Tuesday, February 16, 2016

SO, WE BREAK UP THE BIG BANKS--THEN WHAT, BUNKY?

"Big" is bad.

"Small" is good.

Why?

When we are taught to all be good little capitalists, the purpose of the drill is to build our enterprise to dominating size, success and stated capital account. Those crafty enough, energetic enough and visionary enough to actually get there and become a huge success are rewarded with serial antitrust investigations penalties and injunctions. For the most part, their fault is having pursued the American dream too freaking successfully.

This has become so stylish that it is no longer confined to the United States of America. A basic legal search for EU antitrust and monopolization prosecutions will yield many more Microsoft contacts than for the United States Department of Justice. Old Billy might have started in a garage or in his mother's basement, or whatever the folklore is, but when he got to be a financial juggernaut, he was officially assigned to the Axis of Evil.

All of which circles me back to the current level of white noise about breaking up the "big banks."

If you haven't already done so, do yourself a favor and read "Too Big to Fail" and "The Big Short". (The big short film will not tell you what you need to know).

While it is very nuanced, the essential ingredient in one third of the world economy being vaporized over a period of about two months is not "greedy people taking out mortgages they could not afford…" That is a very nice, Puritan, blameworthy explanation for the economic downturn and it is also a little bit like blaming heroin addicts for the violent behavior of the Mexican drug cartels.

No, the essential ingredient for the collapse of the economy was the activity of brokerage firms (now, try to follow this) SELLING WORTHLESS DEBT IN THE SECURITIES MARKET AS A "FUTURE."

Please understand that this kind of market-making is not a banking function at all. It's a securities function, a brokerage function, if you will.

Until late 1980s traditional banking, that is "technically fractional reserve banking", such as making loans and  managing accounts, perhaps even overseeing trusts, was completely separate from brokerage, no matter the size of the bank. After the change in the law allowing the banking function and the brokerage function to occur, essentially under the same roof, bank size naturally grew. This is an obvious outcome because the bank was simply doing more tasks. As the demand for gambling propositions and hedging increased, the market-making function for new investment vehicles increased and, frankly, the maturing bank/brokerages became more aggressive.

But the important thing to understand is that the devil in all this was not SIZE. It was that the same people were creating markets for this junk who were deciding what junk to fund.

In short, simply breaking up the banks and making them smaller accomplishes nothing except inconvenience for the banks' hopefully successful and honorable customers. The mischief in "securities banking" is the blend of the function of marketer and financier of the market.

Literally from about 2006 to about 2008 major brokerages, linked to banks were able to cover up the weakness in all the deliciously named securities vehicles that were involved in what are generically called "credit default swaps." There were literally about 50 people in the United States who recognized that the debt market related to real estate was going to crash, taking real wealth with it, while the rest of us utterly lacked the sophistication to get in front of such a path.

Lives were ruined by ridiculously irresponsible brokerage practices and access to literally trillions of dollars to cover up those failures as the securities wheezed. None of that had anything to do with size. It had everything to do with the merger of two functions which are inherently separate, one from the other, and intended to be part of an often effective system of "checks and balances."

Trust me when I tell you that this is a grossly oversimplified version of the meltdown in 2008 but it is also essentially truthful.

When anybody tells you: "I intend to break up the big banks!," Please ask them the following two questions:

"What are you going to do next?"

"How will you divide their assets, divisions and departments?"

It is in those two questions that the rubber meets the road. A mere reduction in size is a silly, destructive and futile gesture

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