January 21, 2010 11:15 AM EST by Elizabeth MacDonald
President Barack Obama announced today moves to limit the size and risk-taking ability of the largest banks because of the perceived risk they pose to US taxpayers. Adviser and former Federal Chairman Paul Volcker, no longer marginalized in the administration, backs the changes.
Banks will no longer be allowed to own or operate hedge funds or private equity funds.
Missing here: Giving Fannie Mae and Freddie Mac an unlimited, uncapped credit line into the US Treasury on Christmas eve.
This, at a time when both disclosed in securities filings that the housing policies of the Administration and Congress will lead to additional taxpayer losses. Both have combined balance sheets equal to about 40% of US GDP.
Which company really needs to be shrunk to protect taxpayers?
You should worry that the bank fixes are misplaced and that they don't target the real causes of the crisis, as the administration attempts to re-affix a regulatory antenna to the roof of the government that was knocked off long ago.
Government housing and mortgage policies are really the cause of the banking collapse.
That includes the collapse of banks such as Washington Mutual, Wachovia, and the meltdown at the two invalids permanently stuck in Congress's intensive care unit, Fannie Mae and Freddie Mac, the recipients of the largest taxpayer bailouts.
A government-distorted housing market continues to get a government bailout, showing Washington has no more sense than a flock of pheasants.
And those policies have cost TARP dearly. Taxpayers have lost $27.1 billion on the government's new Home Affordable Modification Program to date; they've lost $30.4 billion on AIG, and $30.4 billion on the automakers.
Fannie and Freddie have already cost taxpayers $110 billion in losses; they've already drawn down $111 billion from the Treasury.
You should worry about the lack of imagination and vision, where the US Treasury, Federal Reserve officials and Wall Street executives all admit they never fully factored in a nationwide housing crash in their risk models during the bubble years.
And borrowers, too, figured they could live fat and happy in their golden years by selling each other houses at inflated prices, which is like trying to sell annuities on the Titanic, as one Wall Street analyst says.
The policymakers now are raising concerns about the wrong risks. Wall Street trading did not solely create the crisis. It was liabilities at the banks instead, liabilities ramped up by loans--and trades made to capitalize off of those loans. Ergo Fannie and Freddie.
Another big focus in the Administration's new financial fixes is stopping the risks involved in trading in the firms' own money, called proprietary trading, versus customers' money sunk in securities, commodities, derivatives, hedge funds and other financial products.
However, since 2003, proprietary trading amounts to just 12% of net revenue. Goldman generated $203 billion net revenue from 2003 through September, meaning that about $24 billion was proprietary trading.
With the Administration's new proposals, watch how fast Goldman and Morgan Stanley hand in their bank charters, which they won during the crisis to get at bank bailout programs.
And the FDIC can forget trying to get the private equity crowd or hedge funds to rescue banks. Private equity funds have already purchased a number of banks during the downturn, with the FDIC's blessing.
The subprime securities market, paper trades built on the backs of subprime loans, did not create the crisis.
At the heart of the crisis are the mortgages given out willy-nilly by banks, the mortgages like the pick-a-payment loans sold by Golden West Financial (acquired by Wachovia, hastening its collapse), all part of the government's push to have a 100% homeownership rate in this country.
Yes, Wall Street was corrupt. Yes, Wall Street did successfully pressure the Securities and Exchange Commission in 2004 to ease up on capital reserve requirements, letting them blow out their wallets which inevitably caused American taxpayers to back them up.
Those were all government decisions "” even JPMorgan Chase's Jamie Dimon candidly admitted the banks needed more regulation to stop their own recklessness. A laissez faire market led to laissez faire bookkeeping, to be sure.
But fake paper trades have been with us since the turn of the 20thcentury, with the bucket shops full of them, and throughout the "?30s, with the Congressional Pecora Commission previewing the recklessness on Wall Street today.
Market cops know you can't legislate out of existence greed. But you can put the guardrails back up.
Forget the hand-wringing commissions. Get a market cop swinging a night stick that's not made out of macaroni noodles. Regulators in the little Office of Thrift Supervision apparently didn't realize they could have sued AIG, or merely threatened to, and stopped its lethal financial products division in its tracks.
But the "?30s saw something else. It saw the dawn of the U.S.'s present housing policy, culminating in President Franklin D. Roosevelt's 1944 address outlining a new economic bill of rights, where he said Americans have a right to a decent home, a right to health care.
Rational thinkers can debate this issue as to what the Constitution really says, that you have a right to the pursuit of happiness, which involves the pursuit of the acquisition of such items. What you should be worried about is this: Fannie and Freddie were placed into conservatorship in the early fall of 2008 and are now hostage to the government's every crisis move.
And the government just lifted the caps on their Treasury borrowings to an unlimited amount. Unlimited. Meaning they can take on all sorts of rotting mortgage paper, a mountain of which taxpayers will be staring at morosely for some time to come.
Fannie and Freddie have a combined balance sheets of more than $5 trillion, with hundreds of billions more off the balance sheet. The administration and Congress now explicitly continue to give support to the worst, most irresponsible crop of borrowers taxpayers have ever endured.
The Obama administration is putting off any effort at reforming Fannie and Freddie; pay czar Ken Feinberg has no jurisdiction over the two companies, both of which just agreed to pay their top executives up to $6 million in compensation for 2009. In cash. Not stock, as the pay czar is forcing other companies. In cash, because the executives see their companies' stock at about a buck apiece.
Already, Fannie and Freddie hold or insure about 10 million subprime and Alt-A loans, as well as mortgage-backed securities, worth in total about $1.6 trillion. This stew of loans and debt is seeing record delinquencies.
It's more than just rising home delinquencies. Fannie Mae just reported that the rate of serious delinquencies - those at least three months behind - on conventional loans in its single-family guarantee business rose to 4.98% in October, up from 4.72% in September - and about triple the 1.89% rate in October 2008.
Again, the Federal is now the mortgage securitization market, and now has $910.3 billion in mortgage-backed securities on its balance sheet, out of a planned $1.25 trillion in such purchases. But it can only tread water for so long. And that Fed program is set to expire next March, which means Fannie and Freddie will need an assist once that happens.
So the new Glass-Steagall rules are a step towards what former Federal Reserve chairman Volcker says what really should be done: break up the banks.
Former Fed chairman Alan Greenspan agrees. 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.
Stop the too big to fail psychosis. The U.S. government and the banking sector have moved in the opposite direction. 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 trillion, or more than three times the size of the planet's GDP, estimated at $65.6 trillion in 2007.
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 trillion balance sheet is beyond the realm of mere mortals. That $2 trillion equals the size of the economy of France.
Officials are so submerged in problems there that they need scuba gear to get out. Bringing back some semblance of Glass-Steagall is a step in the right direction.
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Very well written and spot on. Thanks - We The People.
Jobs. Simply jobs. The people of the United States need jobs and not government hand outs. To find USA produced merchandise is a mission. Getting rid of 3/4 of the lawyers and getting back to good old common sense would certainly help too.
government has a role in the markets, primarily to prevent the abuse of the ignorant by con artists. the problem right now is that those making policy are themselves con artists. certainly some don't intend to be, but there seems little interest in ideology neutral corrections. solutions are only being proffered as a means to ensure continuing careers.
what does the author propose as a resolution to the Freddie Mac disaster- nothing. should we foreclose on all the shaky loans held by these entities and send a huge wave of additional foreclosures into the market place? i don't think so unless you want to cave in the housing market for a decade. once the gov't (we) picked up these obligations both parties knew we were stuck with them. the hard answer is holding onto the mortages is the only alternative left,and it's a poison pill politically.
Franklin D. Roosevelt was a madman leveraging his disabilities to damage the Constitution. He was arrogant, walking around with his long coat draped over his shoulders. He was foolish, smoking despite having severe health problems. He was elitist, choosing to use a cigarette holder for image purposes. He was a cheat, keeping at least one mistress while married. He was incompetent -Pearl Harbor. And this is the same person who decided everyone had some rights not covered in the Consititution.
Love the way the President is trying to be a populist now! Start with the government and straighten out Freddie and Fannie! The whole mortgage started with the Democrats wanting more lending for homes to people with low incomes!
It looks to me that obama failed his classes in economics, free market systems, and what a captalist society is and why. He has interfered with these markets since taking office devaluing the dollar and removing the risk/reward equation from investing. He and his party have consistently rewarded irresponsibility being over extended while penalizing the responsible savers that should have been able to pick up the pieces in a non interfered with capitalist society.
fannie and freddie mae have obama in their pockets. waiting for the next election. That's another deal behind closed doors.
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