMorgan Chase, Bank of America and Wells Fargo control a combined 33% of U.S. deposits as of June 30, up from 22% at the end of 2008, according to SNL Financial;

●U.S. commercial banks have $203 T in notional derivatives, up from $87.9 T in 2004;

●The four biggest U.S. banks -- Bank of America, Citigroup, JPMorgan Chase and Wells Fargo – have about $5.2 T off their balance sheets, according to their 2008 annual filings;

●Toxic assets still plague nation’s banks. At least 150 U.S. lenders have 5% or more of assets tied up in nonperforming loans, a level that could wipe out their equity and threaten their survival, analysts note;

●Citigroup, Bank of America, JPMorgan and Wells Fargo should be forced to have higher capital requirements as their assets exceed $1 T each, analysts say;

●Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of Citigroup, the New York Times reports;

●In the last decade, Citigroup has had four chief executives, six chief financial officers, seven heads of consumer banking and eight investment banking chiefs, the Times says;

●Citigroup’s assets ballooned from $1.49 T to $2.19 T from 2005 to 2007, an increase of 46.9 % (and three times the size of Citigroup’s balance sheet when the merger that created it occurred), the Times says;

●Citigroup amassed a portfolio that would ultimately generate losses of more than $35 B, the Times reports. Citi’s boss reportedly learned of its $43 B in toxic assets in September 2007;

●To confront their recklessness, Citi had a former CIA boss, Lehman an ex-rear admiral of the Navy and also Dr. Doom, Henry Kaufman. Bofa had a former four-star general of the army. None of these board members could stop their risk-taking;

●Like Citi, AIG's mess is forcing a breakup which may generate a net $20 B flowing back to AIG. The remaining assets, such as property and casualty insurance and aircraft leasing, could form a going concern. But AIG would still be swamped by a remaining $60 B or so in liabilities to taxpayers, not to mention tens of billions of dollars more owed to private lenders, analysts note;

●The U.S. taxpayer is a major owner of more than 600 U.S. financial institutions and banks, as well as two automakers, an international insurance conglomerate, and numerous other businesses;

●Already, 33 banks have reneged on the 5% dividend payments they owe to the U.S. government, says Richard Suttmeier of ValuEngine.com. That’s more than double the 15 last May;

●And the U.S. inspector general for TARP, Neil Barofsky, says taxpayers may eventually lose $159 B overall on the TARP bailouts;

●"The TARP has become nothing but $700 B of walking around money,” says Rep. Darrell Issa (R-Calif.), ranking member of the House Committee on Oversight and Government Reform;

●The Federal Reserve is set to take on the role of ‘systemic risk regulator,’ even though the Fed has already been criticized for being unaccountable;

 ●25% of current global savings will be sucked up by the OECD governments to take care of the debt financing needed for their economic recoveries;

●”If it looks like, after the crisis is over, the trajectory of the [U.S.’s] debt is going to be continuously upward, I’d say the [U.S.’s triple-A] rating could be in jeopardy,” says Steven Hess, an analyst at Moody’s Investors Service.