Fed’s Fisher: Too-big-to-fail banks are “crony” capitalists
Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas, speaks during a conference before the Committee for the Republic Salon at the National Press Club in Washington January 16, 2013.
Credit: Reuters/Jose Luis Magana
By Pedro Nicolaci da Costa
NATIONAL HARBOR, Maryland | Sat Mar 16, 2013 1:52pm EDT
(Reuters) – The largest U.S. banks are “practitioners of crony capitalism,” need to be broken up to ensure they are no longer considered too big to fail, and continue to threaten financial stability, a top Federal Reserve official said on Saturday.
Richard Fisher, president of the Dallas Fed, has been a critic of Wall Street’s disproportionate influence since the financial crisis. But he was now taking his message to an unusual audience for a central banker: a high-profile Republican political action committee.
Fisher said the existence of banks that are seen as likely to receive government bailouts if they fail gives them an unfair advantage, hurting economic competitiveness.
“These institutions operate under a privileged status that exacts an unfair tax upon the American people,” he said on the last day of the annual Conservative Political Action Conference (CPAC).
“They represent not only a threat to financial stability but to fair and open competition … (and) are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great,” said Fisher, who has also been a vocal opponent of the Fed’s unconventional monetary stimulus policies.
Fisher’s vision pits him directly against Fed Chairman Ben Bernanke, who recently argued during congressional testimony that regulators had made significant progress in addressing the problem of too big to fail. Bernanke asserted that market expectations that large financial institutions would be rescued is wrong.
But Fisher said mega banks still have a significant funding advantage over its competitors, as well as other advantages. To address this problem, he called for a rolling back of deposit insurance so that it would extend only to deposits of commercial banks, not the investment arms of bank holding companies.
“At the Dallas Fed, we believe that whatever the precise subsidy number is, it exists, it is significant, and it allows the biggest banking organizations, along with their many nonbank subsidiaries – investment firms, securities lenders, finance companies – to grow larger and riskier,” he said.
Fisher argued Dodd-Frank financial reforms were overly complex and therefore counterproductive.
“Regulators cannot enforce rules that are not easily understood,” he said.
(Reporting by Pedro Nicolaci da Costa; editing by Gunna Dickson)
“These institutions operate under a privileged status that exacts an unfair tax upon the American people,” he said on the last day of the annual Conservative Political Action Conference (CPAC).
“They represent not only a threat to financial stability but to fair and open competition … (and) are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great,” said Fisher, who has also been a vocal opponent of the Fed’s unconventional monetary stimulus policies.
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Bernanke Tightens Hold on Fed Message Against Hawks
Ben S. Bernanke is tightening his control of Federal Reserve communications to ensure investors hear his pro-stimulus message over the cacophony of more hawkish views from regional bank presidents.
The Fed chairman, starting tomorrow, will cut the time between the release of post-meeting statements by the Federal Open Market Committee and his news briefings, giving investors less opportunity to misperceive the Fed’s intent. In recent presentations, he has pledged to sustain easing, defending $85 billion in monthly bond purchases during congressional testimony last month and warning that “premature removal of accommodation” may weaken the expansion.
Ben S. Bernanke, chairman of the U.S. Federal Reserve. Bernanke’s push to continue record stimulus faltered with the Jan. 3 release of minutes from the FOMC’s December meeting, which said several officials favored slowing or stopping bond buying well before the end of 2013. Photographer: Andrew Harrer/Bloomberg
Feb. 27 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke testifies about the central banks policies and economic growth. He speaks before the House Financial Services Committee in Washington. (This is the first part of the question and answer portion of Bernanke’s testimony. Source: Bloomberg)
Feb. 27 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke testifies about the central bank’s policies and the U.S. economy. He speaks before the House Financial Services Committee in Washington. (This is the second part of the question-and-answer portion of Bernanke’s testimony. Source: Bloomberg)
Aug. 8 (Bloomberg) — Federal Reserve Bank of Dallas President Richard Fisher talks about monetary policy and the potential risks of additional economic stimulus. He speaks with Tom Keene and Sara Eisen on Bloomberg Television’s “Surveillance. (Source: Bloomberg)
March 19 (Bloomberg) — Glenn Hubbard, chairman of the Council of Economic Advisers under former Republican President George W. Bush from 2001 to 2003 and now dean of Columbia University’s business school in New York, talks about the outlook for Europe, U.S. and Asia’s economies and central banks’ monetary policies. Hubbard speaks from the Credit Suisse Asian Investment Conference in Hong Kong with Susan Li on Bloomberg Television’s “First Up.” (Source: Bloomberg)
“Bernanke rightly views it as imperative to get out in front of any movement to quickly pull away from stimulus, and to signal that to markets,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore who worked at the Fed’s division of monetary affairs from 2004 until 2008. Bernanke “felt he needed to take the wheel” of communications to dispel any misperception that the Fed will end bond purchases too soon.
Bernanke’s push to continue record stimulus faltered with the Jan. 3 release of minutes from the FOMC’s December meeting, which said several officials favored slowing or stopping bond buying well before the end of 2013. The yield on the 10-year Treasury note rose that day about 0.07 percentage point to 1.91 percent, the highest since May.
Promoting Purchases
In his congressional testimony Feb. 26 and 27 and a March 1 speech at the Federal Reserve Bank of San Francisco, Bernanke promoted the Fed’s bond purchases, saying stimulus shouldn’t be slowed by financial-stability concerns. Vice Chairman Janet Yellen echoed those views March 4.
The Fed chairman wants to avert an unintended rise in Treasury yields that would undermine his unprecedented efforts to reduce long-term interest rates and speed growth, including the rebound in vehicle sales and housing, said Nathan Sheets, the Fed’s top international economist from 2007 until 2011.
“If long rates rise because of a misunderstanding of the Fed policy path, that is something that is worrisome and that is something they want to clarify,” said Sheets, now global head of international economics at Citigroup Inc. in New York. “Lower rates are absolutely supporting the recovery and stimulating the housing market, autos and durable goods.”
Third Round
Several FOMC participants have strayed from Bernanke’s line during the past year. Richard Fisher, president of the Federal Reserve Bank of Dallas, said he saw no need for more stimulus on Aug. 8, about a month before the central bank started a third round of quantitative easing.
“We keep applying what I call monetary Ritalin to the system,” he said in an interview on “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “We all know there’s a risk of over-prescribing.”
Philadelphia Fed President Charles Plosser said on Aug. 30 that the potential disadvantages of additional securities purchases outweighed the benefits.
“Increasing accommodation creates risks, and we need to balance those,” he said in an interview with CNBC at the Fed symposium in Jackson Hole, Wyoming.
Plosser, Fisher and Richmond Fed President Jeffrey Lacker are the most “hawkish” FOMC participants, calling for a comparatively aggressive approach to fighting inflation, and aren’t “signals” for future committee action, said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
Steer Policy
“The committee is increasingly a democracy, and if you have one-fourth of the votes, you’re not going to steer policy,” said Feroli, a former Fed researcher.
The 12 district bank presidents have five votes on the 12- member FOMC, with the New York Fed president holding a permanent position and the others annually rotating onto the panel. Lacker voted in 2012 and repeatedly dissented; neither he, Plosser nor Fisher vote this year.
Bernanke, in speeches and testimonies last year, pushed down yields on 10-year Treasuries by 0.06 percentage point on a cumulative basis, more than any of the other 18 FOMC participants, as he promoted accommodation more forcefully than investors anticipated, according to Macroeconomic Advisers LLC.
The research company gauged the impact from speeches and radio or TV interviews, starting from 15 minutes before the event until two hours afterward. It separately measured the effect from Bernanke’s press conferences and semi-annual testimonies to Congress.
Falling Short
The Fed chairman’s speeches last year, while temporarily reducing bond yields, weren’t enough to counteract speeches by his policy-making colleagues, who boosted 10-year yields by 0.11 percentage point when their enthusiasm for stimulus fell short of investor expectations, according to the St. Louis-based company.
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Jail Time?
“The Fed’s alphabet soup of cash-pumping….actions were so reckless that even the outrageous anecdotes to which they gave rise can scarcely capture the lunacy rampant in the Eccles Building. Thus, the nation’s central bank actually guaranteed upward of $200 million that had been borrowed by two New York housewives to start a new business [in November 2008 - FJS]. Amazingly, the purpose was to enable this intrepid duo to purchase large volumes of securitized auto loans about which they knew nothing.” – David A. Stockman, The Great Deformation: The Corruption of Capitalism in America, to be published in April 2013.
Recent attention devoted to banksters by U.S. senators is noteworthy. Not definitive by any means, but the media attention to what could have been ignored may foreshadow a comeuppance.
Members of the Senate Committee on Banking, Housing, and Urban Development did not let Federal Reserve Chairman Ben S. Bernanke escape “Too-Big-to-Jail” questions at a February 26, 2013 hearing. This is alluded to in “Crony Bureaucrat” and “Eating the Fed for Lunch.” Some might think the chairman’s elliptical answers an attempt to duck and cover but it is more probable his mind simply drifted off, his wafting countenance familiar to travelers in the Sahara beaten by a mind-numbing sun while draped on the back of an anemic camel famished upon the outskirts of Chenachene.
However, it was not only Simple Ben. The parade of government officials previously exempt from crony questioning continues. Attorney General Eric Holder was put on the spot before the Senate Judiciary Committee on March 6, 2013:
SENATOR CHARLES GRASSLEY (R-IA): “In the case of bank prosecution. I’m concerned we have a mentality of ‘too big to jail’ in the financial sector, spreading from fraud cases to terrorist financing to money laundering cases. I would cite HSBC. I think we are on a slippery slope and that’s background for this question. I don’t have recollection of DOJ prosecuting any high-profile financial criminal convictions in either companies or individuals….”
ATTORNEY GENERAL ERIC HOLDER: “….the concern that you have raised is one that I, frankly, share. I’m not talking about HSBC here, that would be inappropriate. But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy. I think that is a function of the fact that some of these institutions have become too large. Again, I’m not talking about HSBC, this is more of a general comment. I think it has an inhibiting influence, impact on our ability to bring resolutions that I think would be more appropriate. I think that’s something that we – you all [Congress] – need to consider. The concern that you raised is actually one that I share.”
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Jeff Gelles: Time to take on ‘too big to fail’?
By Jeff Gelles, Inquirer Columnist
Posted: March 18, 2013
What was the biggest shortcoming of 2010′s massive Dodd-Frank financial reform – a flaw that still threatens the U.S. economy and all who rely on it?
One answer pops up with remarkable consistency from across the political spectrum: the belief that the law didn’t actually solve the problem that some financial institutions are so large that they’re “too big to fail.”
Tea party favorites such as Sen. Rand Paul (R., Ky.) have warned against it, as have conservative pundits such as George Will and Peggy Noonan – making unusual common cause with liberals like former Labor Secretary Robert Reich, Columbia University economist Joseph Stiglitz, and former Sen. Ted Kaufman (D., Del.).
They share a concern that some institutions – especially four megabanks that now each count more than $1 trillion in assets – are still protected by an implicit guarantee that the government will step in to stop their collapse.
That’s what happened in fall 2008, when the growing financial crisis pushed Lehman Brothers into bankruptcy while the administration of President George W. Bush stood by. To avoid further panic – and prevent what some feared would be another Great Depression – Bush switched course. His Treasury secretary, Hank Paulson, teamed with Congress and the Federal Reserve on emergency steps designed to prevent a repeat.
The legislation sponsored by Sen. Chris Dodd (D., Conn.) and Rep. Barney Frank (D., Mass), to be fair, sought to end “too big to fail” – not by addressing “too big” but by insisting that teetering banks face an orderly failure rather than a bailout. It established a process for regulators to resolve the affairs of even the largest, most complex institutions, much as the Federal Deposit Insurance Corp. takes over insolvent smaller banks.
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Beginning at 9:30 a.m. tomorrow, I’m going to be live-blogging a hearing held by Senator Carl Levin’s Permanent Subcommittee on Investigations – the best crew of high-end detectives this side of The Wire, in my opinion – who will be grilling J.P. Morgan Chase executives and high-ranking federal regulators in a get-together entitled, “J.P. Morgan Chase “Whale” Trades: A Case History Of Derivatives Risks And Abuses.” This follows this afternoon’s release of a brutal 301-page report commissioned by Levin and Republican John McCain by the same name.
The Subcommittee investigators, largely the same crew who unraveled financial scandals surrounding infamous Goldman Sachs trades like Abacus and Timberwolf, and also took on HSBC’s trans-global money-laundering activities in an extraordinarily detailed report issued last summer, have now taken aim at the heart of the Too-Big-To-Fail issue through its examination of the much-publicized catastrophic derivative trades made by its amusingly-nicknamed “London Whale” trader, Bruno Iksil, last year.
Most ordinary people dimly remember the London Whale episode now, and even at the time struggled to understand even the vaguest contours of the story while mainstream reporters (including people like myself) were trying with all their might to make sense of it from afar. What most people got out of that story was that J.P. Morgan Chase somehow lost buttloads of money through some sort of impossibly complex derivative trade – billions, though nobody could ever settle on an exact number – and that this was somehow a very bad thing that required the attention of the federal government, although even that part of it was a bit of a mystery to most ordinary people.
Gangster Bankers: Too Big to Jail
Why should we care if a private bank, or more to the point a private banker like Chase CEO Jamie Dimon, loses a few billion here and there? What business is it of ours? And why did we have to have congressional hearings about it last year? The whole thing certainly seemed a big mystery to Dimon himself, who dragged himself to Washington and spent the entire time rolling his eyes and snorting at Senators’ questions, clearly put out that he even had to be there.
This new report by the Permanent Subcommittee answers the question of why the public needed to be involved in that episode. What the report describes is an epic breakdown in the supervision of so-called “Too Big to Fail” banks. The report confirms everyone’s worst fears about what goes on behind closed doors at such companies, in the various financial sausage-factories that comprise their profit-making operations.
If the information in the report is correct, Chase followed the behavioral model of every corrupt/failing hedge fund this side of Bernie Madoff and Sam Israel, only it did it on a much more enormous scale and did it with federally-insured deposits. The fund used (in part) federally-insured money to create, in essence, a kind of super high-risk hedge fund that gambled on credit derivatives, and just like Sam Israel did with his Bayou fund, when it got in trouble, it resorted to fudging its numbers in order to disguise the fact that it was losing money hand over fist.
Chase for years hid the very existence of this operation from banking regulators and lied about the purpose of the fund (saying it was purely a hedging operation when it stopped being a hedge and instead became a wild directional gamble), and it also changed the way it calculated the fund’s value once it started to lose hundreds of millions of dollars. Even worse, the bank’s own internal auditors signed off on the phoney-baloney accounting of this Synthetic Credit Portfolio (SCP), at one point allowing it to claim $719 million in losses when the real number was closer to $1.2 billion.
How did they do this? In the years leading up to January of 2012, Chase used a standard, plain-vanilla method to price the derivative instruments in its portfolio. The method was known as “mid-market pricing”: if on any given day you had a range of offers for a certain instrument – the “bid-ask” range – “mid-market pricing” just meant splitting the difference and calling the value the numerical middle in that range.
But in the beginning of 2012, Chase started to lose lots of money on the derivatives in its SCP, and just decided to change its valuations, that they weren’t in the business of doing “mids” anymore. One executive thought the “market was irrational.” As the Subcommittee concluded:
By the end of January, the CIO had stopped valuing two sets of credit index instruments on the SCP‘s books, the CDX IG9 7-year and the CDX IG9 10-year, near the midpoint price and had substituted instead noticeably more favorable prices.
Related articles
- Break up big banks, Dallas Federal Reserve chief says (triblive.com)
- Fed President: Too-Big-To-Fail Banks Need To Be Broken Up (huffingtonpost.com)
- Fed President: Too Big Banks Are Just Crony Capitalists (washingtonsblog.com)
- Dodd-Frank regulatory flaws stir passion at CPAC (watchdog.org)
- Fed President: Too Big Banks Are Just Crony Capitalists (stateofglobe.com)
- Fed’s Fisher says too-big-to-fail banks should be shrunk (banklesstimes.com)
- Bernanke to Push QE While Citing Jobs to Defend Easing (bloomberg.com)
- Bernanke: Premature Fed pullback could ‘short-circuit’ recovery (news.yahoo.com)
- Big Bank News (reform-wall-street.org)
- Megabanks Undermine Americans’ Faith in Democracy (wealthwire.com)
