News What is Sanders' Logic of "Breaking Up the Banks"?

1. Feb 3, 2016

bballwaterboy

Why does Bernie Sanders want to break up the banks?

He's talked baout reinstating Glass-Steagall, but why was repealing this law bad in the first place?

2. Feb 3, 2016

Staff: Mentor

Here's some background on the Glass Steagal legislation and why it was originally created:

https://en.wikipedia.org/wiki/Glass–Steagall_Legislation

I think the danger is that without the law depositors money can be used in a more speculative fashion which means a bank can take risks, fail and lose the money.

3. Feb 3, 2016

Staff: Mentor

jedishrfu has a good explanation. One underlying problem with most things like this is that there is, at bottom, ideology rather than fact. So, I do not think the House of Representatives in its current incarnation would pass anything they thought would impede banking and investment. Since I feel that JBS Haldane's concept of finding an interesting place politically and simply observing the craziness is a great idea, I'm willing to sit and watch the legislative process in DC continue to degrade.

PS: I do vote, but there is no candidate running that rates more than a C-minus grade from me.

FWIW - Norman Ornstein feels that we are in a kind of constitutional crisis. Lawmakers have to be willing to compromise. That seldom happens now.
per: https://www.amazon.com/Even-Worse-Than-Looks-Constitutional/dp/0465074731

Last edited by a moderator: May 7, 2017
4. Feb 3, 2016

Staff: Mentor

And when banks are "too big to fail", we have to bail them out to prevent (not always successfully) economic collapse.

5. Feb 3, 2016

DiracPool

I don't have a problem with banks being too big to fail. I do have a problem with the executives of the banks being too big to fail, though. The greedy white-collar criminals responsible for the 2008 economic collapse along with their "breaking Vegas" crew of fancy derivatives henchmen should all be in jail right now, IMHO. This is an embarrassment to our system of justice. I feel the same way about the Microsoft anti-trust case, if you're old enough to remember that. These clowns get away with this stuff because the self-righteous stuffed shirts in the judiciary are too stupid to know how a computer works or how a financial derivative works. And, of course, the high-powered, high paid defense attorneys aren't going to make it any easier for them, but that's their job not to get snowballed, and they do every time. Keep the banks, arrest the criminals and install a clean crew..

6. Feb 3, 2016

Greg Bernhardt

Did anyone see the movie "The Big Short"? I got zero love for big banks.

7. Feb 3, 2016

gleem

Yes. and Me too. When you allow a system to bet on a bet on a bet.....you are looking at potential chaos especially if betters can't cover their bet. Remember the 1929 crash same thing they couldn't cover their bets and that was a simple problem of buying on margin. Any good financial system requires honesty a virtue seriously in short supply in the business world.

8. Feb 3, 2016

Staff: Mentor

I'm not a fan of too big to fail, but IMO, I think you are going too far with the "throw the crooks in jail" mantra: my understanding is that most of the enabling actions (such as creating the derivatives) were legal. Worse, even some of what might have been illegal (such as improper mortgage reviews) was tacitly encouraged by the government.

The large majority cause was incompetence, from both government and industry, not crime....which is perhaps even more disturbing

http://www.economist.com/news/schoo...risis-are-still-being-felt-five-years-article

One of the underlying issues here is that unlike, say, engineering, the failures themselves are not considered criminal acts. Engineers have an affirmative duty to protect safety. If something goes wrong and someone gets hurt, they could go to jail (and certainly lose their license)if they didn't work hard to stop it. Incompetence/negligence is itself a crime, not a defense. The financial industry doesn't work that way - maybe it should?

Last edited: Feb 3, 2016
9. Feb 3, 2016

Staff: Mentor

Excellent point. But how would you realistically implement it? Today's lawmaking is not working well. People who want to get something done often resort to getting regulatory changes instead. Is that an option? Or even possible....

10. Feb 3, 2016

gleem

Banks used to be very conservative in making loans. They weren't made without proper consideration of how they would be repaid and the risks of default. The banks ignored their fiduciary duty to conduct their business in the interest of their clients. They have put more emphasis on themselves and created a conflict of interest. So again big business betrays trust resulting in more government control.

11. Feb 4, 2016

bballwaterboy

Hmmm. But if depositors know this in advance, couldn't they simply relocate their assets to another banking institution that didn't engage in speculation?

I guess I'm not 100% sure why it was so bad in practice?

And, lastly, don't depositors have FDIC bank insurance for any potential bank losses, so that they'd get all their money back? I'm under the impression that our government backs consumer banking deposits (up to a certain amount?), no?

Thanks!

12. Feb 4, 2016

bballwaterboy

Not yet. Waiting for the DVD.

13. Feb 4, 2016

Hornbein

Exactly. If the taxpayer is on the hook to cover the losses, why should he/she allow the banks to engage in practices likely to realize such losses.

14. Feb 4, 2016

jack476

The argument is that it's not right that any one company should be "Too big to fail", that is, so large that if it goes under it would take the entire global economy with it, as nearly happened in 2008 and ended with the government spending billions of dollars to prevent a global economic meltdown.

Companies go out of business. That's just an unfortunate reality of the world we live in. But when individual companies get so massive and so closely tied to the financial markets as to present a severe global risk should they fail, that means that it's down to everyone else to subsidize the effort to pull them out of the red. When it's their own shortsighted behavior that put them in that position to begin with, you can maybe understand why some people might have felt a bit...irritated, to say the least.

Ultimately, it's risk management. It's inevitable that some companies will fail. Being a very large company is not necessarily a great protection against failure. Ergo having a massive company that could cause tremendous damage if (when) it fails is dangerous. But if you take the one or two massive banks and break them up into a large number of smaller banks, then you mitigate that risk because now a few individuals can fail without causing damage.

Except it's not really about the money in your checking and savings account. That's not in any danger. The problem is that those banks also control such large amounts of debt and stock in other companies. So if they fail, then there's no one to pay off that debt (so a lot of people lose money) and those stocks see their values plummet (so people or companies that keep money in investment funds like retirement accounts see huge losses). The money in your checking account might be safe, but if you've been investing for retirement for the last twenty years and suddenly your retirement fund is worthless, you're pretty much SOL if that happens. Or if you're running a large company that has a lot of assets tied up in investment accounts, and suddenly those assets are worthless, then you're at risk of going out of business (and your employees all lose their jobs, which is where the real mess starts).

15. Feb 6, 2016

bballwaterboy

Hey, jack476

I can understand the logic that it would be dangerous to have any one economic institution become so big and influential that if it were to fail, then it would cause crippling damage to the economy of a nation.

A quick question for you or others who may be in the know is how big actually were these banks that got bailouts during our 2007-2008 U.S. recession? I know the healthcare industry, for example, is approximately 1/6 of the U.S. economy. But I always thought banks were a smaller portion of the economy, no?

Secondly, was there really one, single bank that was that large as to cripple the entire economy during the 07-08 crisis? Or, was it like likes of banks together? It's hard to imagine a single bank being that powerful.

In terms of this part, I guess I still don't quite understand 100%. Please forgive me (and thanks very much for your patience) if I'm merely obtuse at this point! It happens with me sometimes, haha!

So, are we saying? (trying to understand where we agree/disagree):

1.) Consumer deposits (in other words, from individuals - not corporations) are, in fact, covered by FDIC/government, so that anything we put into a bank is safe even if the bank loses its assets through crazy speculation/"gambling" of its money. If I'm not mistaken, the FDIC would cover deposits up to X dollars. So the individual person is safe (up to the FDIC limit).

2.) Banks, after Glass-Steagall was repealed, were allowed to use consumer deposits to gamble/speculate with? This part I'm still unsure of.

3.) If 2.) is true, then wouldn't 1.) cover that for individuals still?

4.) Banks, after Glass-Steagall was repealed, were allowed to use corporate deposits to gamble/speculate with?

5.) If 4.) is true, then would FDIC cover those losses as well?

6.) If FDIC covers all consumer and corporate deposit losses, then what is the harm done to depositors?

If I'm hopeless confused, feel free to just let me know. Hahaha. Just trying to nail down how it all works.

16. Feb 6, 2016

bballwaterboy

Wow, so incompetence/negligence in the field of engineering is really a crime?

Is this what you believe it to be (as in you think it should be a crime) or what the law actually says, russ?

I guess with Wall Street "crime," you'd have to prove intent, right? Isn't the legal issue trying to establish that these bankers intentionally and knowingly defrauded people vs. just being merely incompetent?

Last edited: Feb 6, 2016
17. Feb 6, 2016

bballwaterboy

Yeah, I think I remember reading some stuff on this a few years ago in high school. Aren't investment banks allowed to invest up to 30x what they have in liquid assets? It's the leveraging of bets that's the problem in a lot of cases, right? If you can leverage your bets 10, 20...30x:1 in terms of what you're allowed to wager vs. what you have in assets to cover those bets, then if you lose, you're deeply in the hole. While, on the other hand, if you win, you win a much bigger amount than you would have been to obtain had you been restricted to investing with only what you had in the bank (literally).

To me, that's not fair. If a bank can make big bets where they can potentially gain super-duper amounts of money above and beyond their actual assets and also never have to pay for their losses (b/c the government & tax payers bail them out), then that's just encouraging gambling! No?

18. Feb 6, 2016

gleem

The GDP of the US in 2015 was about $17.9T. The banks bailed out by size of bailout were AIG, BoA, Citibank, JPMorgan, Wells Fargo, Goldman Sachs, M. Stanley plus others to a lesser but still significant amounts. The five largest banks by "asset under custody" (I leave it to the reader to find out what this is) almost$100T!!!!!!!!!!!. The actual assets on their books is about \$7T

Since these banks also manage thing like trust funds and provide investment advice they influence a lot of money.

I can see why banks can be too big. Small banks fail all the time almost 500 since 2009 did you feel the impact?

Banking at this level is a lot more complex that we can imagine.

19. Feb 22, 2016

mheslep

I see this kind of comment from time to time, but I never see a specific crime or charge specified. What might that be? Greed? Being white collar? Anybody that sold or continues to sell derivatives? Anybody that bought or sold sub prime mortgages? Anybody that passed laws encouraging the sale of sub prime mortgages?

Last edited: Feb 22, 2016
20. Feb 22, 2016

jw6661

Banks became too big during 2008-2009

solomon brothers, washington mutual, wachovia and many other "big banks" became assets of bigger banks. chase bank gobbled up Washington mutual.etc.

Housing related crisis were considered too soft. during 2009-2016 CD rates became obsolete. "safe" Savers were punished. Thus Bernie would like to give back to people who would be "safe" savers.

During 2009-2015, investment trade companies like blackrock, goldman sachs were allowed to become traditional banks taking in more money. they were allowed to give out checking/savings and other bank related duties. This was to help the ultra wealthy.

Key is to develop a systematic approach to banking. It is more 'geo politics' than ever.

21. Mar 24, 2016

Derek Francis

Theodore Roosevelt and William Taft) broke up very large corporations during their administrations.

It wasn't radical in 1900-1910, so I fail to see why it would be a radical idea today.

22. Mar 24, 2016

mheslep

TR broke up monopolies.