We added more quotes to our TBTF page

January 03


We added 4 more quotes to out TBTF page, including the one above from Camden Fine. Here are all 4, with links to the sources:

Camden Fine, president of ICBA: "Consolidation in the banking industry and the emergence of financial institutions with explicit government guarantees against failure haven't exactly contributed to an economic boom. It's been just the reverse—they triggered an economic collapse."

Mervyn King
, governor of the Bank of England: "It is hard to see how the existence of institutions that are “too important to fail” is consistent with their being in the private sector. Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk."

David Komansky, former Merrill Lynch CEO: "Unfortunately, I was one of the people who led the charge to get Glass-Steagall repealed. As I sit here today, I regret those activities and wish we hadn't done that."

Phil Purcell, former Chairman and CEO of Morgan Stanley: "There is one benefit of breakups that hasn't gotten much publicity: Shareholders would get greater value from their investments."

Who else should we add to our list?


Atlantic article "What's Inside America's Banks?" reveals the hidden potential losses of megabanks

January 03


The cover story in this month's Atlantic explains why the nation's megabanks are dangerous: They're still taking the same risky bets they did before the financial crisis, and they're very opaque about those bets.

The authors of the article, Frank Partnoy and Jesse Eisinger, analyze one megabank's financial statement in detail and reveal that when they requested more information from the bank about the statement, the bank wouldn't give it. This is bad because there are large sections in the statement with nondescript titles like "customer accommodation" (aka massive derivatives bets) or categories labeled "other." Pure opacity.

The article is essential for understanding why the Move Your Money movement still matters. Megabanks continue to pose a major threat to the economic health of the world's longterm future. By contrast, small lenders don't load up on these risky derivatives bets, and they therefore don't pose the same risks.

If you want to know more about how risky these derivatives bets are, and how they make our economic future more fragile, read Frank Partnoy's Infectious Greed, which is on our reading list.


10 megabanks now have more assets than all 13,631 other US lenders

January 02


We've shown elsewhere why TBTF is still a problem, but this graph clearly illustrates the recent disparity in banking. In other words, TBTF is getting worse, which means we still face big problems—including megabanks that don't face prosecution, megabanks with mega-lobbying power, and megabanks that will demand bailouts if they fail. 

The data in the chart was pulled from lists from the FDIC (including specific data for each megabank) and CUNA.


Motley Fool Infographic: 2012 Megabank Scandals

January 02


This screenshot from a Motley Fool infographic shows the relative cost of megabanks scandals in 2012, from JPMorgan's London Whale loss at just under $6B to Wells Fargo's subprime loan settlement (the smallest square, lower right) at $175M.

Scroll through the full infographic here, and see our related post, "5 Worst Wall Street Moments of 2012."


The fiscal cliff bill extends subsidy for Goldman Sachs and Bank of America

January 02


Whenever we see stories like this one we think of how much overlap there is between Goldman Sachs and the federal government (see image above) and how that overlap seems to create unfair advantages for Goldman. 

Here's the news: The fiscal cliff bill extended many special deals, including one that gives "tax exempt financing" for office space used by Goldman Sachs and Bank of America in downtown NYC. The subsidy was initially created to help companies affected in the 9/11 attacks, but it's likely excessive at this point. See the report from Matthew Stoller of the Roosevelt Institute here (#5 in the list).


Google "Bank of America Reviews"

December 30




William Dudley acknowledges that "too big to fail" still exists

December 29


Last month NY Fed president William Dudley gave an address on "too big to fail" to a group of financiers and regulators in New York. He started by stating that "we cannot tolerate a financial system in which some firms are too big to fail" and he add that "we are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society."

Some people might write Dudley off completely because he's the president of the NY Fed and too closely connected to Wall Street (which he is), but this speech has a lot of smart ideas, as well as an open admission that breaking up the megabanks may be one good answer to solve the problem of TBTF going forward. 

What's most important to us is that Dudley acknowledges that "too big to fail" still exists and that it's unacceptable. He even goes so far as to state that in the financial crisis of 2007-08 "TBTF contributed to the underpricing of risk in the system and did create a bad set of incentives, and if not addressed comprehensively, would likely be an even larger problem in the future." It's precisely because TBTF (and all it implies) has the potential to be an even larger problem in the future that we're fighting for people to switch to a local lender. You can help end "too big to fail" by switching.


5 Worst Wall Street Moments of 2012

December 28


The megabanks were constantly in the news in 2012, often for unpleasant activities. Here are a list of 5 moments that seemed particularly egregious to us.

1. JPMorgan's London Whale loss: Early in 2012, a derivatives trader named Bruno Iskil lost an enormous bet and ended up costing JPMorgan Chase $6 billion. While the nature of this loss isn't as criminal as many of the other banking scandals of 2012, it proves that a single derivatives trader can do major damage to a financial firm—despite the passage of the Dodd-Frank Act.

Why it matters: The London Whale stands out for what it symbolizes: If a firm can unexpectedly lose $6 billion from their derivatives positions, surprising even the CEO of the firm, what is to stop a single rogue trader at any of these Wall Street firms from doing even more damage in the future, damage that may eventually require another government bailout? Derivatives trades have blown up frequently in the last two decades, and the London Whale is proof that that the problem of megabanks gambling with depositor's money isn't fixed.

2. HSBC and drug cartels: HSBC was fined $1.9 billion for several misdeeds over the course of several years, including helping drug cartels launder money. The prosecutors found that the cartels had built special boxes to fit the teller windows at HSBC, and that the cartels sometimes pumped "hundreds of thousands of dollars in cash, in a single day, into a single account."

Why it matters: The $1.9 billion fee is steep, but it seems like it would have made even more sense to prosecute the bank managers who were directly responsible for these cartel transactions. If a manager at a local lender were to commit these same crimes, they would likely go to jail. Why should it be different for a manager who works for a too-big-to-fail bank?

3. Libor manipulation: This year the public discovered that megabanks had been manipulating global interest rates for personal gain. The lawsuit revealed some egregious statements, with one UBS trader saying, "I need you to keep it as low as possible... if you do that... I'll pay you, you know, 50,000 dollars, 100,000 dollars... whatever you want..." and another saying, "JUST BE CAREFUL DUDE... i agree we shouldnt ve been talking about putting fixings for our positions on public chat." (Yes, those words were actually caught on record.) 

Why it matters: Planet Money showed that during 2007-09 these megabanks manipulated the global interest rate downward to make themselves look more stable than they actually were. In addition, these lower interest rates hurt people with pensions. The real point here, however, is that the Libor manipulation harmed trust in the markets. The Planet Money article asks, "If banks will lie so casually about one of the benchmarks of the financial world, what else will they lie about?"

4. Knight Capital loss: A computer glitch cost Knight Capital $440 million when an algorithm that was supposed to do a series of trades over the course of several days ran all the trades in under an hour. The firm's stock then fell 73%.

Why it matters: Glitches like this one from Knight Capital symbolize the possibility that crashes on Wall Street can happen very quickly, and that certain trades are outside of human control. All of this high-frequency trading allows some players to make big money when things go well, but when a computer algorithm has a bug like this and millions of dollars are rapidly lost, it doesn't help the public trust the markets. What's more, this Knight Capital loss means that there's the possibility that another, much larger flash crash could lay in the future unless the system changes.

5. Mortgage settlement for megabanks: Five megabanks—Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Ally Financial—faced a collective $25 billion settlement over charges that they "routinely signed foreclosure related documents outside the presence of a notary public ... without really knowing whether the facts they contained were correct." 

Why it matters: When specific lenders at megabanks are caught breaking the law, then those specific lenders should be prosecuted.  If a banker at a small bank would likely be prosecuted for breaking the law, why should a banker at a megabank be immune?

These five moments represent why "too big to fail" has failed. The megabanks make enormously risky decisions that compromise the integrity of the financial system and have the potential to spill over to the taxpayer. 

Do you agree with the list? What would you add?

Flickr image above from Will Survive

See our previous posts on HSBC and UBS


Demos Report on Megabanks

December 27


This image comes from a report from Demos called "Bigger Banks, Riskier Banks: The Post-Bailout Continuation of a Pre-Bailout Trend." (Click here to read the pdf version.)

The report arrives at the same conclusions we've arrived at. That is, the problems embedded in the megabanks before the financial crisis are still there, and in many cases these problems are worse. You can see from the image above that in the decade before 2009, the banking industry in the US changed dramatically. Unfortunately, in the time since 2009, the concentration of assets is still on the rise.

We assert that the economy would be safer (i.e. less likely to experience major shocks) if the banking industry were less concentrated, and if the megabanks didn't have such power. It's crucial for the future of the US that we not bailout these megabanks in the future. According to data from the report, Citi alone required $374 billion in government support to keep afloat. That is far too much for a single private company to receive.

Read the full report.


Wells Fargo Lawsuit for Overdraft Rigging Overturned

December 27


In 2010, Wells Fargo joined other megabanks—including JPMorgan Chase and Bank of America—who have been sued for rigging overdraft fees in a way that hurt customers the most.  

Here's how they rig overdraft fees. Let's say you had $500 in your account and throughout the day you ran 10 transactions that added up to $75, putting your account at $425. But just before the end of the day, a check you'd written last week for $525 was processed, putting your account at negative $100. 

Instead of running the day's transactions chronologically, these megabanks would process the day's transactions from the highest amount to the lowest amount, making it so you would be charged overdraft fees for all 11 transactions instead of just the $525 transaction that put your account in the negative. If the overdraft fee were $35, those 11 fees would add up to $385—all because the megabank intentionally processed the transactions in a way that hurt you most.

It's clear why customers sued these megabanks for rigging overdraft fees. 

A court in San Francisco led the way for a class-action lawsuit against Wells Fargo, demanding that the megabank pay more than $200M in restitution. But this week an appeals court overturned the suit, saying that national law trumped state law and that it's not against national law for a bank to rig overdraft fees in this way.

Source: Chicago Tribune, WSJ

Link request from Flickr user