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The JP Morgan Chase building in New York City. This is one of the big banks that's filing a "living will" with federal regulators — and dealing with a potentially $9-billion trading loss.
The biggest U.S. banks are delivering their so-called "living wills" to the Federal Reserve and the FDIC today. This is all part of the implementation of the Dodd-Frank financial reform legislation, and it follows the stress tests that the big banks were all subjected to several months back — and that they all passed, some more auspiciously than others.
Today's plans are part one of the living-will process: banks will explain how they intend to enter bankruptcy, if they get in trouble. Obviously, a big bank could enter restructuring and emerge as a new bank, with reduced debts. Part two is more menacing: big banks are being asked to detail how they would work with the FDIC to be taken down, their assets merged with more stable institutions. That's the nightmare scenario.
It's critical that the big banks deal with both possibilities because even though we had a bunch of too-big-to-fail banks before the financial crisis, we have what I call too-bigger-to-fail banks now. The crisis forced the consolidation of failing banks into stronger ones. Additionally, big banks have been buying up weaker smaller banks. So we have a less diverse financial ecosystem now than we did before the Great Recession. This is why a big trading loss at JP Morgan, initially reported at around $2 billion but now climbing to $9 billion according to some reports, is cause for alarm.
U.S. Department of the Treasury
The financial industry is less vulnerable to shocks than before the crisis.
Another downturn or recession might hit us in the next few years, as a natural consequence of the business cycle, but we're unlikely to have another Great Recession or major crisis. At least in the U.S. And here's why.
The Treasury Department released a whole bunch of very nice charts last week that summarize in glorious visual detail the government's response to the crisis. My personal favorite is above.
What put the "crisis" in financial crisis was actually the "financial" part: the nation's "too big to fail" banks all had to be bolstered with taxpayer bailouts (some reportedly against their will). A couple of investment banks went down. A couple more had to seek emergency deals and call in favors through the backdoor — and stop being true investment banks, but rather "bank holding companies" so that they could get more money from the Federal Reserve.
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Bank of America, a big U.S. bank that's a symbol of "Too Big to Fail."
In a very aggressively argued essay by Harvey Rosenblum in the annual report of the Federal Reserve Bank of Dallas, the difference between Very Very Big Banks and small banks is blamed for the Federal Reserve's general inability to use monetary policy to "fix" the financial crisis:
The machinery of monetary policy hasn’t worked well in the current recovery. The primary reason: TBTF financial institutions. Many of the biggest banks have sputtered, their balance sheets still clogged with toxic assets accumulated in the boom years.
In contrast, the nation’s smaller banks are in somewhat better shape by some measures. Before the financial crisis, most didn’t make big bets on mortgage-backed securities, derivatives and other highly risky assets whose value imploded. Those that did were closed by the Federal Deposit Insurance Corp. (FDIC), a government agency.
Coming out of the crisis, the surviving small banks had healthier balance sheets. However, smaller banks comprise only one sixth of the banking system’s capacity and can’t provide the financial clout needed for a strong economic rebound.
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Bank of America is too big to do payday loans, but credit unions and small, regional banks are getting in on the action.
The L.A. Times ran a piece a few days ago about how banks and credit unions are getting into the lucrative but ethically dicey business of payday loans — short-term, high-interest loans that, until recently, were aimed at customers who don't have typical relationships with banks or credit-card issuers. This morning, KPCC's "AirTalk" with Larry Mantle did a segment on the issue.
Payday lending is rife with problems — and the potential for big returns. Here's the LAT:
[M]any people can't repay the loans when they come due. Instead, they simply roll the loans over from payday to payday, or take out new loans to cover the old ones, piling on additional costs that can result in interest charges of 300% or more over the course of a year.
The move by banks into payday lending — or direct deposit advances, as many of them call it — led about 200 fair-lending, consumer, religious and labor groups to write federal regulators last month and call for prompt action to stop "this inherently dangerous product."
"There are people who wouldn't walk into a payday loan store but think that if a bank is doing it, it must be safe," said Lauren K. Saunders, managing attorney with the National Consumer Law Center. "If you take a look at these products from a consumer protection standpoint, they raise serious red flags."
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The LA Times has a story today about the accelerating foreclosure process. The bottom is that banks are ramping up their foreclosure activities, after allowing them to lag for various reasons over the past few years.
There's a day-of-reckoning quality to this. Absent some kind of massive federal assistance program to homeowners who are either losing or about to lose their houses — beyond what's already been enacted — this means that the housing market will soon be hit with a large number of "real estate owned" (REO) properties.
I blogged recently about a Federal Reserve white paper that proposes a solution to this foreclosure crunch, in the form of investor-owned rentals. The rental market is picking up and there's a need for more single-family residences, which shouldn't be surprising given all the families that are losing their homes to foreclusure.