Full blogging of the FCIC is complete, over at New Deal 2.0. Please do check it out.
If you watch one panel, watch Panel Two at CSPAN. It’s important to remember that finance is not just one thing, one Too Big To Fail monstrosity. In Panel Two you get three financial analysts walking you through what has gone wrong, and though i disagreed with them on many points (and they obviously disagreed with each other) you can get very candid talk about the reality of the financial sector.
I’m thinking of financial reform as a long-term project, perhaps generational, and as it starts to build it’s important to find allies within the industry, because there are people of expertise and integrity that are not happy with the way their industry has become an entrenched oligarchy. Whether it’s the buy-side getting squeezed from the sell-side, FASB being told to hold their nose and Frankenstein dead banks into zombie banks, or small and large retailers getting squeezed by transaction taxes from the credit industry, there are natural allies outside of the normal activist front. This panel gives you a sense of where that mind is.
Speaking of bad omens, we didn’t even make it to February before the floaters started about throwing the Consumer Financial Protection Agency under the bus in the Senate. I knew a lot of what the testimony would be going into this, but I was really surprised at the last panel where the state Attorney Generals talked frankly about federal pre-emption destroying their communities. It’s the worst form of corporatism: OTS and OCC regulators go and tell states that powerful subsidiaries of the large national banks don’t have to follow state rules. Now there could be promising movement on the courts on this (Cuomo vs. Clearinghouse), but it is still shocking to hear about state regulators being told to not do their jobs when it comes to the largest players in the field.
We’ll dive into all this next week, but:
Isn’t it amazing to see how concentrated the banking sector is? This is preliminary and thrown together as a thought exercise. That’s data from ffiec on total asset size for the top 50 bank holding companies, and wikipedia’s participants amounts in TARP. The chart shows all bank holding companies with assets larger than $50bn, including those who did not get TARP money (they have a $0 amount listed). AIG, GM, Chrysler and Discover all received TARP money, but they are not listed because they are not bank holding companies (except Discover, which has under $50bn in assets). I’m not sure I trust that ffiec data, it feels off but it’s the quickest to come up: I’ll investigate more: is there a quick Fed source for accurate BHC assets you all use?
So my question for you to think about: Should the Financial Crisis Responsibility Fee be graduated? Should the percent rate at which the banks pay increase with size? I am dubious about the reasons I’ve heard for why scale helps with banking, especially if you reform the over-the-counter derivatives market.
Now if you take the log of both sides above (I give those that received $0 from TARP a $1 value for the log to be zero), and regress, you get a very robust beta of 1.05; If size increases 10% the rate at which they received TARP money increased 10.5%. In addition, I’d think there should be some sort of risk-aversion given the proportionately of danger of a bankruptcy? And the implications was that the largest-of-the-large would have had a deeper well than the smaller banks during the TARP time? I’m going to give this more thought, but really want your feedback.
Also a side question that went through the blogosphere while I was in DC: how serious of an issue is it that JP Morgan never stress tested a 40% decline in housing? I think very serious. But first we need to unpack some stuff about the role of stress testing, especially as it relates to future reform. We’ll discuss all that and more about next week.