The Battle Over Capital at the Mega Banks Must Expand to Breaking Them Up

Gunnar Larson g at
Thu Jan 25 07:03:03 PST 2024

She says to forward to 10 friends and family and here you go!



By Pam Martens and Russ Martens: January 25, 2024 ~

Bank LogosLast Thursday, 12 Democrats in the U.S. Senate sent a deeply
insightful letter on a subject most Americans have never discussed around
their kitchen table: adequate capital levels at the Wall Street mega banks
that came close to bringing down the U.S. financial system in 2008. Before
that financial crisis was over – the worst since the Great Depression of
the 1930s – millions of hardworking Americans had lost their jobs and
millions more had their homes taken in foreclosure.

If the U.S. is going to avoid a replay of that crisis, Americans are going
to have to start having these critical conversations about the structure of
Wall Street mega banks around the kitchen table. Americans are going to
have to start engaging in the battle to shape the future of American
democracy and more equitable wealth distribution, which requires dramatic
reform of the mega banks on Wall Street.

The letter from Senate Democrats, including Senator Sherrod Brown, the
Chair of the Senate Banking Committee, includes these two key passages:

“Capital is the linchpin of safety and soundness in our banking system.
When a bank uses more capital to fund its investments and activities
instead of debt, it is investors and shareholders, not workers and
taxpayers, that take a hit if the bank faces challenges. Strong capital is
the shock absorber on banks’ balance sheets during economic downturns. It
allows banks to keep making loans exactly when businesses and households
might need an economic lifeline the most…

“The small group of banks that the proposed rule covers are among the
largest and most complex financial institutions in the world. Some are
behemoths with trillions of dollars in assets. The institutions that would
be affected the most focus on sales and trading activity that primarily
serve Wall Street and other large institutions. Especially for these large
and complex institutions, capital is what keeps risky bets at banks from
transforming into layoffs, depleted savings, and fewer wealth-building
opportunities for workers, small businesses, and communities. The proposal,
when implemented, will increase capital requirements by 19% for the U.S.
Global Systemically Important Banks (G-SIBs), which consist of only eight
banks. For nearly all other large banks with over $100 billion in assets,
capital requirements will increase by 6%. In aggregate, the proposal will
increase capital requirements by 16% for all banks with more than $100
billion in assets, thereby impacting fewer than 50 banks that operate in
the U.S.”

According to the Federal Deposit Insurance Corporation, as of September 30,
2023 there were 4,614 federally-insured commercial banks and savings
institutions in the U.S. The proposed higher capital levels would impact
less than 50 banks or less than one percent of the total federally-insured
financial institutions in the U.S. But the lobbying, advertising and legal
battle that these banking behemoths have waged today is reminiscent of the
strong-arm tactics they used to defeat meaningful reform after they
collapsed the U.S. financial system in 2008.

Think about these words:

“…the choice that America faces is stark: whether Washington will accede to
the vested interests of an unbridled financial sector that runs up profits
in good years and dumps its losses on taxpayers in lean years, or reform
through stringent regulation the banking system as first and foremost an
engine of economic growth. To restore health and balance to our economy,
Johnson and Kwak make a radical yet feasible and focused proposal:
reconfigure the megabanks to be ‘small enough to fail.’ ”

The above words were written as promotional text for a book released just
shy of 14 years ago: 13 Bankers: The Wall Street Takeover and the Next
Financial Meltdown by Simon Johnson and James Kwak. Now think about this:
Americans have made no headway on this critical subject over the span of 14
years. In fact, Americans have lost ground.

Secretly, from December 2007 through June of 2010, the Federal Reserve
funneled over $16 trillion in cumulative loans at below-market interest
rates to the mega banks on Wall Street and their foreign counterparts (many
of which were counterparties to Wall Street’s derivatives) to keep them
from collapsing.

The Federal Reserve fought a multi-year court battle to keep the names of
the banks and the amounts they had borrowed a secret from the American
people. When the details were finally revealed in 2011, there was major
news coverage.

But as further evidence of just how much ground Americans have lost in this
battle over the past 14 years, after the Fed had secretly pumped trillions
of dollars into these same institutions to prop them up beginning on
September 17, 2019 – in what is now called the repo loan crisis – there was
a Kremlin-esque mainstream media news blackout when it came to naming the
banks and the amounts they borrowed. (See There’s a News Blackout on the
Fed’s Naming of the Banks that Got Its Emergency Repo Loans; Some
Journalists Appear to Be Under Gag Orders.)

Fed's Repo Loans to Largest Borrowers, Q4 2019, Adjusted for Term of Loan

Another serious problem with today’s debate about capital levels is that
it’s a band aide on a much bigger problem. Simon Johnson and James Kwak
perfectly summed up the problem in a blog post the day after their 13
Bankers book was published in 2010:

“…there is the problem that capital requirements, like all complex
calculations, can be gamed. Lehman Brothers, for example, was more than
adequately capitalized on paper – Tier 1 capital of 11.6 percent – shortly
before it went bankrupt in September 2008. Thanks to the literally
voluminous report by the Lehman bankruptcy examiner, we now know this was
in part due to aggressive and misleading accounting. More generally,
rampant use of regulatory arbitrage – techniques to artificially increase
bank capital ratios – was a factor in the failure of AIG (much of whose
business was enabling European banks essentially to evade capital
requirements) and the near-failure of Citigroup (which was almost capsized
by the structured investment vehicles it created to evade capital

For how we reported in November of 2008 on the meltdown of the giant
Citigroup, see our report: The Rise and Fall of Citigroup.

And for anyone who thinks these Wall Street mega banks aren’t manipulating
their capital levels today by holding exposure off their balance sheet, see
our report: Three of the Biggest Banks on Wall Street Have $7.4 Trillion In
Off-Balance Sheet Exposures.

The Fed wants to pretend that it has a bag of magic beans called stress
tests that will catch any major problems at the mega banks before they
implode the U.S. financial system as they did in 2008. But as far back as a
decade ago, even the comedy writers at Saturday Night Live understood the
farce of the stress tests.

For a more serious analysis of the Fed’s stress tests, see: Wall Street
Watchdog Assails Fed’s Stress Tests of Mega Banks as “Toothless” – Provides
a Wakeup Call to Biden Administration; and Bombshell Report: Fed Is Aware
that Big Banks Are Rigging their Stress Tests and Letting Them Get Away
with It; and Three Federal Studies Show Fed’s Stress Tests of Big Banks Are
Just a Placebo.

In the May 2009 issue of The Atlantic Magazine, Simon Johnson talks about
the financial oligarchy that has captured the U.S. government and bends its
will to subservience to the Wall Street bankers. Johnson was completely
spot on in 2009 and Economics Professor Gerald Epstein is completely spot
on in the book he just released on Tuesday: Busting the Bankers’ Club:
Finance for the Rest of Us.

The stunning thing about Simon Johnson’s accurate assessment in May of 2009
and Gerald Epstein’s assessment in January 2024 is how much ground the
American people have lost in terms of meaningful reform of the Wall Street
mega banks. Their concentration of assets has grown; their power in
Washington has grown; and their ability to brazenly asset strip the pockets
of Americans and break laws without criminal prosecution continues.

Americans can win this battle – as they have so many times in history – by
engaging. To engage today, simply forward the link to this article to 10
family members or friends and plan your strategy for fighting back around
the kitchen table tonight.

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