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January 28, 2009

Too Big to Succeed?

Friedrich von Blowhard writes:

Dear Blowhards,

One constant of this financial crisis is the way essentially political decisions keep getting presented to the public as if they were simple matters of pragmatism. One current example is the rumored plan of the Obama administration to rescue the banking system by creating a bad bank to buy distressed assets. This will of course presented as essential to our economy, our way of life, and presumably God, cherry pie and motherhood as well. This presentation, however, glosses over an inconvenient reality, which is that something like two thirds to three quarters of these bad assets sit on the balance sheets of a tiny number of enormous institutions...oddly, the very ones commonly spoken of as 'too big to fail.' It is apparently simply not possible in modern American politics to recognize reality, at least not where huge campaign contributors are concerned. The reality I'm alluding to is that letting such large financial institutions go into the tank, get broken up and be sold off to their smaller competitors in pieces would probably be the fastest and cheapest way out of our troubles.

As a brilliant discussion over at Institutional Risk Analytics, "The Big Banks vs. America: A Roundtable with David Kotok and Josh Rosner" puts it:

...the Good Bank/Bad Bank debate is really a political battle between the large banks listed above [Citigroup, Bank of America, JP Morgan Chase and Wells Fargo] plus Goldman Sachs and Morgan Stanley...vs. the rest of the [banking] industry and the US economy.

Although the banking system is commonly discussed as if it were a single entity, there are banks and banks, so to speak. And the divisions within the ranks are growing:

Remember that the entire banking industry stands in front of the taxpayers in terms of loss absorption at the FDIC [depositor insurance fund, paid for by contributions from the entire banking industry], so you can understand why the smaller banks in the industry are SERIOUSLY PISSED OFF at the large banks and their minions in the Obama Administration like Tim Geithner and Robert Rubin. Oh, and don't forget Chairman Ben Bernanke and the entire Fed board of governors. These leading officials are increasingly taking the side of the large banks in the battle over limited financial resources, a fact that is causing the community [i.e., smaller] bankers to rise in anger. Stay tuned.

Sadly, I doubt that the small fry have the political muscle to prevail over their very well connected, if incompetent, larger competition. Still, check out the whole thing if you want to understand who is really doing what to whom under the covers.



P.S. The malfunctioning link to the story in question is now working. My apologies to one and all.

posted by Friedrich at January 28, 2009


Dear Friedrich:

I want to get your thoughts on something I've been kicking around.

Say there are two kinds of bankers -- one who thinks that making a lot of loans to marginal borrowers is a good idea that will pay off big time (the Optimist), and the other who thinks that it's a losing proposition (the Pessimist).

There's a natural tendency for Optimists to get bigger than Pessimists (until there is a crash, when the Pessimists can buy up the rubble of the Optimists).

But, beyond that, the government was exerting a bias on the acquisition process under the Community Reinvestment Act, favoring Optimists who would lends lots to lower income and minority borrowers. The Pessimists were allowed to continue running their businesses the way they liked, but if they wanted to buy another bank, they had to get Optimist religion and promise to make tons of loans to dubious creditors. Some changed their behavior, but a lot of Pessimists didn't, so they were shut out of the acquisition market, keeping them small, and making it cheaper for the Optimists to expand by buying other banks.

Does this make sense?

Posted by: Steve Sailer on January 28, 2009 8:42 PM

The link in Friedrich's post doesn't work. Here's a link to the article:

Posted by: Bill on January 28, 2009 10:58 PM

Steve, that's exactly right. The government is in the process of covering its tracks right now by propping up these "Optimists", i.e. large failed banks. Can't have a failed ideology showing up, can we?

Posted by: Charlton Griffin on January 29, 2009 10:38 AM

Steve et al. I've been following this closely for going on two years now. I would say the CRA aspect was present but not a driving factor. The driving factor was executives had gamed the system such that their bonuses were based on short-term results. By the time the thing blew up, it wouldn't matter. Their stock options would have already vested, exercised, and cashed-out.

I don't have the source at hand, but there's a study out there that shows the only correlation bank size has with anything is executive compensation. Profitability, customer service, deposit rates, lending rates, shareholder returns, etc. showed no positive correlation to bank size.

Posted by: AllanF on January 29, 2009 4:35 PM

Wikipedia on Baldness "An additional bald patch may develop on top (vertex). The trigger for this type of baldness (called androgenetic alopecia) is DHT, a powerful sex hormone, body, and facial hair growth promoter that can adversely affect the hair on the head as well as the prostate[...]. German researchers name the androgen receptor gene as the cardinal prerequisite for balding[7]. They conclude that a certain variant of the androgen receptor is needed for AGA to develop. In the same year the results of this study were confirmed by other researchers [8]. This gene is recessive and a female would need two X chromosomes with the defect to show typical male pattern alopecia. Seeing that androgens and their interaction with the androgen receptor are the cause of AGA it seems logical that the androgen receptor gene plays an important part in its development..

If the bald tend to be hairy then they may be more intelligent.
"Dr AG Alias [...} Alias is an expert on certain aspects and implications of the hairiness of men.
"I am fairly certain that the vast majority of hairy/hirsute men, compared to the respective 'much less' hirsute men of the same race and ethnic group, are strikingly more intelligent and/or educated, but only from a statistical point of view."

More on DHT from Dr. Alias
A role for 5alpha-reductase activity in the development of male homosexuality?

Posted by: Tod on January 31, 2009 5:33 AM

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