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"The apologists of successful dishonesty always declaim against any effort to punish or prevent it on the ground that such effort will 'unsettle business.' It is they who by their acts have unsettled business ... But if it were true that to cut out rottenness from the body politic meant a momentary check to an unhealthy seeming prosperity, I should not for one moment hesitate to put the knife to the cancer."

Theodore Roosevelt wrote that in 1908, amid searing debate over breaking up John D. Rockefeller's oil trust, Standard Oil. Roosevelt was berated tirelessly in his quest to end the oil monopoly. Protesters said he was hurting business. He was ruining the oil industry. He was destroying wealth.

Standard Oil was eventually split up in 1911 under President Taft. Within two years, Rockefeller's net worth doubled, and the industry was in boom like never before. The Baby Standards were on fire. A new prayer emerged on Wall Street: "Oh Merciful Providence, give us another dissolution." The oil industry, as we now know, hasn't done too badly over the years.

The example isn't perfectly equivalent, but we're somewhere near where Teddy Roosevelt stood in 1908. A century ago, the oil monopoly's imposition on the economy involved anticompetive behavior. Today, the issue regards banks becoming too big to fail -- a far more dangerous situation. Yet the debate is just as nasty today as it was back then.

Banks get bigger and bigger
Just to give you an idea of the ridiculousness we're dealing with today, Simon Johnson and James Kwak, authors of 13 Bankers, have found that since 1995, assets controlled by the six largest banks have exploded from 17% of GDP to 63%.

Source: 13 Bankers. All rights reserved.


We find this sickening -- and spectacularly dangerous to the economy. The next time one of these banks stumbles, it could take down the rest of our economy with it. Then Congress and whoever is President will have to make the impossible choice between bailouts and financial collapse.

Most of us agree that the bailouts of fall 2008 must never happen again. Yet letting a massive bank like Lehman Brothers simply disintegrate, while taking the entire economy with it, is not the answer, either. When the mistakes of a few people affect everyone, we've moved beyond free-market capitalism into economic carpet-bombing.

Adam Smith, the father of free-market thinking, agrees. So does the judge who oversaw Lehman's bankruptcy. Lehman's collapse "can never be deemed precedent for future cases. It's hard for me to imagine a similar emergency" said Judge James Peck.

We've had enough
Thankfully, we're now moving toward a more sensible system of financial failure, one that tries to escape the bailout-vs.-economic-ruin dilemma. The financial reform bill proposed by Sen. Christopher Dodd, now coming up for debate in the Senate, tries to address the issue with an alternative to bankruptcy known as "orderly liquidation."

Here's how it's supposed to work. When any financial company starts giving off the aroma of distress, the Dodd bill proposes that the government call upon a special dissolution team. The team will only spring into action if two-thirds of Federal Reserve Governors, two-thirds of the SEC, a special panel of Delaware Bankruptcy judges, and the Treasury Secretary (in consultation with the President) think the company in question is about to blow up.

If that ailing company's failure would wreck the economy, there's no private buyer for it, and bankruptcy's out of the question, the FDIC (or SIPC) would take over and liquidate its assets. Shareholders and creditors are supposed to bear all the losses, just like in a Chapter 7 bankruptcy. Management responsible for the failure gets canned. Basically, it would do for massive Frankenbanks what the FDIC already does for small banks when they fail.

This is a great start. We need a process to clean up and liquidate megabanks when they fail, so that the shock of bankruptcy doesn't jackknife our economy like Lehman Brothers did. The problem is that on its own, orderly liquidation doesn't solve the problem of "too big to fail." Someone would still need to absorb the massive losses such a failure could create. And while the bill makes it clear that somebody is supposed to be shareholders and creditors, if the size of those losses set off a ripple effect throughout the economy -- and they always do -- we'd still have a financial panic.

Imagine that we had liquidated AIG -- but instead of making taxpayers foot the $180 billion tab, the liquidation authority would most likely force AIG's creditors (Goldman Sachs, et al.) to eat that massive loss, in the midst of a hysterical market panic. Do you honestly imagine that wouldn't cause financial calamity? That's exactly the dilemma we faced in 2008. To be brief, the Dodd bill in itself doesn't end too big to fail, nor does it end the need for future taxpayer-funded bailouts.

That isn't just our opinion. A recent informal survey of experts -- Democrat and Republican -- conducted by NPR's PlanetMoney found exactly no one who thought the Dodd bill in its current form would end "too big to fail."

For any reform to be effective, we need rules that prevent banks from becoming so unwieldy that they can't be wound down without financial panic and taxpayer support. We need rules that end too big to fail.

Lucky us!
One promising idea put forth by Sens. Sherrod Brown and Ted Kaufman is the SAFE Banking Act. Proposed as an amendment to the Dodd bill, this act would break up too-big-to-fail Wall Street megabanks and install firm, unambiguous limits on the nation's financial behemoths.

The bill has three key components. First, banks would be barred from holding more than 10% of the nation's deposits -- end of story. Current rules already assert such restrictions, but they're obnoxiously easy to circumvent. Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) have blown right past 10% in recent years without breaking a sweat.

Second, there'd be limits on how much financial institutions could borrow from non-deposit sources of funding, such as short-term debt. For banks, the limit would be 2% of GDP, or about $290 billion in today's economy. For non-bank financial firms such as AIG (NYSE: AIG  ) and General Electric (NYSE: GE  ) , the cap would be 3% of GDP, or about $440 billion.

Third, leverage at all banks would be capped at 16-to-1, meaning a mandatory 6% capital ratio, period. No more of the 30-to-1, or even 50-to-1, leveraged suicide missions that got banks into this mess to begin with.

These rules would cause the largest banks and pseudo-banks to shrink in dramatic ways, either by selling assets or breaking themselves up like Standard Oil did a century ago. To get a sense of the scope of any potential changes, Goldman Sachs (NYSE: GS  ) and Morgan Stanley (NYSE: MS  ) now hold $778 billion and $724 billion in total liabilities, respectively. Under the SAFE Banking Act, both would effectively be forced to shrink by more than 60%.

This is anything but extreme, since the new Baby Banks would still be some of the world's largest financial institutions. But critically, when combined with a sensible liquidation process and derivatives reform, the SAFE act would bring today's banks down to a size that would allow them to fail. Under the new rules, banks would be held accountable for their own mistakes. Those that fail would go out of business in a calm, coherent way, without spewing collateral damage throughout the economy. In other words, we'd see the return of capitalism.

We're cheering loudly for it, and we think you should, too. The SAFE Banking Act to shrink Wall Street megabanks is gaining momentum, and it has a real chance of making it into the final financial reform bill. We count 20 senators who have already taken a strong stand in favor of breaking up too-big-to-fail banks. The best way we can make a difference is for all of us to contact our senators now, and tell them that we need them to support the SAFE Banking Act to put hard caps on bank size and end the need for taxpayer bailouts

Let's do this, Fools!
We've called our respective senators today to ask them to support the SAFE Act. It took only five minutes, but we made sure that our representatives heard us at this critical time for financial reform.

Click here for your senator's phone number. There is also a major petition going around in support of the SAFE Banking Act, which you can sign here.

Morgan Housel and Ilan Moscovitz don't own shares of any companies mentioned in this article. The Motley Fool is investors writing for investors.

Read/Post Comments (96) | Recommend This Article (116)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 28, 2010, at 5:22 PM, Tomtherailnut wrote:

    Does the SAFE act anticipate the new BabyBanks would have superior management, or would it just spread the stupidity around a lot more, but now smaller and less damaging, entities? Part of the growth in oil industries after the break up of Standard was a huge growth in oil using industry - the automobile being a huge driving force. So long as our national tax policy is headed down the "higher taxes" path, industrial and other private sector growth will remain stunted and there will be a limited need for banks' loan products. Hence, they will find a way to roll up huge profits beyond simple 16:1 lending. Doesn't anyone remember the savings and loan crisis of the 1980's?

    Why can't we do what was originally suggested for these "toxic" assets - create a new governmental entity to purchase up these gnarly turds and get them off the balance sheets. Restart the banks at 16:1, and get banking out of the investment world, and the investment world out of banking. So long as we have these huge megabanks deeply involved in all aspects of the economy, the country is at risk of huge economy-swaying hiccups. Then, the SAFE banking act starts to make some sense.

  • Report this Comment On April 28, 2010, at 5:23 PM, TimBode wrote:

    So....GS and AIG support this legislation, that will cause them to shrink by 60%. Get real. If GS is for it, we should be against it.

  • Report this Comment On April 28, 2010, at 5:25 PM, cmfhousel wrote:


    Goldman has made it clear that it supports the Dodd bill ... the SAFE Banking Act is an entirely different deal, and there's 0% chance GS supports it.

  • Report this Comment On April 28, 2010, at 5:34 PM, TimBode wrote:

    Further, having Chris "Countrywide" Dodd in charge of a financial reform committee is no doubt the sweetest irony ever. He is a huge part of the problem.

  • Report this Comment On April 28, 2010, at 5:40 PM, TMFDiogenes wrote:

    Hi Tom,

    No, the SAFE act wouldn't necessarily make managers smarter. Nor would it separate investment banking from commercial banking -- another thing that Morgan and I think should be part of reform. But the bill would 1) make sure that if managers decide to blow up their bank, it'll be less likely to take down the economy with it, and 2) tell managers that they need to do a better job managing risk because if they're no longer too-big-to-fail, taxpayers won't be forced to bail them out next time. So it would make financial stupidity less likely and less damaging.

  • Report this Comment On April 28, 2010, at 5:50 PM, TopAustrianFool wrote:

    "Standard Oil was eventually split up in 1911 under President Taft. Within two years, Rockefeller's net worth doubled, and the industry was in boom like never before. The Baby Standards were on fire. A new prayer emerged on Wall Street: "Oh Merciful Providence, give us another dissolution." The oil industry, as we now know, hasn't done too badly over the years.

    The example isn't perfectly equivalent, but we're somewhere near where Teddy Roosevelt stood in 1908. A century ago, the oil monopoly's imposition on the economy involved anticompetive behavior."

    Whoa!! Where are you getting your history? By the time Standard Oil was broken up it was already loosing market share. In 1911 Standard Oil's market share was 25% and it had been in steady decline since 1899. Where do you get that Rockefeller's fortune doubled due to the brake up? It seems that is what you are implying.

    I love T-Rex, but he knew nothing about economics.

  • Report this Comment On April 28, 2010, at 5:55 PM, cmfhousel wrote:


    The source for that is the book Titan: The Life of John D. Rockefeller. His net worth peaked at $900 million in early 1914.

  • Report this Comment On April 28, 2010, at 5:55 PM, TopAustrianFool wrote:

    "The next time one of these banks stumbles, it could take down the rest of our economy with it. "

    There is no such a thing. If a bank fails and no bail-out occurs you will get liquidation and the market share will get split among the competition. No need for anti-trust or anything of that sort.

    "letting a massive bank like Lehman Brothers simply disintegrate, while taking the entire economy with it..."

    The bail-out were nothing more than a story bankers came up with in order to get themselves paid. Politicians are too uneducated to realize that this was so, and now they won't admit it.

  • Report this Comment On April 28, 2010, at 5:58 PM, TopAustrianFool wrote:

    It might have peaked, but the implication is that the break up was the cause. Maybe I am just reading it wrong.

  • Report this Comment On April 28, 2010, at 6:02 PM, eldetorre wrote:

    "create a new governmental entity to purchase up these gnarly turds and get them off the balance sheets. "

    And who pays for all of these turds????

  • Report this Comment On April 28, 2010, at 6:02 PM, TopAustrianFool wrote:

    Have you heard of the Panic of 1837 and the Panic of 1920? Specifically the Panic of 1837 was due to Bank Failures and Real Estate speculation. Nobody was bailed-out and recovery was swift and soon arriving during 1838.

  • Report this Comment On April 28, 2010, at 6:09 PM, TopAustrianFool wrote:

    Is it me or am I the only one who realizes that bankers like Paulson wwere made rich by the government? Although what Paulson did was questionable, he would have lost a lot of money also, had the government not bailed-out the banks, which then were able to pay people like him. Schemes like his only work if the market you are playing doesn't collapse. If it does, then everyone looses. Of course that is only true in a Free Market, if the government steps in and bails you out, then that is more like a wild card. But it is possible to do, if you convince politicians that it will be to their detriment to let you fail. Nevertheless this is no easy task, since you have to also provide a story that they can sell to the public in order for them to bail you out. This is the genesis of the “Too-Big-to-Fail" non-sense, or shall we call it “Too-Big-to-Fail” scheme. These bankers took our uneducated politicians for a ride and convinced them of the fantasy that the bank failures would spread throughout the whole economy, just so that they themselves would not go out of business. The financial system froze anyway, lending is still trickling and for good reasons. This is likely the biggest scam in the history of the world, but it was done legally, since every act of Congress is law. This is all too embarrassing to admit, so don't expect politicians to look back and show regret.

    Too-Big-Too-Fail is a fantasy, nothing is so. No matter how big you are, you will get liquidated and your market share will be taken by up and coming competiors. As a matter of fact, failure of a company is the same as an anti-trust break up.

  • Report this Comment On April 28, 2010, at 6:17 PM, mikecoursey wrote:

    A link to the actual proposed SAFE Banking Act would be appreciated. While the idea of the Act sounds great to me I would like to read the actual language of the bill to understand fully the pros and cons of it.

  • Report this Comment On April 28, 2010, at 6:17 PM, mikecoursey wrote:

    A link to the actual proposed SAFE Banking Act would be appreciated. While the idea of the Act sounds great to me I would like to read the actual language of the bill to understand fully the pros and cons of it.

  • Report this Comment On April 28, 2010, at 6:27 PM, TMFDiogenes wrote:

    Hi Mike,

    Good idea. Here's the text of the bill. It's short -- the three parts of it that we described are the only three things it does.

    We'll add a link to the article as well.



  • Report this Comment On April 28, 2010, at 6:28 PM, bpan500 wrote:

    It's too bad that Senators Brown and Kaufman seem to the the only people in Washington who get it!

  • Report this Comment On April 28, 2010, at 6:36 PM, CMFStan8331 wrote:

    I agree wholeheartedly.

    I'm willing to bet that anyone advocating "just let all of them fail and the markets will recover soon enough" did not personally live through the Great Depression. Perfect market discipline exacts an incredibly heavy toll in human misery because people who are not independently wealthy can't just go into some sort of stasis waiting for the economy to recover.

  • Report this Comment On April 28, 2010, at 6:45 PM, mtracy9 wrote:

    All these problems trace back to the

    deregulation started under Ronnie RayGun.

    This deregulation produced our first crisis

    back in the 1980's with the S & L's

  • Report this Comment On April 28, 2010, at 6:47 PM, PALH wrote:

    The banks have to be broken up, shrunk and put on a tight leash of regulation. Unchecked capitalism and unregulated markets are a disaster.

  • Report this Comment On April 28, 2010, at 7:01 PM, Harley117 wrote:

    There are a lot of things not addressed in your article. First of all, the the real estate bubble and mark to mark accounting were the primary forces driving the banks to the brink of failure. Secondly, the lack of regulations on credit default swaps at AIG created the only real too big to fail situation. You do not mention that public policy of extremely low interest rates contibuted to the real estate bubble. Also public policy put a lot of pressure on banks to make risky loans to homeowners that could not afford them. Finally, the only banks with 30 to 1 capital ratios were the five investments banks and you can blame SEC's Cox for that. That was insane.

    We do not need to break up the banks. Simon Johnson has been a proponent of nationalizing the banks for a long time. Ted Kaufman would also go along with that. It also sounds like TMF would agree. Or we could break up the big banks and let the government choose winners and losers and sell some of the assets to George Soros for pennies on the dollar the same way FDIC did.

  • Report this Comment On April 28, 2010, at 7:24 PM, jerryguru69 wrote:

    "A century ago, the oil monopoly's imposition on the economy involved anticompetive behavior. Today, the issue regards banks becoming too big to fail -- a far more dangerous situation. Yet the debate is just as nasty today as it was back then."

    My thoughts exactly. I'll read the bill, and I think sign the thingie.

  • Report this Comment On April 28, 2010, at 7:30 PM, JustinSeine wrote:

    Why don't we replace "Too BIG to Fail" with "Too GOOD to Fail"! Survival of the FITTEST, not survival of the FATTEST!

  • Report this Comment On April 28, 2010, at 7:45 PM, jerryguru69 wrote:

    Just had another thought. The SAFE bill only applies to bank holding companies. Wouldn't AIG and hedge funds and pure investment banks till be able to leverage 50-1 and finance their long term debt with short term financing?

  • Report this Comment On April 28, 2010, at 7:50 PM, cmfhousel wrote:


    "Just had another thought. The SAFE bill only applies to bank holding companies."

    Nope -- it's both bank holding companies and non-bank financial institutions like AIG, GE Capital, etc.


  • Report this Comment On April 28, 2010, at 8:15 PM, jerryguru69 wrote:

    "it's both bank holding companies and non-bank financial institutions"

    Just read in the bill:

    " the term ‘financial company’ means any nonbank financial company that is supervised by the Board"


    "the Board of Governors of the Federal Reserve System (in this Act referred to as the ‘Board’)"

    I'll have to do more research to find out exacty what this means.

  • Report this Comment On April 28, 2010, at 8:35 PM, stringman101 wrote:

    I think Harley117 is on to something. Good point.

  • Report this Comment On April 28, 2010, at 8:39 PM, TopAustrianFool wrote:

    "A century ago, the oil monopoly's imposition on the economy involved anticompetive behavior. Today, the issue regards banks becoming too big to fail -- a far more dangerous situation. Yet the debate is just as nasty today as it was back then."

    Oil monopoly never was. Market share 25% is not much of a monopoly. I give up on you guys. You have something on your mind and no matter the facts you will believe whatever sounds good to you.

    You are exactly the reason these bankers can get politician to do anything they want. To bad...

  • Report this Comment On April 28, 2010, at 8:42 PM, BMFPitt wrote:

    1) Bankruptcy court.

    2) Institute the death penalty for asking for a bailout.

  • Report this Comment On April 28, 2010, at 9:50 PM, xetn wrote:

    The idea of too-big-to-fail is an concept of the government which was used as justification for bailouts of the big banks. The whole mess of the big banks is a direct result of the Federal Reserve system that was created by them and for them. Without the Fed and the FDIC there would not be any too-big-to-fail banks because there would not be anyone to save them from their reckless activities.

    So, that which the government as created, now it wishes to destroy. Sounds like government intervention in action. I don't like big banks or big corporations but I really don't like government regulation or interventionism.

    Just take a look at this:

  • Report this Comment On April 28, 2010, at 10:24 PM, xetn wrote:


    Why are you here? Are you a socialist wanting to make a capitalist gain?

    As for TMF, I am getting rather fed up with all the political BS that has been spewing forth for so long. This is supposed to be an investment forum, not a soap box. Please keep your politics to your selves.

  • Report this Comment On April 28, 2010, at 11:08 PM, rd80 wrote:

    Good article. A couple of comments.

    1. Any reform that doesn't address Fannie, Freddie and non-bank companies like GM - and maybe stakeholders like unions and pension plans - is incomplete. Reform seems focused almost entirely on the banks, but the biggest losses to the bailout programs are likely to be AIG, GM, Fannie and Freddie - of those, it sounds like only AIG would fall under SAFE.

    2. Same as 1, but for the government. We need to get rid of regulations and policies that encourage stupidity and get sensible regulation in place for stuff like CDS. Gov't regulators and politicians, along with the bankers, were all too willing to ignore warning signs - as long as home prices kept going up, everyone with authority was perfectly happy ignoring warnings and enjoying the party.

    3. Same as 1. but for the rating agencies.

    4. It's more than 'too big to fail.' I would argue that it wasn't the size of Lehman that was a hazard, but the unknowns associated with its counter-party spider web. As long as derivatives or some other way to create leverage without it showing up on a balance sheet are out there with no reserve requirements, it's possible for a fairly small company to wreak havoc on the system. As an example that 'too big' may not always be a disaster, Wachovia would have certainly qualified as TBTF, but it's failure was handled without much disruption to the system.

    5. Any solution needs to target symptoms, not specifics - much like virus protection software looks for malicious behavior in addition to known threats since it's nearly impossible to keep up with each new threat as it pops up.

    I find it very concerning that politicians are quick to simplify the problem, point fingers and scream "Wall St. did it" while ignoring the role legislation, regulation, monetary policy, individual borrowers, etc. had in creating the problem.

    Wish I knew the answers.

  • Report this Comment On April 29, 2010, at 12:57 AM, cmfhousel wrote:


    You write: "Oil monopoly never was. Market share 25% is not much of a monopoly. I give up on you guys. You have something on your mind and no matter the facts you will believe whatever sounds good to you."

    You're right: 25% isn't much of a monopoly. But how about 90%, which is what Standard Oil's actual market share was?

    "In the 1890s the law had forced Standard Oil to alter some of its worst practices, and to move many operations from Ohio to New Jersey; but this had little real impact on the oil giant. By 1900, it controlled over 90% of the refined oil in the United States."

  • Report this Comment On April 29, 2010, at 1:59 AM, cmfhousel wrote:

    But to be fair, you did specifically mention 1911. In that year, SO's market share was 64%.

  • Report this Comment On April 29, 2010, at 2:24 AM, PerfectlyLegal wrote:

    Good article. About time. My only concern is that the reforms won't be radical enough.

  • Report this Comment On April 29, 2010, at 7:43 AM, TopAustrianFool wrote:

    "You're right: 25% isn't much of a monopoly. But how about 90%, which is what Standard Oil's actual market share was? "

    No, 90% is not a monopoly. 100% is a monopoly. Like the 100% market share the utilities, the Fed. in monetary policy, and soon the healthcare companies will, have with govt regulatory assistance.

    And 64% is certainly not a monopoly. Before JDF started Standard Oil, oil was nothing but a nuisance to farmers, most people would go to sleep after dark, because whale oil was too expensive, and that's right, whales were being slauthered for oil. So JDF makes it possible for all of this to end by providing super cheap oil and you think 64% is unfair. Who cares, thanks to him you had cheap oil. If this is a monopoly what would be the point? I think that you need to put numbers into context and not just take the ones that reinforces your prejudice.

    In 1913 Vail (AT&T) got his wish of govt sponsored monopoly, by convincing politicians that every one had the right to universal access to telephone. Sound familiar? So the thousands of small local telephone companies soon disapeared, thanks to govt regulation.

  • Report this Comment On April 29, 2010, at 7:48 AM, TopAustrianFool wrote:

    Also, Tesla and others had already developed wireless communication during the turn of the century, but thanks to Bell's govt sponsored monopoly you had to wait until the 1980's to use it. Didn't you?

    I know you want to avoid the banking problems, but your regulations will only allow other problems to appear. These guys in Wall St. adapt and eventually cause the same problems. The only way to avoid it is by retricting the Fed.

  • Report this Comment On April 29, 2010, at 8:36 AM, MPov wrote:

    Simon Johnson has a political agenda. He wants big banks broken up because, if he had his druthers, the financial world would be ruled by his former employer, the IMF.

    Take two grains of salt with everything he says.

  • Report this Comment On April 29, 2010, at 8:36 AM, Melaschasm wrote:

    From everything I have seen, Dodd's bill will make the situation worse. Which is not surprising, since he worked so hard to create the mess we are currently in.

    The SAFE act sounds like it has some solid reforms in it, and should be a stand alone bill, not part of some sham legistlation designed to give politicians cover without making any useful changes.

  • Report this Comment On April 29, 2010, at 9:05 AM, Radiance08 wrote:

    RD80 says it best:

    We have forgotten that most of the problems here are not related to the size of the bank but to their lending practices.

    Congress had a big hand in encouraging banks to lend to those who really couldn't pay it back... the subprime mortagages.

    If we clean up the lending practices, the size of the bank doesn't matter. You shouldn't be limited the size a company can grown and you shouldn't be limited how much a person can make.

    Be careful what you wish for.

  • Report this Comment On April 29, 2010, at 9:27 AM, Big50Shooter wrote:

    BRAVO (again) Morgan! You're STILL my favorite TMF writer...

    I admitted am NO expert on banking, but I totally agree that the banks need to be limited in size by law. SAFE would be a good start, but I also think we need to get something like Glass-Steigel (sp?) back into law. I agree with Tomtherailnut on this one; the banks need to be OUT of the investing world and visa-versa, or at a minimum let them only invest with money that is not derived from their depositors.

    Those government sponsored HOGS known as Freddie and Fannie also need to be dealt with, but let's not mince issues...

    One other thing that I think had been overlooked is this "shadow banking" issue. Let's face it derivatives, are what really made the government bailouts necessary to a large degree... Because of the domino affect that they have on one another; bank A is betting on the failure of Bank B, and Bank B is betting on the failure of Bank C, and Bank D is betting on the failure of Bank A, and ALL of them are over-leveraged on these bets. So, when one fails, it is a domino affect of failures. I heard a stat that at the beginning of the last financial collapse, there was something like 1.14 QUADRILLION worth of these derivatives in circulation between the major banks/funds in the world! If the "too big to fail" were indeed allowed to fail (no gov. intervention), the whole world's financial system would have gone down like dominos, one right after the other... The people at the heads of these institutions that got us into that situation shouldn't just be fired, they should be SHOT!

  • Report this Comment On April 29, 2010, at 9:31 AM, haywool wrote:

    Instead of having the creditors and share holders liable for the company in bankruptcy's losses, let's have the C-level responsible for the whole mess foot the bill ! "You caused it, you pay for it."

  • Report this Comment On April 29, 2010, at 10:54 AM, Harley117 wrote:


    I do not understand your comment to me "harley117 why are you here? are you a socialist wanting to make a capital gain? A socialist does not believe in capitalism. I am an investor and I do not want the government to muck up capitalism. I believe what ever comes out of this reform probably will not be good for capitalism.

    I do believe there needs to be some regularation on derivates and bond default risk trading. However, to break up comanies is only one step away from nationalization and I view that as socialism. I am opposed to breaking up banks.

  • Report this Comment On April 29, 2010, at 12:04 PM, ezed1 wrote:

    Thanks for a great article. I've contacted both of my senators.

  • Report this Comment On April 29, 2010, at 12:11 PM, ezed1 wrote:


    I don't agree that breaking up dangerously large entities is socialism. Free markets need to be transparent and free from bullies.

    You may be too young to remember how the oil industry thrived after the breakup of Standard, but what about the breakup of Ma Bell. The subsequent generation of net worth was also tremendous.


  • Report this Comment On April 29, 2010, at 12:56 PM, Tiki38 wrote:

    I am also getting fed up with TMF's political campaigning. I pay for a premium service and I expect Investment Advice not political opinions. If they keep this up, I'll be taking my business elsewhere.

  • Report this Comment On April 29, 2010, at 1:07 PM, Celtics17 wrote:

    Where's the FMAC and FNMA reform? Oh, that's right - Comrade Dodd wrote this bill. Once upon a time in America Dodd would be wearing an orange jumpsuit instead of writing legislation.

    This is just another shameful power grab by ObaMarx, Soros, SEIU et al.

  • Report this Comment On April 29, 2010, at 1:29 PM, cmfhousel wrote:

    To those complaining about articles where we mention the word "politics," we only write articles with political flavors when discussing legislation that will have a direct impact on your investments. It would be irresponsible for Ilan and I, who write about banks, to ignore legislation that will completely transform the industry only because we're afraid of saying something our readers might disagree with.

    If we ever write an article about, say, the electoral college or judicial system, you can call us out on it. But writing about the politics of business and investments on an investment website is not straying from our mission of educating investors.


  • Report this Comment On April 29, 2010, at 3:27 PM, Harley117 wrote:

    This is the kind of article I would expect to read about in Venezuela or possiblely the Huffington Post here in the U S. When you say it is sickening that bank are becoming too big or wite to ask your readers to write to their Senators and ask the government break up the banks you are promoting a socialist political agenda.

  • Report this Comment On April 29, 2010, at 4:42 PM, TMFDiogenes wrote:

    Woah. Let's all take a deep breath here and think this through.

    The reason free markets are supposed to be great is that competition spurs innovation, efficiency, and entrepreneurialism, which does all sorts of wonderful things for consumers and society.

    Can someone explain why asking a banking oligopoly ripping the face off our entire country -- which is a PROFOUND market distortion -- to split up their companies in such a way as to make the industry more competitive would be an instance of socialism, as opposed to, say, freer competition?


  • Report this Comment On April 29, 2010, at 5:21 PM, MyDonkey wrote:

    The folks in control at the top of the pyramid don't care what investors and taxpayers think. They'll get their way regardless of the masses' opinion, and they'll break laws to do it if necessary (remember the original NO bailout vote that they quickly "corrected" to YES?; remember GM's bondholders?).

    To suggest that Big Banking should be regulated is akin to Aesop's Mice in Council suggesting that the Cat should wear a bell. And to further discuss details of regulation is akin to the Mice discussing the specific size, shape, sound, and loudness of the bell. The Mice can't forcibly bell the Cat, and the Cat won't agree to wear a bell, so there's no point in talking about it except perhaps as a form of entertainment or mental exercise.

  • Report this Comment On April 30, 2010, at 11:00 AM, JerryMandering wrote:

    To Housel and Moscovitz:

    What many of us are saying to you is that we find disturbing your confidence that this government is going to act in America's best interest....this administration and legislative branch is running rough-shod over the American people right now and you two are writing articles about how they are going to end "To Big To Fail"?

    And even though he anguishes over proposed regulation on derivatives, I'm sure Warren Buffet would agree with you....this man VOTES for these same clunker politicians term after term.

  • Report this Comment On April 30, 2010, at 11:55 AM, yooperking wrote:

    Is government oversight going to result in more Fannies and Freddies and Government Motors?

    Government isn't the solution to our problems.

    There shouldn't be such a thing as "too big to fail".

  • Report this Comment On April 30, 2010, at 12:17 PM, ihtfp92 wrote:

    This is long past due - and desperately needed to bring some sanity to the financial world. This is unlike any other sector of the economy due to its interconnectedness (an unavoidable by-product of fractional reserve banking). We need rules to prevent contagion so if one institution fails it does not take everyone else down with it. We enforce fire safety rules for the same reason.

    I contacted both my Senators and urged their support for the Safe Banking Act. I hope everyone else does as well.

  • Report this Comment On April 30, 2010, at 12:19 PM, fool425 wrote:

    Excellent idea! I get a kick out of you fools who think FNM and FRE were the source of the credit crisis. 84% of the loans that were foreclosed at the height of the mortgage crisis were funded by private sources, not the GSEs. This is more than a small anomaly. It completely destroys the false argument made by the conservative echo chamber. No, as TMF says; 1. it is the lack of regulation and oversight, 2. unconscionable leverage, and 3. purposefully opaque derivatives that lead to the meltdown. No laws or regulations can truly prevent greed from overtaking a cunning executive, so breaking up the too-big-to-fail group is necessary.

  • Report this Comment On April 30, 2010, at 1:03 PM, varney wrote:

    You are comparing apples and oranges again!

    The structure of banks has changed since 1995. In 1995, they were commercial banks. Today, they are investment banks. You haven't told the whole story until you show what the assets of the 6 largest INVESTMENT banks were in 1995.

    As you point out, failure at Goldman Sachs (an investment bank) couldn't be tolerated either. You are suggesting that the situation is different today by comparing the size of the largest 6 commercial banks in 1995 to the size of the largest 6 full-service banks today; but unless you have numbers on how big the biggest investment banks were in 1995, you haven't shown that anything is all that different.

    In any event, we don't need to limit the size of banks (beyond antitrust regulations); what we need to do is eliminate non-collateralized insurance (like CDOs). This will prevent the "domino effect" problem that results in "too-big-to-fail" because any bank which needs to be dissolved will have adequate assets to make the other side of their derivatives contracts whole.

  • Report this Comment On April 30, 2010, at 1:08 PM, varney wrote:


    Not so. Just because FNM and FRE didn't make the loans doesn't mean that the policies in place to satisfy the requirements of the CRA weren't what plunged us into this problem.

    Banks had to meet very stringent requirements on what portion of their loans went to "underserved" segments of the market. The problem is, the reason those segments were underserved was that they weren't credit-worthy. To comply, banks had to slacken their lending standards. Banks did this across the board (reasoning that it didn't make sense to have looser credit standards for their least credit-worthy borrowers than for their most credit-worthy borrowers). This along with artificially low interest rates lead to the housing bubble and it attendant collapse. The one big miss on regulation was allowing CDOs (which were basically insurance) to be entered into without sufficient assets to back up the claims.

  • Report this Comment On April 30, 2010, at 1:20 PM, varney wrote:

    I could only find the figures for the 50 biggest banks, not the total banking industry. In any event, the biggest bank (BAC) has less than 16% of the total assets of the 50 biggest banks (and an even smaller chunk of the total assets of the US banking industry). This is a FAR CRY from a monopoly situation like Standard Oil or Ma Bell.

  • Report this Comment On April 30, 2010, at 1:42 PM, cmfhousel wrote:


    Welcome back. We never said banks have a monopoly similar to Standard Oil. In fact, we specifically wrote:

    "A century ago, the oil monopoly's imposition on the economy involved anticompetive behavior. Today, the issue regards banks becoming too big to fail -- a far more dangerous situation."

  • Report this Comment On April 30, 2010, at 1:49 PM, dono7767 wrote:

    @rd80 et al

    We need to confirm that Fannie and Freddie and the US student loan programs (just nationalized) are covered by this amendment. If they are, then I agree with the direction. If not, it is smoke and mirrors to blame the private sector and set up for more public funded take-overs.

    I do not like the over regulation and manipulation mentioned by many here. And I believe it deserves at least 50% of the blame. I see this as a replacement to that philosophy of over management of the market. Not sure the politicians will remove any existing rules...

    Too big to fail has concentrated on manipulating actions and liquidation during failure. This changes the focus to keeping the market free enough to allow failure to occur. My hope would be that this amendment alone provides the flexibility to avoid the Dodd law all together. His law is the old school, "How do we take over, sell off and fail huge organizations that we have regulated?"

    Given a free-market limited to avoid a systemic impact during failure, they should be able to do much more as they please.

    End of flowers and lollipops... Government will not limit themselves, they will not remove regulation and will pass new laws to allow industries they like (aka Fannie and Freddie) to grow out of control as long as they fulfill a social experiment. Until this attitude is reversed we are not protected.

    This amendment may be the foot in that door.

  • Report this Comment On April 30, 2010, at 1:51 PM, varney wrote:


    My point was that none of those banks is so powerful or indispensible individually that they need to be broken up. What we need is reform that prevents firms from selling what is essentially insurance (CDOs) without proper capital to back it up. AIG's selling of "naked" CDOs was what caused "too big to fail" in the first place.

    And I'm still waiting to see the size of the 6 biggest investment banks. I've been unable to dig it up, but I was also unable to reproduce your 1995 numbers for the 6 biggest commercial banks, so I was hoping you might be able to dig up the size on investment banks in 1995.

  • Report this Comment On April 30, 2010, at 1:59 PM, LosAlamosJoe wrote:

    Fannie Mae and Freddie Mac should not be excluded. They also are too big, and, as we have seen, pose substantial risk.

    Let's not forget about reinstating Glass-Steagall. The people should not be insuring deposits in the investment banks. Many of the current operations should be located in Las Vegas or New Jersey casinos

  • Report this Comment On April 30, 2010, at 2:18 PM, GenYfool wrote:

    First, the banks should have been allowed to fail, in an orderly fashion. Period.

    Secondly, in all of this financial reform smoke screen from Washington, I've heard NOTHING about repealing Gramm Leach Bliley.

    Make the SOBs gamble with their OWN money.

  • Report this Comment On April 30, 2010, at 3:12 PM, fool425 wrote:

    FreeMortal- I'm free too. I read Ayn Rand's novels and I noticed that they were fiction. If the last 30 or so years haven't proven that the laissez-faire, free market mantra that has been shoveled into the media is bunk, I don't know what it will take to make you see reality. Reagan said government is the problem and every time we elect politicians who adhere to privatizing everything, we get screwed. Enron, WorldComm, Tyco, Bear Stearns, Countrywide, et. al. are private enterprises. If Rand's work were real, John Galt would be leveraging the lowest interest rates in ages and our unemployment problem would be the fantasy!

  • Report this Comment On April 30, 2010, at 3:18 PM, fool425 wrote:

    GenYfool sez "First, the banks should have been allowed to fail, in an orderly fashion. Period." Nice thought. If your neighbor is careless and starts a fire while smoking in bed, I guess we should just allow his house to burn to the ground. Should we allow the entire World's capital markets to grind to zero to avoid a moral hazard? That's what Paulson and Bernanke were facing in case you didn't comprehend it. It is precisely because there is no method available to provide an orderly failure of the twenty or so largest financial institutions that breaking them up is mandatory. Moreover, this must be expanded to include all countries to prevent contagion from elsewhere.

  • Report this Comment On April 30, 2010, at 3:41 PM, varney wrote:


    The only reason failure couldn't proceed was because of what equated to insurance (CDOs) was sold without capital backing. This is fraud, and is the main regulation that the government missed.

    However, government over-regulation is also largely responsible for the problem. Banks loosened their lending standards to comply with government mandates on loans to under-served borrowers. In addition, the mark-to-market rule (another government regulation) caused many banks' capital structures to look insufficient when mortgage paper was valued at 50 cents on the dollar even though there is no way 50 percent of those mortgages will default. This caused an artificial capital crisis.

    If the government had been doing its job right, CDOs would have required capital backing equivalent to any other insurance product, and banks would not have been forced to customers who weren't credit worthy nor to value assets at far below their real intrinsic value.

    More regulation is not the answer. PROPER regulation is.

  • Report this Comment On April 30, 2010, at 6:32 PM, Tiingall wrote:

    The unfortunate truth is that despite the bad legislation, the political meddling etc, the people we were lead to believe could be trusted to look after our savings and our investments - ie:the supposedly responsible bankers whom we pay enormous salaries to attract the brightest and best to look after our money we deposit and invest with them - failed in their duty to look after our interests.

    Are they all so stupid they did not see this coming? If so, why are we paying them such high salaries?

    I recently had a visitor - a USA born/trained expert who advises Central banks in SE Asia. When I asked his opions:

    1. His wife was quick to say it was just greed that drove it. Many could see the potential abyss, but they could not overcome their personal greed to be professionally responsible.

    2. He had no answer for my question about professional responsibility in the banking industry. In other professions there are means by which people can be held accountable and responsible for professional neglect or incompetence. Apparently we are not protected by similar opportunities to have someone stuck off when they do a disasterous job. So the people who ripped us off recently, are still there waiting for the opportunity to do it again.

    3. Yes, it will happen again was his response. The system is based solely on profit so it will happen again.

    I recall a recent investigative TV report on the housing loan scam that undepinned part of this human disaster and the people knew exactly what they were doing and the inevitable consequences. When asked about new legislation the response was "do it fast so we can work out how to get around it and get on with our activities".

    There is something seriously wrong with a society where psycopaths such as these are allowed and/or encouraged to create the scale of human suffering these people have been willing to impose on fellow human beings simply to satisfy their personal greed.

    There is no sign these mentally deficient (see Adrian Raine research into psycopaths in white collar jobs) people are being weeded out of the banking and finance industry. The same psychopaths are still there, waiting to do it again. The structure of the system aids and abets their repeat performance.

    There are millions of people around the world suffering because their savings have been deliberately and cold-heartedly stolen or vaporised. There have been family murder-suicides in the USA when people have lost all hope. A French report in 2008 said expect tens of thousands more child deaths per week because aid agencies do not have the donation funds to do their work.

    These people society and business have chosen to responsibly manage OUR savings and investments are making decisions with OUR money that are very directly and predictably killing hundreds of thousands of poeple, and causing widespread suffering to billions more.

    Is this what the economic management model is supposed to achieve? Death and suffering for the majority while a few get very rich? Remember, the OECD reported the gap between poor and weathy was getting bigger, faster, in DEVELOPED countries.

    I have seen no signs of remourse on the part of the big bankers. No information telling us they are giving back OUR money by emptying their personal bank accounts, or seeling off their yachts or real estate or returning the funds in their offshore accounts. Instead we are getting higher bank charges to help refill the vaults, or we suffer, or die, so they can keep their stolen wealth.

    Why are the same mentally deficient psychopaths still allowed to be in the posts WE pay them so highly to occupy; expecting them to responsibly guide the banking and finance industries and protect OUR savings and investments?

  • Report this Comment On April 30, 2010, at 7:26 PM, jimw3326 wrote:

    Beware of the ones that say "I'm from the government and I'm here to help."

  • Report this Comment On April 30, 2010, at 10:27 PM, poppawheeler wrote:

    Its all rather simple. Politicians bail out AIG because of massive amounts of money that they contributed to campaigns. Politicians bail out GM and Chrysler because of the unions who vote the politicians into office. Amazingly the whole subject of too big to fail is an operative word concocted by the people involved.

    Any reference to the great depression, saying that if these companies had been allowed to fail would have put us in a tail spin downward equivelent to the 19 30's is just because most people don't remember that it wasn't because of big business failure and free market recovery it was because of Roosevelt's regime taking over and trying to micro manage american industry and ingenuity. If the medling politicians had stayed out of the picture the whole thing would have been settled in the dust. But due to influences out of washington it caused the depression to drag on for many many years. The only salvation was the second world war, which was the catalyst for american business to take off again in spite of washington politics.

    In short get the politicians down to short term limits and out of managing the economy and the free market economy will take care of itself.

  • Report this Comment On April 30, 2010, at 10:33 PM, xetn wrote:

    TMFHOUSEL wrote "To those complaining about articles where we mention the word "politics," we only write articles with political flavors when discussing legislation that will have a direct impact on your investments. It would be irresponsible for Ilan and I, who write about banks, to ignore legislation that will completely transform the industry only because we're afraid of saying something our readers might disagree with."

    This is missing the point, that you or IIan make a pretense of knowing what is best for us. I don't care what your political views are; they are no different from politicians who make the same claims that they know what is best for us or how it is the best way to run a private enterprise.

    You believe, as do the politicians that regulation is absolutely necessary and must therefore be instituted so nobody will get hurt. But these very same regulations are chocking American businesses to the point of driving many of them off-shore; taking their jobs with them. All government intervention/regulation (over 80000 pages of it in the Federal Register) amounts to central planning. I, for one (maybe the only one) who believes in free-markets and the power of voting with my dollars as the best and most efficient form of regulation. Of course, that requires personal responsibility. If you vote (purchase) and get screwed, it becomes your personal problem. If government regulation doesn't work (and mostly doesn't) then it becomes everyone's responsibility (or more accurately, nobody's).

    All I am asking as a subscriber is don't sit there and pretend to know what is best for me. You do not and can not. This holds true for the rest of the subscribers; you do not know what is best. You can only know what is best for yourself.

  • Report this Comment On April 30, 2010, at 11:02 PM, jimw3326 wrote:

    When the country is run by a kakistocracy then I believe I can make certian presumptions.

    kak·is·toc·ra·cy   /ˌkækəˈstɒkrəsi/ Show Spelled[kak-uh-stok-ruh-see] Show IPA


    government by the worst persons; a form of government in which the worst persons are in power. Jim W.

  • Report this Comment On May 01, 2010, at 1:08 PM, cmfhousel wrote:


    First, I have to point out the irony that there isn't a single Fool member who writes as persistently and passionately about political matters as you, yet you're appalled that someone else would do the same.

    But to tackle some of your points:

    "you or IIan make a pretense of knowing what is best for us."

    We're just sharing our feelings. Take a deep breath, count to ten, and accept or reject our views as you wish.

    "I don't care what your political views are; they are no different from politicians who make the same claims that they know what is best for us or how it is the best way to run a private enterprise."

    Many people, including me, don't care about your political views either, but we still encourage you to share them because debate is an awesome thing.

    "You believe, as do the politicians that regulation is absolutely necessary and must therefore be instituted so nobody will get hurt."

    Basically. Swap "nobody" with "those not involved with the banks' activities," and you've summarized my feelings. Also, I'd like to propose the outlandish theory that just because someone disagrees with you doesn't mean they're automatically wrong.

    "All I am asking as a subscriber is don't sit there and pretend to know what is best for me. You do not and can not."

    We don't pretend to know what's best for you. We're just sharing our ideas. If you disagree with us this much, and i know you do, I'd encourage you to call your congressmen and tell 'em that you do not support the SAFE Banking Act. Or whatever you want; just do as you wish man. We're not forcing anything down your throat.

    But if you're really this appalled at us sharing our views, a website that's dedicated to sharing a broad set of perspectives may not be for you. Frankly, I think it's funny that someone who is as passionate about free markets and liberty as you is basically telling me to shut up.

  • Report this Comment On May 01, 2010, at 1:21 PM, TMFDiogenes wrote:


    Morgan and I write articles expressing our opinions about legislative issues that have a direct impact on our investments and economy. We're not infallible wizards behind the curtain who pretend to "know what's best for you." That's why the article is written with our names in the bylines -- it's our opinion. There's pros and cons to everything. And that's why there's a comment section, so people can provide well-reasoned responses.

    That said, I spend 3-4 hours a day reading about these issues, Morgan is a banking expert, and we don't form our opinions lightly. There's some proposed legislation we like, some of it we hate. Legislation is going to get passed in an attempt to fix some glaring problems because we just had an economic crisis, and we think as citizens it's a good idea to support the good ideas being considered.

    But if someone thinks axiomatically that everything the government ever does is bad -- implying that we should just disband our police, fire, and military as well and let everyone fend for themselves -- well, okay, that's their opinion, and unfortunately there's not much I can say to refute axioms. But because we live in a sufficiently large society (I'm not talking about living in a commune with 12 of our most trust-worthy buddies, but a country of 300 million where some people are trying to rip our faces off), I think we can all agree there are some things we need government to do. It's extremely important for freedom-loving citizens of a democracy to clog up the comments section debating what those things government should do are. Better still, instead of just saying "it must be a bad thing if it's the government that's doing it," let's give reasons why in this instance we think it's a good or bad idea to mandate an upper size limit to private power in a banking oligarchy that's really screwing our country.

    Thanks for the comments, everyone.

    Fool On!


  • Report this Comment On May 02, 2010, at 11:03 AM, dhuddle wrote:

    Morgan and Ilan, Great article! Well researched and logical. Thank you for writing it.

    I think you guys are logical and reasonable but the same can't be said for a lot of the posters here.

    What you are seeing is that surprising number of intelligent people have joined the "Free Market" religion promoted by Ayn Rand. It is a religion to them because they follow it blindly based on faith, not facts, in spite of the fact that there is no country in the world that has the type of utopian "Free Market" they advocate except Somalia, a country without government ruled by warlords and pirates which I wouldn't call a utopia.

    To the Free Market believers:

    1. Even Alan Greenspan, who was mentored by Rand, admitted that the theory failed and almost toppled the economy.

    2. Ayn Rand's real name was Alisa Rosenbaum, she was a Russian immigrant writer. Her father supported the Tsar and the Bolsheviks seized his property, and she was bitter. She was an atheist and opposed public schools and had no business experience. Those facts alone should give you pause. Where would this nation be without God and public schools? Why do you follow the economic teachings of a woman who had no business experience? I think Rand wished for a return of the aristocracy. Would you want the U.S. to become a country where there are only rich and very poor with no significant middle class? That is the way it was in most of the world until about 100 years ago. Is that what you want for the U.S.? That is what unrestricted "Free Markets" have always led to, all through history. Can you show us one example to the contrary?

    3. Tell us a country you admire that has the type of Free Market government you would wish for?

    4. Give us examples of regulations you would repeal or abolish. I would abolish Endangered Species laws and not spend any money on space exploration. What laws or regulations would you change? Re-direct your rage into thinking about something constructive. For example, it would help a lot of people if the law was changed to require insurance companies to reimburse for prescriptions bought in Canada. That is consistent with Free Markets. Would you support that? The Republicans won’t – I have asked my Rep and her people told me they can’t because drugs from Canada might be unsafe.

    5. You obviously have adopted a simple belief: "All government is bad and a total Free Market is good". That is a silly, naive and dangerous philosophy. It is laughable and indicates either a lack of understanding of history or a lack of compassion. There is a reason for almost any law. Speed limits. Weights and Measures. CDC. FDA. Insurance regulations. They all came about for a reason. Are there too many? Sure. But tell us what you would change. Don’t just rant and rave about it

    6. Currently, the % of U.S. wealth that is held by the wealthiest 1% is the highest in almost 100 years, back to the days of the Robber Barons, before Anti-Trust laws were passed. Do you consider that a good trend? Do you believe the U.S. is better off if the wealth and power is in the hands of a few? Are you one of the wealthy who would benefit from that?

    7. Spend some time studying history back and what happens without the Rule of Law and when there are unregulated Free Markets, as there were in the Middle Ages.

    8. Don't believe the Fox News propaganda.

    9. Why do you demonize Obama and attack anyone who says anything good about him or about liberals or Democrats? That is what the RNC would like you to do so they can win back power, but don’t be manipulated. Your hate goes beyond logic. The Democrats aren’t all bad and the Republicans aren’t all good. If you want to change the country stop believing the lies told by any party – think for yourself and support the best people. I will support Corker but not Alexander, for example. In FL, I will support Crist, an independent.

    10. Are any of you Christians? If you are, remember the teachings of Jesus. Two of his main teachings were love and to help the poor. You are preaching hatred of the poor and worship of the rich. I am a Jesus follower. Ayn Rand is an atheist and anti-Christian. You cannot follow her teachings and also those of Jesus because they are the opposite. You need to understand the choices you are making.

  • Report this Comment On May 02, 2010, at 11:18 AM, cmfhousel wrote:

    dhuddle, I'd give you a hug right now if I could. That was a great post.


  • Report this Comment On May 02, 2010, at 3:52 PM, Tiingall wrote:

    I'm not USA born and bread. But as a Churchill Fellow, I was fortunate to spend about six months in the USA looking into the operating of affective learning institutions that utilised an experience based adventure training format to generate the learning outcomes. I was initially shocked/stunned/bewildered at the intensity of review and evaluation sessions. After a while, I realised this is the only way to get through the thick skull of most USA residents to create any undertanding of a problem and the need for change.

    What causes this ignorant, self-focussed, insensitive approcah to life is still a mystery; to me anyway. Perhaps it's the constant bombardment of advertising; people need to put up a thick filter to preserve their self-concept. Perhaps it's the inward focus of life in most institutions; including learning institutions. Perhaps it's the public administration systems that put priority on local needs/wants, rather then also incorporating a broader national perspective to help create local solutions.

    Perhaps it's the fact that up to 15 years ago only 10% of USA citizens had a passport and ventured outside to see what the rest of the world is really like. That has shifted, now about 15% of USA citizens have a passport. Still dangerously inward focussed.

    Whatever the cause, the consequences are reguarly monumental:

    1. It took the Japanese to attack Pearl Harbour before the USA populace would officially enter a fight that was already destrying millions of lives in other places. There was no compassion for other people who were suffereing, until someone really stuck it to you. Only then did the giant wake up. Before that, the USA was in denial and turned a blind eye.

    2. More recently, people had to drive airplanes into some buildings to get you to realise there is a problem in Afganistan. That this problem existed did not get through your thick skulls previously, even when someone set off a bomb in the World Trade Centre. No alram bells, no antenna twitching, no sensitivity to what's going on beyond your individual personal spaces. Apparently the security services were too parochial to share information that might have prevented the problem. Too busy doing their own things and protecting theirn own turf.

    3. How long did it take for the rest of the USA to start to help New Orleans in any meaningful way when they were suffering dues to Katrina?

    Someone has to really stick it to you before you guys seem capable of waking up. And when you do, it seems that you can only respond to one concern at a time; you are not multi-tasking in that sense. You put a massive effort into that one task - because you are so far behind that you need to catch up fast - and during that process, all other smaller or growing isssues are ignored, until they get to be big, dangerous and catastrophic, at which point that topic gets to be top priority and all else is ignored or forgotten. So a new cycle of ignorance begins.

    Institutionalised Anarchy is the term I use to describe the USA operating style. One issue/topic dominates at the expense of all others until onother gets to be so big and catastrophic that it becomes the top topic; at the expense of all others until there is another which rises up and creates a monumental disturbance to then be the top of the pile.

    Similarly, economic cycles in the USA also slam from one extreme to the other. People who know there is an impending problem do nothing about it (well, except to take personal profit from the situation while ignoring the suffering this causes), until the whole place goes into a wild downward spiral and equally dramatic and massive action must be taken to fix the now enormous problem.

    You guys seem to be too thick to see the writing on the wall and act to avoid the abyss. Every time it happens there subsequently appear many people who were ringing the warning bells, but no one listened until the catastrophy struck. Think about the Challenger disaster, World War 2 and planes in the Twin Towers. All horrible events.

    The present economic implode seems to have a similar pattern. Another wild gyration from the extreme of boom to the extreme of bust; which then required equally extreme and very expensive remedial action, with losts of collateral damage. If only people listened.

    It reminds me of my experience buying a hotdog from a NY street vender. Great hotdog, great selling style, and big sales, but despite standing there for five minutes after he handed me my hotdog, I could not get his attention to take my payment. Eventually I left. Too busy doing his own thing to realise what was happening, right there in front of his face. But he was the ultimate looser. I walked away with an excellent hotdog.

    The s... really has hit the fan - and it's splattering all around the world - with your latest myopic economic gyration. Please take this opportunity to clean out your bad players and your bad systems and your bad products and put in place some procedures to avoiud a repeat. Othewise someone else will walk away with your hotdog and you'll be left wondering why your working hard but the cash register is empty at the end of the day.



  • Report this Comment On May 02, 2010, at 4:03 PM, dhuddle wrote:

    @ Tiingall - Good point. Thought provoking. But I'll be surprised if some people don't slam you. That is the norm today - attack the messenger or anyone who disagrees with the extremists.

  • Report this Comment On May 02, 2010, at 6:37 PM, HarryCaraysGhost wrote:

    Are'nt most folks in a credit union by now?

  • Report this Comment On May 03, 2010, at 8:50 AM, xetn wrote:


    1st. What does Ayn Rand have to do with anything?

    2nd Greenspan was no free-market advocate, he worked for the government.

    3rd: What does Jesus have to do with markets?

    4th: "That is what unrestricted "Free Markets" have always led to, all through history. Can you show us one example to the contrary? Please show your proof of this assertion.

    5th: I am not a Democrat or Republican. I am not a fanatic. I am not a liberal or conservative except as it applies to finance. My religious views are my own. I do believe that there is nothing that government does that can not be done better and cheaper by private enterprise (does the Post Office ring a bell?).

    I believe in giving to the less fortunate but on my own terms, not by mandate. And as for Jesus, his only believed in one government:God's.

    I have never watch Fox News. As for the top earners, they also pay over 90% of the taxes and the bottom 50 % pay none. What is your point? Do you despise wealth and people that produce?

    I see we are all socialist and Keynesians here. I am not. As for me, I am officially out of here. Good luck!

  • Report this Comment On May 03, 2010, at 8:51 AM, varney wrote:


    You've set up a straw man (along with Ilan). Conservatives aren't against all government at all. We are for limited government. The government should protect people against fraud, as that is a form of theft, and protection of personal property rights is (or at least should be) one of government's main purposes. But to ignore the role of government regulation (CRA and mark-to-market) in causing this crisis is to miss the point, and risk either strangling the market with over-regulation or causing a new crisis with misplaced regulation.

    To recognize that greed was implicit in the crisis is akin to saying "he drowned because he couldn't breathe water". DUH! If you believe that you can ever have a system managed by people who aren't greedy, then you're living in a dream world. People are greedy by nature; that's why it make some people so upset when someone else is making more than they can ever hope to.

    The problem was not greed - greed is a constant, and as long as human beings walk the earth, there will be greed. The question is, what's the best way to contain and channel that greed to do the most good. Free markets with APPROPRIATE regulation are the answer. Limiting the size of financial institutions (aside from ensuring monopolies don't develop) is not what I consider appropriate regulation. Regulating things like CDOs to ensure that the company selling them has the assets to pay them off IS appropriate regulation, because selling insurance you can't hope to pay off is essentially fraud.

    And dhuddle, I too am a follower of Jesus. Please point me to the specific verse where Jesus suggests we should forcibly take money from others to help the poor. You won't find it. It is our own personal responsibility to help those less fortunate, and every study that's been done shows that conservatives give more of everything measurable (time, money, blood) than liberals do. Trying to tear down the "rich" is not concern for the poor; it is envy.

    I suggest, dhuddle, that you open your mind a little. Your post shows clearly that you have made use of simplifications, strawman arguments, and baseless assumptions to "inform" your opinion of conservatives.


  • Report this Comment On May 03, 2010, at 9:46 AM, varney wrote:


    You (along with Ilan) have done a good job setting up a strawman: conservatives are all wealthy Fox-News-watching anti-government Ayn Rand followers who hate the poor. Even I would want to distance myself from such people. But it isn't a true portrait of what conservatives believe.

    Conservatives aren't against all government. We're for limited government. Government has many important roles, including protection of personal property rights. Laws preventing fraud (which equates to theft) are well within the limited purpose of government. Lack of regulation requiring proper capital requirements for the selling of CDOs (essentially insurance - and selling insurance you can't hope to pay of is fraud) was one of the big culprits in this mess.

    But to ignore the role of misplaced regulation (requirements on mortgages to under-served borrowers, artificially low interest rates, mark-to-market) on the crisis is to risk creating even more misplaced regulation that will at best hamper the markets, and at worst help create yet another crisis.

    Note that I too am a follower of Jesus. I'd like you to point me to the verse where He suggests that we should forcibly take money from others to help the poor. I'll save you some time - you won't find it. Helping the poor is a personal responsibility for all of us. That is why every study I've ever seen shows that conservatives give more of everything measurable (time, money, blood) than liberals despite the fact that liberals have a higher median income. Demonizing and seeking to punish the "rich" isn't concern for the poor; it's envy.

    And to suggest that the middle ages (nobility and serfs) resemble a free market democracy is simply incorrect. Neither do monopolistic entities embody a free market, which is why most conservatives aren't against anti-trust regulations. But the current proposed bill has nothing to do with preventing monopolies (as I've pointed out, no bank has as much as 16% of the total assets of the top 50 banks).

    The answer to avoiding a new crisis isn't tighter regulation; it's appropriate regulation. The government should ensure that markets remain free and that fraud is prevented, but no more.


  • Report this Comment On May 03, 2010, at 9:47 AM, varney wrote:

    (sorry for the some-what repeat. First post hadn't appeared 40+ minutes after I posted it, so I thought it had been lost)

  • Report this Comment On May 03, 2010, at 10:13 AM, varney wrote:


    Take a look at

    What you'll find is that the US gives more in foreign aid than any other country. Moreover, you'll find that roughly 80% of this giving is private, not governmental, and that the privately donated funds and time are more efficient (one study suggests, for example, that the cost of privately funded doctors serving in pediatric aids programs is 1/3 the cost of government funded doctors).

    But of course, we're inwardly focused.

    Americans give more money to charity within the borders of the US than any other country does within it's own borders as well. Your Katrina example is a bad one, as charitable giving for Katrina was huge (corporations and private citizens gave vast amounts in addition to governmental help). The failure in Katrina was on the part of the local and state governments, who did not take proper care in their first responder duties, and waited too late to authorize the federal government to help.

    As to your comments on 9/11 and Pearl Harbor, you can see in Iraq what happens if the US tries to act to avoid a later crisis. And to suggest we didn't "awaken" until Pearl Harbor is ignore the roughly 3/4 of a Trillion (yes with a T - in today's dollars) in equipment that we provided to the Allied nations in the Lend-Lease program which was authorized in March of 1941 (9 months PRIOR to the Pearl Harbor attack).

    And as to your story about how you stole a hot dog, I found your statement "But he was the ultimate looser" ironic. I wonder if that "looser" has a better grasp on the English language than you seem to. Most Americans faced with that situation will simply leave their payment on the cart or demand attention (if they don't have an appropriately sized denomination to just leave it) rather than stealing.

  • Report this Comment On May 03, 2010, at 5:14 PM, TMFDiogenes wrote:

    Hey varney,

    I think if you reread the last paragraph in my comment you'll see that I didn't mean to set up a straw man for conservatives:

    "I think we can all agree there are some things we need government to do. It's extremely important for freedom-loving citizens of a democracy to clog up the comments section debating what those things government should do are. Better still, instead of just saying "it must be a bad thing if it's the government that's doing it," let's give reasons why in this instance we think it's a good or bad idea to mandate an upper size limit to private power in a banking oligarchy that's really screwing our country."

    I really am glad to have dissenting comments on our article and am grateful for the nuance you bring. I was only responding specifically to absolutist comments such as:

    "To suggest that Big Banking should be regulated is akin to Aesop's Mice in Council suggesting that the Cat should wear a bell."

    "All government intervention/regulation (over 80000 pages of it in the Federal Register) amounts to central planning."

    Morgan and I totally agree with you on the need to do something about CDSs -- selling insurance protection you can't afford to pay off is, as you say, fraudulent.

    You acknowledge that breaking up companies that have a badly distorting effect on competition is part of government's proper role. I would also add that we need government to protect the public from certain terrible negative externalities. Insanely large banking, I think, fits both categories. When a bank knows that its destruction would necessarily inflict unacceptably horrendous economic devastation, it knows it can expect a bailout from the public should things go wrong. This leads them to take larger risks, because they get the upside, while we hold the downside. This, along with panic-induced mergers, allows them to grow larger, reinforcing the reality and belief that they are too big to allow to fail.

    As I see it, we have four options:

    1. Accept that there will be banking failures every 5-7 years or so (as JPM CEO Jamie Dimon suggested we should.) Do nothing and enjoy the inevitable Depression(s).

    2. Accept that there will be banking failures every 5-7 years or so. Make regular bailouts as necessary, and go bankrupt.

    3. Regulate banks so there aren't panics every 5-7 years. (What you're advocating.) Keep tbtf banks in place, so they still have an incentive to lobby to have regulation gutted so they can go back to taking insane risks. Cross our fingers and pretend Congress will be able to stand up to them for decades, despite the fact that even 2 years after a financial collapse they can barely cobble together a fairly weak bill that (might?) put derivatives on exchanges and clearinghouses.

    4. Regulate banks and break them up so that at least they won't have an enormous incentive to capture Congress and regulators and take the largest possible gambles (what Morgan and I propose.)

    (Also, regarding your question about looking at the 6 largest investment banks in 1995, I think the numbers would look even more dramatic by comparison. Goldman Sachs had $146 billion in liabilities in 1996 -- versus $767 billion today --, or about 1.7% of inflation adjusted GDP at the time.)

    Thanks for posting,


  • Report this Comment On May 04, 2010, at 8:32 AM, varney wrote:


    I guess where we part company is that I disagree with your analysis of option 3. I believe that if you appropriately regulate financial institutions (to ensure that there is no fraud and that they have sufficient capital to pay off any insurance they've sold), and leave them otherwise free, no bailouts will be necessary because you've removed the domino effect created by the fraudulent activity that went on. Thus there is no "To Big to Fail" anymore.

    I don't agree that lack of more regulation will result in big bank failures every 5-7 years (I don't personally remember a banking crisis of 2003 or 1998, and I'll bet you that if no "break-up" bill gets passed, we won't have a crisis in 2013/2015). Failures will be much less likely if we stop forcing banks to lend to un-credit- worthy customers (that policy resulted in loosening of lending standards across the board) and eliminate the mark-to-market rule in favor of reasonable but transparent valuation of assets. Housing bubbles will be less likely if we stop artificially controlling interest rates and get rid of this insane notion that "everyone should have a home" (similarly, we have a college tuition bubble caused by the insane notion that "everyone should go to college").

    16% of the market simply isn't big enough to consider breaking a company up for reasons market-distortion. If it were, we'd have to break up the largest companies in nearly every industry in the US.

  • Report this Comment On May 04, 2010, at 4:04 PM, gnorton100 wrote:

    Funny that nobody has moved to RE-INSTATE the 1933 Glass-Seagall act that was repealed in 1999.

    The finance industry via the lobbyists got the law was repealed, permitting the runaway over-leveraging of the finance industry, which directly led to current Recession.

    Read the wiki about the act:

    It must be a pretty good law considering ...

    "In Mainland Europe, notably in France, Germany and Italy, an increasing number of think-tanks such as the CEE Council are calling for the adoption of stricter bank regulation through new national and EU-wide legislations based on the Glass-Steagall Act."

  • Report this Comment On May 04, 2010, at 8:00 PM, Tiingall wrote:

    Hi Varney,

    Thanks for the spelling lesson and the local practice about leaving money behind. There is always something to learn.

    I also understand that private philanthropy in the USA is massive, but:

    1. That's because it reflects the fact the USA is skewed towards the extreme end of private and free-market dominance above public sector. In other western countries, a lot of tax money is used to support public benevolent institutions; because it's far more efficient that the government running the same services itself.

    2. Public Benevolent Institutions are receiveing a lot less money now that your greedy bankers and financial wizzards were left unrestrained to rampage around and cripple the world's financial systems. That's why a 2008 French study reported they expected thousands more child deaths per week for the next few years till this is fixed. USA bankers, financial wizzards and finance system policies are killing the same people your personal philanthropy is trying to help. Time to wake up.

    3.Given the anti-philanthropic behaviour of USA bankers and finance people, it's not hard to understand why people in Iceland and Greece - who are suffereing because these people in the USA we should have been able to trust proved themesleves untrustworthy - do not want to pay back their debts to the banks. Why should the people who wrecked the system be rewarded. If I run a business that fails to perform, do the bank execs give me money?

    4. I'm sure private giving to Katrina victims was immense. But after the damage created by poor preparation, poor anticipation, poor management, and slow response for the first week or two. Because the problem was not dealt with effectively, and therefore became a disaster, there was a LOT more to fix and it cost MASSES more to do it. Just like the financial mess created by a banking and finance industry that abdicated on its responsibility to self-police, operating within a system that allowed such culpable action to go unchecked, and with political processes that facilitated buying out the peoples' elected representatives who should have been looking out for everyone's interests, and the long term perspective.

    That old saying "a stitch in time saves nine" could well be relevent to what happend in New Orleans and the world as a result of clear failures in the USA sytems that should have protected people in both instances. In both cases, a lot of people are dead and a lot more are still suffering. And in the present financial collapse, are yet to die.

    Hands up all the USA residents who are proud of creating all this death and suffering. Very few I expect. So isn't that a reason to get mobalised and change the existing systems - and people - that clearly do not work? Why are you still paying the big salaries (from your money) to the leaders who created the circumstances to precipitate this debarcle and the predatory profiteers who carried it out?

    I know it's hard to plot the course and lead when the USA is rightfully acknowledged as the world leader in so many aspects of life, economic development and philanthropy. But there are smart people in other countries who can see your mistakes and they will take the lead if you guys are too thick to see, acknowledge and learn from those mistakes.

    In a modern world with access to knowlege, the media and other means of communication to inform and educate, there is a new definition of freedom; "the opporrtunity to police yourself before someone else - who knows or cares nothing for your goals or values - does it for you".

    Please wake up over there. I'd hate to think what life might become if you guys drop the ball and some other big national players take world economic, technological and financial leadership from you.

  • Report this Comment On May 05, 2010, at 10:21 AM, varney wrote:


    No problem on the lessons, though I'm surprised you needed a lesson in not stealing....

    1) The USA is at the extreme end? US government expenditures on welfare programs total $5079 per capita, compared with $5266 for the UK (numbers from 2001 - the latest year for which I could find a comparison; the US expenditures will be even higher today given expansions in unemployment, welfare, and increases in the food stamp program). Wow, that $187 per person is extreme! Of course, we also give twice as much in private funds as a percentage of GDP (2.2% vs. 1.1% - numbers from 2005) as citizens in the "more enlightened" UK (which is the leader among European nations), which equates to a roughly $500 per capita delta. Overall, this results in MORE total spending (on a per capita basis) to help the less fortunate, and more of it is done by private institutions rather than the government, which you noted yourself is more efficient.

    2) If by a lot you mean 2%, then you're statement is true. That was the drop in giving from 2007-2008 in the US, 2%. Projections for 2009 indicate it may be down another 3-4% (though final numbers aren't in); hardly a huge drop in giving. Of course, government aid is up significantly over that same time period (loosening of welfare restrictions, increased unemployment, increased food stamps). And note that we could sustain another 40%+ drop in private giving before we "greedy, inwardly focused" Americans were down to the level of the UK (again, the leader among European nations).

    3) There's no response to your point here because you've started with the bizarre premise that USA finance people are anti-philanthropic, which is incorrect. The "rich" in the US (over $200K/yr) give an average of 7.4% of their income to charity; that figure in the UK is 1.2%! Now just who is anti-philanthropic? As to failures, many of the "failures" were caused by a government enforced accounting rule that bears little resemblance to reality. Mark-to-market caused many banks to fail to maintain the correct level of capital even though the idea of their mortgage assets actually being worth only 50 cents on the dollar was ludicrous. But I see why you understand people not wanting to pay off their debts, given your view that stealing a hot dog from someone makes the victim a loser.

    4) Failures for Katrina had nothing to do with the financial industry. Money was appropriated year after year to shore up the levees in New Orleans, but local officials chose to use that money for other purposes. Just exactly how do you propose to pin that on Wall Street?

    The problem is that you have misinterpreted the current situation, assuming that if the US government just controlled the private sector more, all the problems would go away. The fact is that much of the problem was created by too much (inappropriate) control by the government: they held interest rates artificially low, forced banks to loosen credit standards and lend money to people who were not credit worthy (and who like you, later decided that it was somehow OK to not try to pay off their debts), and forced banks to value assets at unrealistically low levels. The result of this was a massive crisis that would never have developed if it weren't for government interference. The sad part is that the end result is likely to be increased regulation, which will at best hamper the market and at worst lead to another crisis.

    The US is likely to lose it's lead in the world economy as it moves away from free markets while other, more populous nations are moving towards free markets. Our free markets have enabled us to economically dominate nations with 3-6 times our population for decades, but we're moving in the wrong direction while China and India are moving in the right one. At some point, their markets will be free enough and ours restricted enough that we can no longer overcome the headwinds of a population deficit.

    I'm not sure why you have this anti-American bias, but a simple reading of the facts will show that Americans are more generous in total than the citizens of any other nation on the planet. And where we fail to do the most good, it is usually because of government involvement, not lack of government control. Look at malaria, which infects nearly a quarter of a billion people and kills a million each year. We have a solution for malaria called DDT. It was used extensively in the US in the mid 20th century with no harm to anything but mosquitos and (perhaps) the eggs of a few species of birds; it wiped malaria out. We could do the same in Africa, but our government (and the governments of most other nations) won't allow it because of the potential harm to birds, even though we now know we could use it in much lower concentrations and still be effective at stopping the spread of malaria. These are the impersonal (and morally repugnant) decisions of government; saving birds at the costs of 10s of millions of people's lives over the past few decades. Government interference is responsible for the death of these people. Who's proud of that? Government interference in the 1930s in the US caused the Depression to drag on far longer than it should have, causing death. Who's proud of that? No, I'm not proud of the misery created by the latest banking crisis. But the difference is that I lay the blame where it belongs: on excess government regulation.

    Government taking on the role of aid to the poor leads to similarly impersonal decisions. The result is that many people (especially progressives) no longer see a need to give to the poor, because "that's the government's job". The problem is that the government does a really terrible job at it, and the poor begin to look on it not as help from a fellow human, but as something they are owed (hence the name "entitlement programs"). This results in a lack of motivation to "get off" of public assistance. And all the while, the interference of the government drags on the real engine that can lift people out of poverty: the free market. Haven't we learned anything from the numerous failed experiments with government control from the 20th century? Why do we continue to repeat the cycle of government control that has been shown so many times to lead to ruin?

  • Report this Comment On May 05, 2010, at 4:16 PM, Tiingall wrote:

    Hi Varney,

    I can see that you are certainly anti-government. I'm also not a big fan of the imprecise and commonly arrogant methods which people in government choose to use when carrying out government business. I'd much rather see the private sector in total control, looking into the future, managing with precision, applying ethical business practices, and policing itself to maintian it's credibility and public confidence.

    But I learnt in a series of Fool posts over a year ago, that big banks in the USA launched a conserted campaign, spending million of depositors dollars to get the result they wanted - in Clinton's time if I recall correctly - to change the bankruptcy rules and other government regulations so they could launch their predatory loan scam operation which seemed to trigger the worst in personal ethical qualities for hundreds of thousands of people in the banking and finance industry who should have known better.

    Lots of others banks got in on the act. I recall that HSBC in the USA had an operation with over 700 people in a USA state where they had no actual banks; this operation was spearheading their foray into the scam. Once it became clear that the game was up, this operation was closed overnight in an attempt to hide their complicity. HSBC has been writing off over US$50M per day in depositor and investor funds as lenders defaulted and housing prices plummeted. Last year they had to go out to the market and sell more shares to cover the losses from this private sector driven punge into greed.

    Since the guys running HSBC - and other banks - are presumably the brightest we have (judging by their salaries and bonuses), why did they fail to see this problem they deliberately created and then deliberately plunged into. Why did they not use their superior capabilities and massive financial analysis resources to look after the people who trusted them with their savings and investments. We pay them millions to do it, surely that is enough. Surely they did not need lots more millions of our money?

    Surely they did not need to spread the damage of their greed to others all around the world by creating false derivatives to sell to governments and private investors? Surely their sense of professional responsibility would not allow them to take such devious, predatory and predictably catastrophic actions.

    What the private sector bankers and finance wizzards demonstrated is they choose to operate in an ethical vacuum. And they continue to do so. They continue to expect their massive salaries for ripping people off, for wrecking the world economy, and for causing so much human suffering and death. They have not shown any signs of remorse for their actions - such as giving back our money, selling off their yachts, luxury homes etc.

    The private sector bankers and finance wizzards have totally undermined their public credability. They have demonstrated they put their personal greed way above their professional resonsibility and duty of care towards to people who trusted them with their savings, and the people who took their advice about taking a sub-prime loan.

    Their greed, immorality and total lack of professional responsibility has driven people to the only non-violent alternative that seems to have the power to control their anti-social behaviour - the government. Bad though it might seem, it's the answer people are forced towards because the private sector businesses and people they thought they could trust have proven themselves totally corrupt.

    If the private sector banks and finance businesses took the initiative to admit their responsibility, to clear its corridors of the worst of the predatory scum, for CEOs and Directors to resign their posts, sell their assets and return the public's money, and to change their operating procedures to prevent a repeat, people might be reassured. But it does not seem people in the banking and finance industry are willing to do that. So, they get the imprecise and no doubt damaging alternative - draconian government intervention.

    As I said in my previous post, freedom is "the opporrtunity to police yourself before someone else - who knows or cares nothing for your goals or values - does it for you". In this case, the government will also not know the degree of precision and the techniques to do what the bankers and finance people should have done. They can just impose restrictions.

    No doubt we'll all suffer somewhat from the need to have the government step in to restrain the people in the banking and finance businesses, but it's because those people on the inside - who should know the details to finely tune and manage the system for the benfit of all - failed us. They used their inside knowledge to rip us off. They abused the trust we placed in them.

    They have proven themselves to be immoral, unethical and untrustworthy. They have undermined peoples' faith in the private sector's ability to responsibly manage the economy and our money, and to operate their business in an ethical manner. That's why people are turning to the government; imprecise though it may be. Given the deplorable practices and immorality of the people working in the private banking and finance sector, it's the lesser of two evils.

  • Report this Comment On May 06, 2010, at 2:01 PM, varney wrote:


    You have to dig deeper.

    Yes, these folks were motivated by greed, as (like it or not) we all are. It would have been nice if their own personal conscience was sufficient to keep them from bringing down the whole system, but expecting that will be the case is wishful thinking.

    So what about the free market keeps greed from bringing us to ruin? That very same greed! For ages, banks did not make risky mortgages because they did not want to lose their money. Their tried and true rules (20% down payments, limits on mortgage/income and debt/income ratios) kept them from experiencing massive defaults.

    So what happened to change that? Did the financial industry suddenly become stupid or short-sighted? No.

    What happened was that the CRA and the courts were used to force banks to change their standards. This didn't happen directly, but the fact that the outcomes weren't equal among different segments of society were used as "evidence" of bias in the banking system. The tried an true rules that banks had used for decades were suddently deemed discriminatory, and regardless of what it took, banks had to "change their ways" and start offering financing to those under-served segments of society.

    The problem is that the banks' policies weren't discriminatory at all. As you've noted, finance people (like all people) are greedy. If they can make money off of someone, they will. Their policies were in place to minimize the chances of default. Unfortunatly, community activists didn't see it that way; pressure from them led the legislative and judicial hammers that dislodged banks from sound practices.

    So now, banks were required to make loans to individuals who they had previously deemed uncreditwothy. To make this work, they had to loosen lending standards. Lower down payments, no down payments, higher debt/income ratios and "no-doc" loans were the result. And to boot, banks were villified for charging higher interest rates to these uncreditworthy individuals.

    So what did banks do to try to ameliorate this undue risk they had been forced into? They turned to securitization.With the repeal of Glass-Steagal, banks were allowed to buy these mortgage securities, and the loans in the securities were applicable to meeting a portion of the requirements for lending to under-served communities. Mortgage securitization had been around for some time, but it really took off once the banks were forced into loosening their standards and when (in 2005) securities were allowed to be considered in meeting CRA requirements. Why would they want to turn to mortgage-backed securities?? Imagine you're forced to lend $100,000 to questionable borrowers. Would you deem it safer to make one risky $100,000 or 100,000 risky $1 loans. Securitization provided a way for banks to try to offset this risk. In addition, they took out "insurance" against failure of these mortgage-backed securities in the form of CDOs.

    So, because of legislative and judicial actions banks were forced to start using risky business practices. They did what they could (through securitization and CDOs) to reduce the risk.

    Now, you will no doubt object that only a portion of the loans in default were subprime loans, and the effects of lending to under-served individuals can't be blamed for the defaults on other loans. But the fact is that banks (reasoning that having tighter standards for their most credit-worthy customers made little sense) loosened standards across the board. This meant that even credit-worthy borrowers often got in over their heads. Sometimes this was a matter of wanting to "move up" to a better house, but it also had a lot to do with speculation - again, greed reared it's ugly head, but it was the consumer that was greedy here. I heard a number of people say, during this time, that you should buy the biggest house you can possibly stretch to afford because property values were going up, up, up (because of the over-suply of credit caused by the forced change in lending standards and interest rates that the government held artificially low). And in the end, many of these people simply walked away from their mortgages (sometimes after buying another house in the same neigborhood for 30% or more less and moving a couple blocks) with no attempt to pay back the lender because they were "under-water". No doubt these folks considered their lenders the "loser" much like your hot-dog vender.

    Of course, you'll also object that the majority of the faulty loans that were made by institutions (including mortgage brokers) that weren't under CRA control. You'd be right about that particular, but the implication that this fact lets the CRA off the hook is faulty. Under the "old" system of conservative lending standards, no mortgage broker would have been able to make these loans because no-one would buy them from him. But under the "new" system ("everyone deserves to own a home") they could make the riskiest loans imaginable and still sell them off because the appetite for securities that were backed by loans to "low and middle income" folks was ravenous because financial institutions needed these loans, and preferred to get them through securities (where they were only exposed to a small slice of each bad loan) rather than making the loans themselves (where they were exposed to the entirety of each bad loan).

    To suggest that any of this has taught us that the free market doesn't work is ludicrous. IT WAS NOT A FREE MARKET!! The government forced financial institutions to abandon their conservative lending practices. In their effort to manage the risk this introduced, banks enabled unscrupulous people to make ultra-risky loans because they new the banks needed such loans to keep in the good graces of the government and the courts.

    I don't want more regulation. What I want is proper regulation. Keep fraud from happening. Require borrowers to repay loans (most states have no-recourse laws on mortgages which enables borrowers to "walk away" from a home that has dropped in value without repaying the difference). But leave the banks alone to set reasonable standards rather than bullying them to loosen standards so "everyone can own a home".

    Characterizing me as anti-government is incorrect. I'm not anti-government. I'm pro-proper-government. For example, I've pointed out that the government missed the boat on CDOs, which were essentially insurance but not regulated like insurance. The result was that companies sold CDOs they had no hope of paying off (AIG) and companies bought CDOs even when they had no exposure to the underlying securities (naked credit default swaps). But CDOs are insurance (one party pays premiums, the other party pays out a big sum if some adverse event happens - if it walks like a duck and quacks like a duck....) and should have been regulated as such. If they had been, AIG would not have needed a bailout, and the crisis may have been relatively minor in comparison. But again, had it not been for government interference in lending practices (along with "mark-to-market" and artificially low interest rates), the crisis would never have happened in the first place.

  • Report this Comment On May 06, 2010, at 2:05 PM, varney wrote:

    And as long as we're talking about immorality, I think the morality of folks on Wall Street stacks up pretty well compared to the morality of politicians. Again, it's politicians who are the culprits of the deaths of roughly 1 million people each year in the third world due to malaria. Can we really consider them the lesser of two evils?

    The founders of this country didn't think so, which was why they put so many restrictions on government. Unfortunately, we've relaxed those restrictions over the years (ignoring some entirely).

  • Report this Comment On May 07, 2010, at 9:57 PM, Tiingall wrote:

    Hi Varney,

    I can see you appear to be very well aware of the root causes of these problems. Some questions to help me understand what causes seemingly predictable outcomes to occur:

    You did not acknowledge my reference to the previous post on MF that big USA banks spent millions to lobby government to get the rules changes so they could embark on this predatory lending campaign? True or not?

    Your comment suggests everyone is driven by greed. The majority of people I deal with are not motivated by greed, but by a more human set of values. I have been told a few times by people working in the banking and finance industry in the USA that the world works on greed. My conclusion is that the banking and finance industry in the USA thinks that is how the world works and can't see any other perspective of the world. Is this a sgn of the problem I descrbed previously of being too thick to even consider there might be alternate paradigm. And you stated "But of course, we're inwardly focused." What do you think?

    You appear convinced you know what lead the banking and finance industry in the USA into such a big disaster with massive worldwide consequences; including 3 bank employees fire-bombed in Greece a few days ago. What stopped you from applying your wisdom to prevent this predictable implosion?

    Was it the greed you stated motivates everyone; "as (like it or not) we all are" ?

    Did you walk the talk? Or did you cash in?

  • Report this Comment On May 08, 2010, at 11:52 PM, MyDonkey wrote:

    Well, folks, Too-Big-To-Fail is alive and well, as the Ayes (33) lost to the Nays (61) two days ago in a vote on the Brown amendment:

    The Cat has once again refused to wear a bell, because doing so would not be in the Cat's best interest. Writing and talking about it does nothing. Next time you write to your representatives, maybe include a check for 10 or 20K in an attempt to buy their vote. But remember, you'd be bidding against lobbyists giving hundreds of thousands, so don't get your hopes up too high.

    If we Mice were serious about trying to influence the Cat's behavior, we would organize strikes and take to the streets in protests all over the country. In short, start a revolution.

    But apparently we're not even close to becoming serious. The vast majority of Americans today are blissful entertainment addicts who spend most of their leisure time under the spell of computers and television. We would much rather watch "reality" shows on TV than try to deal with the real world outside our cozy livingrooms.

    An extended power outage would certainly change that. With our "drug supply" cut off, we'd become helpless babbling idiots within days. No electricity to run lights, appliances, and motors for our furnaces & water pumps, and when diesel/gasoline runs out in a few days, no fuel for portable generators, and no fuel for trucks to bring food & water and other necessities. I wish it weren't the case but I honestly believe it's going to take some drastic event (such as a lengthy blackout) to get our full attention.

  • Report this Comment On May 10, 2010, at 9:55 AM, varney wrote:


    Banks lobbied to reduce certain regulations which shouldn't have been in force in the first place. The "predatory lending" to which you refer is something that the banks were FORCED INTO by regulations that required them to make loans to individuals who weren't credit-worthy.

    Your suggestion that you live in some Utopian community where everyone is altruistic falls flat. Whether you're willing to admit it or not, people are driven by selfish instincts; we are all sinful by nature. As you've noted, you considered your time more valuable than a hot dog vendor's rightfully earned money; your selfishness led you to walk away without paying (and furthermore to justify your actions by calling the vendor a loser). Suggesting that we can set up a society based on altruistic behavior is naive.

    As to what I did, I voted for candidates that were less likely to try to force banks into lending money to individuals who couldn't (or wouldn't), which is pretty much all that I can do in my position. I don't work in or near the financial industry; I'm an engineer.

    I did not cash in. I lost roughly half of my savings for retirement and college (though I've gained that back as the market has run back up).

    But again, it's people's selfishness, greed and envy that drives them to "punish" the rich, who they incorrectly assume must be the cause of all this trouble (since anyone who has "too much" money must be evil). The blame has been laid at the wrong feet; all these attempts to use the government to force "altruistic behavior" have resulted in ruin. Forced altruism is soulless and will never work.

  • Report this Comment On May 10, 2010, at 4:55 PM, Tiingall wrote:

    Hi Varney,

    Thanks, I've learnt a little more again. Some comments, for what they are worth:

    I'm still amazed that the so called professionals who worked in the banks - and a lot more small time loan agents who chose to get into the action - could be so devoid of any compassion for others, or any business ethincs, that despite knowing the government regulation to be flawed, they jumped in and knowingly exploited their fellow citizens. There must be something fundamentally wrong with individuals and society when that can happen. Is that soulless?

    That extreme interpretation of the profit motive makes me recall a biblical reference to clearing out the money changers from the temple. And I also recall that under Islam, interest on loaned money is not permitted; their approch to banking is more that the bank is taking a share in the enterprise - and will live with the success or failure - rather than getting a return regardless.

    I have all my insurances with an Islamic insurance company. The system is based on the principle that everyone puts some money into a pot so those who have a problem can get help at their moment of need. When I renew my policy, I get a deduction off the new premium which is my share of the money remaining in last year's pot; after admin costs and staff salaries are also removed. Everyone profits from that system. I guess it's a more altruistic concept of profit than the narrowly defined - greed based - concept that has led to the implosion of the USA banking and finance systems.

    I agree that it's incorrect to assume that anyone who is rich is somehow bad. Many rich people have worked hard, been creative, energetic and conscientious to get to their situation, and have in the process, helped to make a lot of employees, suppiers etc wealthy too.

    But there are clearly a lot of people in the USA banking and finance sector who are rich - or trying to be rich - by doing nothing more than gambling with shares and money. Many of the convoluted finance products seem deliberately designed by create opportunities to win - or lose - by betting on movements of value etc. It's hard to understand how that contributes to productive wealth. That's just being a parasite, trying to live off the productive effort of the people who actually create products, ideas, human advancement and wealth. Lies and cheating associated with the sale of these contrived financial products seem to underpin the collapse, and the active export of this greed based activity to the rest of the world.

    No doubt Europe and other western nations will learn from these problems and put in place positive government legislation to protect themselves from these extremes of the USA cultural interpretation of profit.

    What I see ahead is the possibility the USA will be treated as a pariah state in terms of it's banking and finance operations. A financial terrorist if you like. The failure of the Brown amendment - as reported by MyDonkey - just gives more evidence to people outside that the extreme free-market perspective that lives in the banking and finance sector in the USA is dangerous; and that those people in the USA who should be taking steps to protect everyones' interests, are failing to do their job. They are being bought out by the banking and finance parasites.

    The warning bells are ringing but you guys still can't hear it. Your currency has fallen dramatically against all the major international currencies. The oil and other imports needed to satisfy the extreme consumer based market have increased in price. The USA's conomic power is dwindling because of personal greed, inward focus and lack of altruism.

    I was fortunate not to suffer too much from the USA banking and financial implosion. Althought not an insider, I read the signs - banks deliberately delaying TT transit times to keep the money in their accounts, increases in charges and fees, and a bank employee who spent 40 minutes on the phone from half way around the world trying to convince me that it is normal and OK for a TT to take 8 days transit time. I sold almost all my USA shares and waited. About 12 months later the collapse began. Then I started buying shares again in productive enterprises that do something; giving my savings to the people who actually create wealth.

    One outcome of watching this USA collapse, and learning about the myopic attitudes which underpin it - plus listening to TMF advice - is I'll shift more of my share holding into productive enterprises outside the USA. I'm closing the USA brokerage account I've held for 10 years with the one firm, and signing up with a brokerage outside the USA. The per trade price will be a little higher, but I'm an investor - not a money gambler - so the amount I pay is a relatively small cost compared to the potential loses.

    I expect I'm not the only person who can see that it's become dangerous to rely upon people in the USA's banking and finance system to manage themselves and the industry; partly because of the corrupted people themselves, and partly the corrupt relationship between that industry and government decision making.

    Government "of the people, for the people, by the people" leads to a downward spiral when the key institutions and individuals lack compassion for their fellows, and where personal greed is worshipped above all else.

  • Report this Comment On May 11, 2010, at 9:04 AM, varney wrote:


    How did they "take advantage" of their fellow citizens? By lending them money? They were REQUIRED to do that!

    Yes, some within the system did take advantage of the situation to make the quick buck. But they were only enabled to do so because of the environment created by government interference. Scam artists were able to make absolutely horrible loans because they new the banks were desperate to buy loans to to low-income individuals. Why? Because the government required them to do so!! The result was that unethical people were enabled (as a result of government regulation) to make money with no risk that they would be left holding the bag.

    You've completely misunderstood my point about greed.

    First off, whether you like to admit it or not, everyone is greedy to some extent. That includes you. Do you have anything you don't need? A mobile phone? A car with any unnecessary features (GPS, CD player, air conditioning)? Is your dwelling larger than you need to simply prepare meals and sleep? If so, you are using money for an enhanced lifestyle that you could instead give to others less fortunate. Why? Greed.

    But more importantly, the point is to understand that there will always be "very greedy" people looking to take advantage of the system in unscrupulous ways. You have to know this when designing regulation and not enable this type of behavior by forcing financial institutions to make bad loans.

    Without the tremendous number of bad loans, there would have been no crisis. Without the government regulations which forced lenders to offer mortgages to uncreditworthy individuals, and which artificially kept interest rates low (both of which led to an artificially high demand for housing), there would not have been a tremendous number of bad loans.

    Government failed by improper regulation. The answer isn't to stuff more regulation into the system!! The answer is to remove the regulation which caused the moral hazard in the first place!

    I agree that the warning bells are ringing. But what they are warning us of is what happens when government takes too big a hand in trying to control the economy and "help" people. What's happening in Greece and throughout Europe? It's becoming clear that massive social program spending is unsustainable. Will European governments listen to that warning and step back? The citizenry of Greece certainly isn't heeding the warning. They want their transfer payments to continue (greed). Will the US government listen to that warning and stop the rapid expansion of entitlement spending that's ready to swallow us whole?

    Sadly, I think we're learning the wrong lesson and focusing on the wrong people as "villains". Certainly, there were unscrupulous people in the finance industry. But they didn't have the power to force banks into buying worthless mortgages from mortgage brokers - it was the government who did that. And the unscrupulous people in the finance industry aren't responsible for the massive transfer payments that our government has signed up for. I can't tell you how many people I've talked to who are glad to have extensions for unemployment payments so that they "don't have to look for a job very hard", or the how many have offered to sell their left over monthly food stamps (because food stamps provides far more money than necessary) at 50¢ on the dollar.

    It is government who is responsible for this crisis, and government who is running us into the ground. More regulation and more transfer payments are not the answer, they are the problem!

  • Report this Comment On May 11, 2010, at 9:12 AM, varney wrote:

    I thought this deserved a separate post.

    Tiingall wrote:

    'Government "of the people, for the people, by the people" leads to a downward spiral...'

    This is exactly the thinking which is dangerous, and which leads to totalitarian regimes. "The people don't know enough to govern themselves. We the government bureaucrats know best."

    '... when the key institutions and individuals lack compassion for their fellows, and where personal greed is worshipped above all else.'

    Greed is not worshiped in the US. But we're not naive enough to believe that it doesn't exist. That is why capitalism is the best form of economic organization - it channels greed (which you cannot get rid of) to do the most good for the most people.

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