Explaining Southern California's economy

Big bank living wills: Outsourcing the obituary

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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. 


Small banks v. too-big-to-fail banks

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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.


Tim Geithner, technocrat

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U.S. Treasury Secretary Timothy Geithner.

As the sovereign debt crisis continues to roil Europe, the eurozone is currently in the process of trying to save the euro single currency by deposing elected political leaders — Papandreou in Greece, Berlusconi in Italy, the socialists in Spain — and replacing them with "technocrats," or economic experts who, in theory, will be able to make the dispassionate, non-political, utterly essential decisions that need to be made.

Can't happen here, right? Well, maybe it's happened already. Take as Exhibit A one Tim Geithner, U.S. Treasury secretary and according to the Atlantic's Dan Indiviglio, a man disliked by all but his boss, one Barack Obama. 

Geithner is probably the closest creature to a technocrat we have in American government. And he runs practically the entire economy (the Federal Reserve runs the rest, and its part is extremely not insignificant). So who needs to hire technocrats when we already have one in the top job?


U.S. Treasury says Wall Street reform won't hurt small banks

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File: A Bank of America branch is seen in Times Square October 19, 2010 in New York City.

Financial regulation of Wall Street matters in Washington. The U.S. Treasury thinks so and has begun to blog about why. Yes, blog. In its most recent post, the Treasury debunks the idea that bank reform is somehow bad for small banks:

Myth #1: Wall Street Reform Hurts Small Banks


This claim is particularly dubious given strong support for enactment of the Dodd-Frank Act by the Independent Community Bankers of America.  Wall Street Reform helps level the playing field between large banks and small ones, helping to eliminate distortions that previously favored the biggest banks that held the most risk.

The operative concept here is risk. It isn't small banks that pose systemic risk to the banking system — it's the too-big-to-fail banks that ignored prudent risk models in the lead-up to the financial crisis. Robert G. Wilmers — a banking executive who runs M&T Bank, one of the few large banks that more or less sailed throught the financial crisis — provides a very succinct take on the problem at Bloomberg:


Visual Aid: Is California too big to fail?

I just started reading Michael Lewis' big new Vanity Fair piece on California's precarious finances. More on that later. But for now, check out the chart, above, which tallies up the total debt of all U.S. states and breaks out California's contribution. Doesn't look too bad at first. But remember, there are 50 states. And every single one of them has less debt than Cali.

Taken together, the states have $1.045 trillion in debt. California has about $135 billion. New York is number two at $123 billion. Massachusetts is third, with a distant $75 billion. California isn't twice as high, but it's not far off (and these are 2009 numbers). And this situation is unlikely to improve any time soon. The most recent UCLA Anderson Forecast doesn't anticipate a turnaround in the state economy for another year, with no real sustained progress until 2017.