Banks ‘Too Big to Fail’ Have Grown Even Bigger and others issues
Banks ‘Too Big to Fail’ Have Grown Even Bigger
David Cho | The Washington Post | August 28, 2009 Banks ‘Too Big to Fail’ Have Grown Even Bigger Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral Hazard
When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation’s leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.
Today, the biggest of those banks are even bigger.
The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.
J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.
A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.
“It is at the top of the list of things that need to be fixed,” said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. “It fed the crisis, and it has gotten worse because of the crisis.”
Regulators’ concerns are twofold: that consumers will wind up with fewer choices for services and that big banks will assume they always have the government’s backing if things go wrong. That presumed guarantee means large companies could return to the risky behavior that led to the crisis if they figure federal officials will clean up their mess.
This problem, known as “moral hazard,” is partly why government officials are keeping a tight rein on bailed-out banks — monitoring executive pay, reviewing sales of major divisions — and it is driving the Obama administration’s efforts to create a new regulatory system to prevent another crisis. That plan would impose higher capital standards on large institutions and empower the government to take over a wide range of troubled financial firms to wind down their businesses in an orderly way.
“The dominant public policy imperative motivating reform is to address the moral hazard risk created by what we did, what we had to do in the crisis to save the economy,” Treasury Secretary Timothy F. Geithner said in an interview.
The worry for consumers is that the bailouts skewed the financial industry in favor of the big and powerful. Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.
Those mergers were largely the government’s making. Regulators pushed failing mortgage lenders and Wall Street firms into the arms of even bigger banks and handed out billions of dollars to ensure that the deals would go through. They say they reluctantly arranged the marriages. Their aim was to dull the shock caused by collapses and prevent confidence in the U.S. financial system from crumbling.
Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation’s deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice’s antitrust guidelines typically allow, Federal Reserve documents show.
“There’s been a significant consolidation among the big banks, and it’s kind of hollowing out the banking system,” said Mark Zandi, chief economist of Moody’s Economy.com. “You’ll be left with very large institutions and small ones that fill in the cracks. But it’ll be difficult for the mid-tier institutions to thrive.”
“The oligopoly has tightened,” he added. Consumer Choice
Federal officials and advocacy groups are just beginning to study the impact of the crisis on consumers, but there is some evidence that the mergers are creating new challenges for ordinary Americans.
In the last quarter, the top four banks raised fees related to deposits by an average of 8 percent, according to research from the Federal Reserve Bank of Dallas. Striving to stay competitive, smaller banks lowered their fees by an average of 12 percent.
“None of us are saying dismember these institutions. But you do want to create a system that allows for others to grow, where no one has an oligopolistic power at the expense of others who might be able to provide financial services to consumers,” said Richard Fisher, president of the Federal Reserve Bank of Dallas.
Normally, when faced with price increases, consumers simply switch. But industry officials said that is not so easy when it comes to financial services.
In Santa Cruz, Calif., Wells Fargo, Bank of America and J.P. Morgan Chase hold three-quarters of the deposit market. Each firm was given tens of billions of dollars in bailout funds to help it swallow other banks.
The rest of the market, which consists of a handful of tiny community banks, cannot match the marketing power of the bigger banks. Instead, presidents of the smaller companies said, they must offer more personalized service and adapt to technological changes more quickly to entice customers. Some acknowledged it can be a tough fight.
Wells Fargo is “really, really good at the way they cross-sell and get their tentacles around you,” said Richard Hofstetter, president of Lighthouse Bank, whose only branch is in Santa Cruz. “Their customers have multiple areas of their financial life involved with Wells Fargo. If you have a checking account and an ATM and a credit card and a home-equity line and automatic bill payments . . . to change that is a major undertaking.”
Wells Fargo, J.P. Morgan and Bank of America declined to comment for this article.
Last October, when the Fed was arranging the merger between Wells Fargo and Wachovia, it identified six other metropolitan regions in which the combined company would either exceed the Justice Department’s antitrust guidelines or hold more than a third of an area’s deposits. But the central bank thought local competition in each of those places was sufficient to allow the merger to go through, documents show.
Camden Fine, president of the Independent Community Bankers of America, said those comments reveal the government’s preferential treatment of big banks. He doubted whether the Fed would approve the merger of community banks if the combined company ended up controlling more a third of the market.
“To favor one class of financial institutions over another class skews the market. You don’t have a free market; you have a government-favored market,” he said. “We will never have free markets again if you have the government picking winners and losers.” Moral Hazard
Before the crisis, many creditors thought that the big institutions were a relatively safe investment because they were diversified and thus unlikely to fail. If one line of business struggled, each bank had other ventures to keep the franchise afloat. And even if the entire house caught fire, wouldn’t the government step in to cover the losses?
With executives comforted by that thinking, risk came unhinged from investment decisions. Wall Street borrowed to make money without having enough in reserves to cover potential losses. The pursuit of profit was put ahead of the regard for safety and soundness.
The federal bailouts only reinforced the thought that government would save big banks, no matter how horrible their decisions.
Today, even with the memory of the crisis fresh in their minds, creditors are granting big institutions more favorable treatment because they know the government is backing them, FDIC officials said.
Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.
Many of the largest banks reported a surge in profit during the most recent quarter, including J.P. Morgan Chase and Goldman Sachs. They are prospering while many regional and community banks are struggling. Nearly three dozen of the smaller institutions have failed since July 1, including Community Bank of Nevada and Alabama-based Colonial Bank just last week.
If the government continues to back big firms over small, regulators worry that reckless behavior could return to Wall Street.
The administration’s regulatory reform plan takes aim at this problem by penalizing banks for being big. It would require large institutions to hold more capital and pay higher regulatory fees, as well as allow the government to liquidate them in an orderly way if they begin to fail. The plan also seeks to bolster nontraditional channels of finance to create competition for large banks. If Congress approves the proposal, Geithner said, it would be clear at launch which financial companies would face these measures.
Economists and officials debate whether these steps would address the too-big-to-fail problem. Some say, for instance, that determining the precise amount of capital big financial companies should hold in their reserves will be difficult.
Geithner acknowledged that difficulty but said the administration would probably lean toward being more strict. Taken together, the combination of reforms would be a powerful counterbalance to big banks, he said.
“Our system is not going to be significantly more concentrated than it is today,” Geithner said. “And it’s important to remember that even now, our system remains much less concentrated and will continue to provide more choice for consumers and businesses than any other major economy in the world.”
Filed under: Capitalism in Crisis
• 10:11 am 0 Federal Reserve made $14 billion on turmoil loans: report
| Thomson-Reuters | August 31, 2009
LONDON (Reuters) – The Federal Reserve has made $14 billion in profits on loans made in the last two years, The Financial Times reported on Monday, citing officials close to the matter.
The U.S. central bank also earned about $19 billion from interest and fees charged to institutions that tapped liquidity facilities during the global financial crisis, the report said.
If the Fed had invested the same amounted loaned out in three-month Treasury bills since August 2007, it would have earned $5 billion in interest, the FT said.
This estimate excludes company bailouts and purchases of long-term assets as well as unrealized gains or losses on the Fed’s portfolio of mortgage-backed securities and Treasuries purchased as part of the $1.75 trillion asset purchase program.
The Fed was not immediately available for comment on the report.
August 30, 2009 • 10:18 pm 0 American Antiwar Movement Plans an Autumn Campaign Against Policies on Afghanistan
JAMES DAO | The New York Times | August 30, 2009
A restive antiwar movement, largely dormant since the election of Barack Obama, is preparing a nationwide campaign this fall to challenge the administration’s policies on Afghanistan.
Anticipating a Pentagon request for more troops there, antiwar leaders have engaged in a flurry of meetings to discuss a month of demonstrations, lobbying, teach-ins and memorials in October to publicize the casualty count, raise concerns about the cost of the war and pressure Congress to demand an exit strategy.
But they face a starkly changed political climate from just a year ago, when President George W. Bush provided a lightning rod for protests. The health care battle is consuming the resources of labor unions and other core Democratic groups. American troops are leaving Iraq, defusing antiwar sentiments in some quarters. The recession has hurt fund-raising for peace groups and forced them to slash budgets. And, perhaps most significant, many liberals continue to support Mr. Obama, or at least are hesitant about openly criticizing him.
“People do not want to take on the administration,” said Jon Soltz, chairman of VoteVets.org. “Generating the kind of money that would be required to challenge the president’s policies just isn’t going to happen.”
Tom Andrews, national director for an antiwar coalition, Win Without War, said most liberals “want this guy to succeed.” But he said the antiwar movement would try to convince liberals that a prolonged war would undermine Mr. Obama’s domestic agenda. Afghanistan, he said, “could be a devastating albatross around the president’s neck.”
But there is also a sense among some antiwar advocates that Mr. Obama’s honeymoon with Democrats in general and liberals in particular is ending. As evidence, they point to a recent Washington Post/ABC News poll showing that 51 percent of Americans now feel the war in Afghanistan is not worth fighting, a 10-point increase since March. The poll had a margin of sampling error of plus or minus three percentage points.
“We’re coming out of a low period,” said Medea Benjamin, co-founder of the antiwar group Code Pink. “But as progressives feel more comfortable protesting against the Obama administration and challenging Democrats as well as Republicans in Congress, then we’ll be back on track.”
The Obama administration has opposed legislation requiring an exit strategy, saying it needs time to develop new approaches to the war. “Given his own impatience for progress, the president has demanded benchmarks to track our progress and ensure that we are moving in the right direction,” a White House official said, speaking on condition of anonymity.
The October protest schedule is expected to include marches in Washington and elsewhere. But organizers acknowledge that it may be difficult to recruit large numbers of demonstrators. So groups like United for Peace and Justice are also planning smaller events in communities around the country, including teach-ins with veterans and families of deployed troops, lobbying sessions with members of Congress, film screenings and ad hoc memorials featuring the boots of deceased soldiers and Marines.
“There are some that feel betrayed” by Mr. Obama, said Nancy Lessin, a founder of the group Military Families Speak Out. “There are some who feel that powerful forces are pushing the president to stay on this course and that we have to build a more powerful movement to change that course.”
The October actions will be timed not only to the eighth anniversary of the first American airstrikes on Taliban forces and the seventh anniversary of Congressional authorization for invading Iraq, but also an anticipated debate in Congress over sending more troops to Afghanistan. Gen. Stanley A. McChrystal, the commander of American forces in Afghanistan, is widely expected to request additional troops, beyond the 68,000 projected for the end of the year, after finalizing a policy review in the next few weeks.
The antiwar movement consists of dozens of organizations representing pacifists, veterans, military families, labor unions and religious groups, and they hardly speak with one voice. Some groups like Iraq Veterans Against the War have started shifting their focus toward Afghanistan, passing resolutions demanding an immediate withdrawal of troops from there. Others, like VoteVets.org, support the American military presence in Afghanistan, calling it crucial to fighting terrorism.
And some groups, including Moveon.org, have yet to take a clear position on Afghanistan beyond warning that war drains resources from domestic programs.
“There is not the passion around Afghanistan that we saw around Iraq,” said Ilyse Hogue, Moveon.org’s spokeswoman. “But there are questions.”
There are also signs that some groups that have been relatively quiet on Afghanistan are preparing to become louder. U.S. Labor Against the War, a network of nearly 190 union affiliates that has been focused on Iraq, is “moving more into full opposition to the continuing occupation” of Afghanistan, said Michael Eisenscher, the group’s national coordinator.
“President Obama risks his entire domestic agenda, just as Johnson did in Vietnam, in pursuing this course of action in Afghanistan,” Mr. Eisenscher said.
Handfuls of antiwar protestors can still be seen on Capitol Hill, outside state office buildings and around college campuses. Cindy Sheehan, for instance, has set up her vigil on Martha’s Vineyard while Mr. Obama vacations there. But many advocates say a lower-key approach may be more effective in winning support right now.
An example of that strategy is an Internet film titled “Rethink Afghanistan,” which is being produced and released in segments by the political documentary filmmaker Robert Greenwald. In six episodes so far, Mr. Greenwald has used interviews with academics, Afghans and former C.I.A. operatives to raise questions about civilian casualties, women’s rights, the cost of war and whether it has made the United States safer.
The episodes, some as short as two minutes, are circulated via Twitter, YouTube, Facebook and blogs. Antiwar groups are also screening them with members of Congress. Mr. Greenwald, who has produced documentaries about Wal-Mart and war profiteers, said the film represented a “less incendiary” approach influenced by liberal concerns that he not attack Mr. Obama directly.
“We lost funding from liberals who didn’t want to criticize Obama,” he said. “It’s been lonely out there.”
Code Pink is trying to build opposition to the war among women’s groups, some of which argue that women will suffer if the Taliban returns. In September, a group of Code Pink organizers will visit Kabul to encourage Afghan women to speak out against the American military presence there.
And Iraq Veterans Against the War is using the Web to circulate episodes of a documentary, “This Is Where We Take Our Stand,” filmed in 2008 at its Winter Soldier conference, at which veterans from Iraq and Afghanistan testified about civilian casualties, combat stress and other tolls of the wars.
The group’s leaders say they do not expect many people to take to the barricades against the administration any time soon. But that will change, they argue, as the death toll continues to rise.
“In the next year, it will more and more become Obama’s war,” said Perry O’Brien, president of the New York chapter of Iraq Veterans Against the War. “He’ll be held responsible for the bloodshed.”
