Killing 'Too Big to Fail' Could Unite America

Wouldn’t it be wonderful if there was an issue so compelling, it could unite Americans of every ideological stripe? Well, not everyone, just Americans who are beginning to understand the long-term effects of the concerted effort to destroy national sovereignty. What’s that you say? You didn’t know there was an effort underway to destroy our national sovereignty? Four words should give you a clue: too big to fail.

Full disclosure: I am an unabashed free-market capitalist who, to paraphrase Winston Churchill, believes it is the worst economic system in the world — save for all the other ones. However it is the adjective preceding the word “capitalist” that is the one on the verge of being swept onto the ash heap of history. In the modern age, the term “free-market” has been almost completely subsumed by the word “crony” in all its government-aligned, competition-crushing, “bail us out when we screw up” glory.

The effects of that sea change have been dramatic. As ordinary Main Street Americans continue to cope with a moribund economy that continues to produce “unexpected” results befuddling our so-called economic “experts,” there’s been an unconscionable consolidation of wealth occurring. How troubling is that consolidation? Try this from CNBC:

“The largest five banks in the U.S. now control nearly 45 percent of the industry’s total assets, according to an analysis from SNL Financial that comes amid an earnings season that has been generally positive for the largest institutions.

"In total, the five institutions — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and U.S. Bancorp — had just under $7 trillion in total assets as of the end of 2014. That’s good for 44.61 percent of the industry total. It also leaves the other 55.4 percent of the assets to be divided up among 6,504 other institutions.”

Again, I’m all for earned success, but who’s kidding whom? Let’s look at what taxpayers provided those very same banks when their so-called best and brightest managed to run the entire American economy into the ground back in 2008:

JP Morgan Chase: $25 billion
Bank of America: $45 billion, plus a $118 billion government guarantee of their assets
Wells Fargo: $25 billion
Citigroup: $45 billion
U.S. Bancorp: $6.5 billion

And they weren’t the only ones feeding off the government trough. GM got a whopping $50 billion, Chrysler got $10 billon and insurance giant AIG got $67 billion, largely because they were the insurer of last resort for the banking industry’s credit default swaps (CDS). Credit default swaps that, as Reuters puts it, allowed financial institutions “to make a lot more money than was possible through traditional investment methods” and “helped transform bond trading into a highly leveraged, high-velocity business.”

Until it all came crashing down, because those best and brightest had somehow convinced themselves real estate was an asset that would never decrease in value. Which begins us to the Mac Daddy, Government-Sponsored Enterprises (GSEs) known as Fannie Mae and Freddie Mac that issued and guaranteed more than 71 percent of mortgage-backed bonds in 2009. Add in guarantees by the Federal Housing Administration and the government was backing 97 percent of all U.S. mortgages. When the housing market collapsed, taxpayers were forced to pony up more than $116 billion for Fannie and another $71 billion for Freddie.

But not to worry, my fellow Americans. According to the Washington Post, we’re supposed to feel great about all of this because most of these institutions paid the money back, and the government made a little bit of a profit as well. What about the millions of Americans who lost their jobs, their homes and their hard-earned savings? Lives destroyed by this bipartisan attempt to turn home ownership into a de facto affirmative action program in the sub-prime market, followed by the shark-feeding frenzy of “conventional” mortgage deals that accompanied it?

You gotta break a few Main Street eggs to save the Wall Street omelet.

And as much as Americans would like to blame the banks themselves for this debacle, far more ire should be directed at government. It was government that came up with the Community Reinvestment Act, forcing banks to loan money to otherwise unqualified minority borrowers, lest the heavy hand of that government change them with discrimination, fine them, and/or prevent them from expanding operations. It was the Clinton administration that insisted Fannie and Freddie should increase their exposure to those riskier loans. And while the Bush administration offered repeated warnings about Fannie and Freddie being over-leveraged, they were also quick to brag about increasing levels of home ownership that occurred during its tenure.

As for the banks themselves, their reasoning was simple: If we have to underwrite risky loans for the sub-prime crowd, why stop there — which is why at the height of this insanity borrowers were getting no-money-down mortgages that often had closing costs written into the loan as well. And as it was mentioned above, many of these institutions remained unconcerned about the risk — because, after all, AIG had their back, right?

Now for a bit of unpleasantness: The people who took those loans are hardly blameless. Many of them would like to think so, but a couple of phrases come to mind, as in “buyer beware,” and “if it sounds to good to be true,” etc. Such basics were overwhelmed by a lethal combination of unscrupulous pitchmen, America’s infamous entitlement mentality and an economic illiteracy highlighted by the lack of comprehension regarding such things as variable-rate loans and the balloon payments they ultimately precipitated.

So everyone learned their lesson, right? Wrong.

The Obama administration is once again lowering lending standards, once again using affirmative action as their hammer, there’s another huge asset bubble on Wall Street derived from the Federal Reserve’s QE and Zero Interest Rate Policy (ZIRP), and in December, Congress repealed a provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that barred banks from trading derivatives. The Japan Times illuminates the implications, explaining that Citibank, Goldman Sachs, Bank of America and Morgan Stanley “handle the bulk of derivatives trading,” because the government “bailout option for too-big-to-fail banks concentrates the derivatives market among a few major institutions, increasing further their systemic importance.”

Banks are allowed to do such trading because the Glass-Steagall Act was repealed in 1999 when President Bill Clinton and Republicans led by Sen. Phil Gramm decided to “modernize” the banking industry. Glass-Steagall was enacted in 1933 to separate the linkage between commercial and investment banking many people insist contributed to the 1929 stock market crash and the Great Depression that followed. The modernization effected in 1999 allowed banks to use FDIC-insured depositories to underwrite private securities and foist them on their own customers.

And despite all the garbage you may hear to the contrary, this was the genesis of too big too fail.

As for the aforementioned disdain for national sovereignty, an investigative report courtesy of Bloomberg News reveals that the $700 billion Congress allocated to those too big to fail institutions via the Troubled Asset Relief Program (TARP) amounted to chump change. A mind-blowing $7.7 trillion in loans was made available by the Federal Reserve, including a single-day layout on Dec. 5, 2008 of $1.2 trillion to banks that were in the deepest trouble, even as those banks “were assuring investors their firms were healthy,” Bloomberg emphasizes. Adding insult to taxpayer injury, “banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates.” And not just American banks. Foreign banks such as Deutsche Bank ($354 billion) Royal Bank of Scotland ($541 billion) Societe Generale ($124 billion) and Credit Suisse ($262 billion) also ponied up to the Fed loan window.

None of this would have become public knowledge without Bloomberg LP winning a court case allowing the info to be disseminated. Furthermore, when Dodd-Frank mandated a one-time look at a broader time period of Fed lending, a GAO report revealed that a staggering $16.3 trillion in loans were made available between December 1, 2007 and July 21, 2010.

And during the entire time it occurred, Congress remained wholly unaware it was occurring.

Are you getting the transnational elitist, “couldn’t care less about national sovereignty” vibe, my fellow Americans? One more thing: You’ll hear a lot of people insist we had no other recourse, lest the entire worldwide financial system would’ve come crashing down around our collective ears. A couple of things come to mind in that regard. First, you can’t prove a negative, as in who knows what might have occurred if the free market of creative destruction had allowed other entities to pick up the broken pieces of institutions allowed to fail and re-organize, just as many businesses and other entities have done throughout history. For example, does anyone seriously think no one would have stepped into the car-selling vacuum created by the demise of GM?

Instead, too big to fail has been institutionalized.

Yet just as important, not a single resignation was demanded in return for those taxpayer bailouts, putting an exclamation point on the reality that there are two sets of standards in this nation: one for the politically connected mega-rich, and an entirely different one for the rest of us who bailed out their sorry behinds.

And despite all of this, nothing has changed. In 2010, the Brown-Kaufman bill, mandating no bank could hold more than 10 percent of the total amount of insured deposits, and limiting liabilities of a single bank to two percent of GDP, was soundly defeated in the Senate by a vote of 61 to 33. Sen. Judd Gregg (R-NH) was indignant regarding the prospects of the bill’s passage. “I don’t understand this Brown-Kaufman amendment,” he said at the time. “Basically, what it says is if you’re successful … you’re going to break them up? I mean, where does this stop? Do we take McDonald’s on?”

The demise of a hamburger joint doesn’t threaten the entire economy, and the bet here is an overwhelming majority of Americans might have a bit of trouble with the word “successful,” when such “success” cost them trillions of dollars, along with their homes, their jobs, their savings — and maybe their futures as well.

It is precisely this profound disconnect between these arrogant transnational elitists and their enablers, and ordinary Americans who must backstop their excesses, that has enormous potential for bridging the ideological gap that separates us. It’s way past time to drive a stake through the heart of too big to fail for the simplest of reasons: In the long run — which may be far, far shorter than anyone could imagine — there’s no such thing.

Why? Fiat currency, as in currency with no tangle assets to back it up, is based on nothing more than faith. If that faith is shattered, it’s nothing but paper.

The Patriot Post® · Killing 'Too Big to Fail' Could Unite America