Public Citizen’s Bart Naylor is out with a new book titled Too Big: The Mega-Banks Are Too Big to Fail, Too Big to Jail, and Too Big to Manage.
And Naylor adds — too big to regulate.
His fix? Break up the big banks. Slow the revolving door. Don’t let the banks gamble with taxpayer insured deposits. Jail time for bank executives who commit crimes. And increase capital requirements from five percent to twenty percent.
“The book looks at four elements of the too big problem,” Naylor told Corporate Crime Reporter in an interview last week. “Well known is the problem that the banks are too big to fail. We were told we had to dip into our pockets and bail the banks out — more precisely, we bailed out their creditors, the people to whom they owned money.”
“They are also too big to jail. In testimony before Senator Charles Grassley, our Attorney General, when asked why the Justice Department wasn’t tougher on perhaps the greatest corporate crime in world history, namely HSBC’s global money laundering operations for tyrants and drug lords, trillions in derivative exposure, Holder said — they were too big to jail.”
“And they are too big to manage. They have massive violations. Either the CEOs and senior management directed these crimes, which I assume didn’t happen. Or they didn’t know it was happening and couldn’t stop it — they were too big to manage.”
“I know the chief investment officer at one of these megabanks because he’s a relative — and he has 200 reports. He can’t possibly understand what each one of them is doing.”
“A report is a person who reports directly to him. You are responsible for what that guy does. The megabanks have about 200,000 employees each. They manage about $2 trillion in assets each.”
“Let me tell you what a trillion is. If I handed you a dollar every second of the day for 24 hours a day — every second a dollar — it would take me two weeks to give you a million dollars.”
“It would take me 30 years to give you one billion dollars.”
“It would take me 30,000 years to give you one trillion dollars.”
“Homo sapiens did not know how to farm 30,000 years ago.”
“JP Morgan has more than $1 trillion in our deposits.”
Too big to fail, too big to jail, too big to manage — and then what’s the fourth?
“Too big to regulate. The regulators are not only not capable, they are corrupted by the revolving door.”
“The book not only lays out the problem, but it lays out the solution. We need higher capital. That’s the mathematical difference between assets and liabilities. It needs to be higher than the five percent it is now.”
What should it be?
“It should be 20 percent. Capital is not cash. Capital is what you get when you subtract liabilities from assets.”
“Russell owns his house and his car. The house is worth $100,000 and his car is worth $20,000. That’s $120,000 worth of assets. But Russell also owes Wells Fargo Bank $80,000 on his mortgage and $10,000 on his car loan. So, Russell has $90,000 in liabilities and $120,000 in assets. That’s $30,000 in capital. That is what capital is. It’s a slice of your house and your car. It’s nothing real. It’s a math equation.”
“Capital should be 20 percent. And right now at the megabanks it’s five percent.”
“What you owe Wells Fargo is real. They are not going to come to you and say — we are feeling generous today, you don’t owe us the $80,000.”
“But the value of your house is not real. There could be layoffs in West Virginia and suddenly housing prices go from whatever it is worth now to less. The assets of the banks were highly inflated by the housing bubble. An asset at a bank is a loan. And suddenly, people couldn’t pay those loans, so their assets plummeted, on average, 18 percent, well below the five percent.
“You have what is known in accounting as insolvency. The banks were insolvent.”
“When you close a bank, it’s not because they don’t have cash in the till. You close a bank because they have failed the math test. Their assets are no longer bigger than their liabilities. You close the bank. You have someone else manage it. And all of the customers don’t know any difference at all other than the name on the bank. That’s called insolvency.”
“The banks want the capital requirements as low as possible, because it’s a big leverage play.”
Was it ever at 20 percent?
“Yes, when the banks were private, when they didn’t have public shareholders. Goldman had 20 percent capital before they went public — probably even more — they didn’t have to tell us. That capital was owned by their partners. And the only way the partners got rich is when they retired, because then they got paid off. They were long term greedy. They did not screw customers as badly as they do now.”
“Now they get paid in stock and the goal is to move the stock price up. And they get paid every year. So, they are now short term greedy.”
“If I asked you for your wallet right now, you would not give it to me. You would certainly hesitate. And yet, we have given $1.2 trillion worth of our wallets to JPMorgan Chase without knowing the name of the CEO or the teller. We do not do what the average person is supposed to do and that is scrutinize the person to whom we are lending money.”
“What did they do with that $1.2 trillion? The took about $300 billion or $400 billion of it and quite literally gambled with it, much of it in London. That’s the London Whale.”
“Sometimes they do well. They bet that American Airlines would go bankrupt and they won. And they won $450 million. Just as an aside, why is that socially useful to take taxpayer subsidized cheap money and bet that American Airlines would go bankrupt? I thought we were going to build airlines?”
“Then they made a bet that went awry. In this case, they were betting, in a complex derivative, that things would go a certain way. They eventually would have. But the bets were so big that counterparties ratted them out to reporters. They lost $6 billion.”
“I went to school at the same place and the same time as Jamie Dimon and I studied math. And I met my match in Algebra. There is just stuff that my little brain can’t deal with. And Jamie Dimon’s little brain couldn’t deal with the very complex math that the quants were doing at JP Morgan.”
“Jamie Dimon looked at the London Whale and his first response was — this is a tempest in a teapot. Two months later, he said — Ah Hah — and he had a Rah Ro moment — it was an egregious mistake. Then they hired an outside firm to look at this and they missed the essence of this. This was not a hedge as claimed. It was a directional bet. It was a bet that the Redskins would win or lose. One thing is going to happen. And they weren’t hedging by betting the opposite way with someone else. That would be a hedge.”
“They needed to stop the gambling. Go ahead and do it but don’t do it with taxpayer insured deposits where the lenders are mindless and careless about whether you are going to screw up or the bank burns down – because the FDIC will pay you back.”
“The third solution is to break up the banks. Even if Wells Fargo was a relatively boring bank and didn’t do too much gambling, if it were to fail, that would be a bad thing. That’s the solution to too big to fail — break up the big banks.”
“The solution to too big to jail? Jail. It’s a deterrent. Already, people go to Wall Street for the wrong reason. No twelve year old wants to go to Wall Street. She wants instead to be a software engineer, doctor, firefighter. It’s only in college when you are buried in debt that you say — Ah Hah. I want to pay for things myself.”
“Thirty percent of my Harvard class went to Wall Street. And now, it’s down to 20 percent. But it’s still bad. Why do they go to Wall Street? To make America great again? No. It’s to make their wallets great again.”
“Too big to regulate? Slow the revolving door.”
Breaking news. Just now, Bernie Sanders, the man who accused Hillary Clinton of being beholden to the big banks and Wall Street just endorsed her. Is Hillary in the pocket of Wall Street?
“If there is money laying around on the ground, it’s hard for me not to pick it up. I might pick it up and say — did anybody drop this? I just found $20 — is this yours? If nobody says no, I’m going to keep it. Goldman Sachs and others offered Clinton money on the ground for free. She had to give a 30 minute speech. She gave the same one. I don’t know what she said, but I assume she just gave a stock speech.”
Why won’t she release the transcripts?
“I think she should. Nothing would bolster her stature more than the stern lecture she would give behind closed doors to a company that has contributed to the near ruination of our country.”
We don’t know that she gave a stern lecture to them. She could have just been giving the same drivel.
“She picked up a $20 bill because it was there and all she had to do for that was open and close her mouth with air going through her larynx. I hope she didn’t say — you are a fine company that made America great again.”
There was a vote in the Senate on breaking up the big banks. Brown Kaufman.
“I think she voted the wrong way but I actually don’t know. By the way, Public Citizen is non partisan. We do not support Hillary Clinton or any other candidate.”
Bernie accused Hillary of being beholden to Wall Street. Do you agree?
“I do not. She’s a woman of tremendous ambition. She knows that to become President will cost a billion or so dollars. Much of industry is skeptical about somebody who is a Democrat. They tend to give to Republicans. But there is one industry that gives to everybody because they survive on government gifts. And that’s the banking industry.”
Isn’t it true that Wall Street is supporting Clinton over the Republicans?
“At this time eight years ago, the Senate Democrats had raised $22 million from Wall Street. This year, it’s $8 million.”
But the Wall Street Journal is reporting that the Wall Street money is shifting away from the Republicans toward the Democrats.
“They should want to.”
Why should they want to?
“The oddsmakers say it’s going to be a Democratic President and maybe even a Democratic Senate. And they need to buy whoever is in power.”
[For the complete q/a format Interview with Bart Naylor, 30 Corporate Crime Reporter 29(13), July 18, 2016, print edition only.]