Bailout

Make that two cheers for Obama

By Felix Salmon

In public, Barack Obama was stern and tough:

Never again will the American taxpayer be held hostage by a bank that is too big to fail…

The American people will not be served by a financial system that comprises just a few massive firms. That’s not good for consumers, it’s not good for the economy. And through this policy, that is an outcome we will avoid…

if these folks want a fight, it’s a fight I’m ready to have.

In private, however, according to Simon Johnson, a very different message is being sent about how much smaller the Obama administration wants America’s biggest banks to be. The answer: no smaller than they are now — even after the wave of panic-induced M&A at the height of the financial crisis.

The biggest banks in the US — JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley — are not only too big to fail, they’re also, as a group, significantly larger than they’ve ever been in the past. The systemic risk they pose by sheer dint of their size has therefore never been greater. They all of us, right now, are holding us hostage by being too big to fail: no matter how much they borrow and gamble, they know the US taxpayer will be there, in extremis, to bail them out.

Now the proposed Volcker rule will try to cut back on some of that borrowing and gambling, but it probably wouldn’t have had any effect on their idiotic actions in mortgage-backed securities and collateralized debt obligations. Banks will always find a way to lose money: not all banks fail, but there are always bank failures. The important thing is that when banks fail, there aren’t massively destabilizing systemic consequences. And the only way to ensure that is to make the biggest banks smaller. It’s sad that the Obama administration seems to have flubbed this final chance to get that done.

Full post as published by Macroprudential on January 21, 2010 (boomark / email).