13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

by Simon Johnson, James Kwak

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Overview

In spite of its key role in creating the ruinous financial crisis of 2008, the American banking industry has grown bigger, more profitable, and more resistant to regulation than ever. Anchored by six megabanks whose assets amount to more than 60 percent of the country’s gross domestic product, this oligarchy proved it could first hold the global economy hostage and then use its political muscle to fight off meaningful reform. 13 Bankers brilliantly charts the rise to power of the financial sector and forcefully argues that we must break up the big banks if we want to avoid future financial catastrophes.
 
Updated, with additional analysis of the government’s recent attempt to reform the banking industry, this is a timely and expert account of our troubled political economy.

Product Details

ISBN-13: 9780307476609
Publisher: Knopf Doubleday Publishing Group
Publication date: 01/11/2011
Edition description: Reprint
Pages: 336
Sales rank: 618,226
Product dimensions: 5.22(w) x 7.97(h) x 0.73(d)

About the Author

Simon Johnson is Ronald A. Kurtz Professor of Entrepreneurship at MIT’s Sloan School of Management and a senior fellow of the Peterson Institute for International Economics. He is coauthor, with James Kwak, of The Baseline Scenario, a leading economic blog, described by Paul Krugman as “a must-read” and by Bill Moyers as “one of the most informative news sites in the blogosphere.”
 
James Kwak is an Associate Professor at the University of Connecticut School of Law. He previously co-founded Guidewire Software.
 
Visit the authors' blog at baselinescenario.com.

Read an Excerpt

They were careless people, Tom and Daisy—they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made.
—F. Scott Fitzgerald, The Great Gatsby

INTRODUCTION

My administration is the only thing between you and the pitchforks.
—Barack Obama, March 27, 2009


Friday, March 27, 2009, was a lovely day in Washington, D.C.—but not for the global economy. The U.S. stock market had fallen 40 percent in just seven months, while the U.S. economy had lost 4.1 million jobs.2 Total world output was shrinking for the first time since World War II.

Despite three government bailouts, Citigroup stock was trading below $3 per share, about 95 percent down from its peak; stock in Bank of America, which had received two bailouts, had lost 85 percent of its value. The public was furious at the recent news that American International Group, which had been rescued by commitments of up to $180 billion in taxpayer money, was paying $165 million in bonuses to executives and traders at the division that had nearly caused the company to collapse the previous September. The Obama administration’s proposals to stop the bleeding, initially panned in February, were still receiving a lukewarm response in the press and the markets. Prominent economists were calling for certain major banks to be taken over by the government and restructured. Wall Street’s way of life was under threat.

That Friday in March, thirteen bankers— the CEOs of thirteen of the country’s largest financial institutions— gathered at the White House to meet with President Barack Obama.* “Help me help you,” the president urged the group. Meeting with reporters later, they toed the party line. White House press secretary Robert Gibbs summarized the president’s message: “Everybody has to pitch in. We’re all in this together.” “I’m of the feeling that we’re all in this together,” echoed Vikram Pandit, CEO of Citigroup. Wells Fargo CEO John Stumpf repeated the mantra: “The basic message is, we’re all in this together.” What did that mean, “we’re all in this together”? It was clear that the thirteen bankers needed the government. Only massive government intervention, in the form of direct investments of taxpayer money, government guarantees for multiple markets, practically unlimited emergency lending by the Federal Reserve, and historically low interest rates, had prevented their banks from following Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia into bankruptcy or acquisition in extremis. But why did the government need the bankers?

Any modern economy needs a financial system, not only to process payments, but also to transform savings in one part of the economy into productive investment in another part of the economy. However, the Obama administration had decided, like the George W. Bush and Bill Clinton administrations before it, that it needed this financial system— a system dominated by the thirteen bankers who came to the White House in March. Their banks used huge balance sheets to place bets in brand-new financial markets, stirring together complex derivatives with exotic mortgages in a toxic brew that ultimately poisoned the global economy. In the process, they grew so large that their potential failure threatened the stability of the entire system, giving them a unique degree of leverage over the government. Despite the central role of these banks in causing the financial crisis and the recession, Barack Obama and his advisers decided that these were the banks the country’s economic prosperity depended on. And so they dug in to defend Wall Street against the popular anger that was sweeping the country— the “pitchforks” that Obama referred to in the March 27 meeting.

To his credit, Obama was trying to take advantage of the Wall Street crisis to wring concessions from the bankers— notably, he wanted them to scale back the bonuses that enraged the public and to support his administration’s plan to overhaul regulation of the financial system. But as the spring and summer wore on, it became increasingly clear that he had failed to win their cooperation. As the megabanks, led by JPMorgan Chase and Goldman Sachs, reported record or near-record profits (and matching bonus pools), the industry rolled out its heavy artillery to fight the relatively moderate reforms proposed by the administration, taking particular aim at the measures intended to protect unwary consumers from being blown up by expensive and risky mortgages, credit cards, and bank accounts. In September, when Obama gave a major speech at Federal Hall in New York asking Wall Street to support significant reforms, not a single CEO of a major bank bothered to show up. If Wall Street was going to change, Obama would have to use (political) force.

Why did this happen? Why did even the near-collapse of the financial system, and its desperate rescue by two reluctant administrations, fail to give the government any real leverage over the major banks?

By March 2009, the Wall Street banks were not just any interest group. Over the past thirty years, they had become one of the wealthiest industries in the history of the American economy, and one of the most powerful political forces in Washington. Financial sector money poured into the campaign war chests of congressional representatives. Investment bankers and their allies assumed top positions in the White House and the Treasury Department. Most important, as banking became more complicated, more prestigious, and more lucrative, the ideology of Wall Street— that unfettered innovation and unregulated financial markets were good for America and the world—became the consensus position in Washington on both sides of the political aisle. Campaign contributions and the revolving door between the private sector and government service gave Wall Street banks influence in Washington, but their ultimate victory lay in shifting the conventional wisdom in their favor, to the point where their lobbyists’ talking points seemed self-evident to congressmen and administration officials. Of course, when cracks appeared in the consensus, such as in the aftermath of the financial crisis, the banks could still roll out their conventional weaponry— campaign money and lobbyists; but because of their ideological power, many of their battles were won in advance.

The political influence of Wall Street helped create the laissez-faire environment in which the big banks became bigger and riskier, until by 2008 the threat of their failure could hold the rest of the economy hostage. That political influence also meant that when the government did rescue the financial system, it did so on terms that were favorable to the banks. What “we’re all in this together” really meant was that the major banks were already entrenched at the heart of the political system, and the government had decided it needed the banks at least as much as the banks needed the government. So long as the political establishment remained captive to the idea that America needs big, sophisticated, risk-seeking, highly profitable banks, they had the upper hand in any negotiation. Politicians may come and go, but Goldman Sachs remains.


The Wall Street banks are the new American oligarchy— a group that gains political power because of its economic power, and then uses that political power for its own benefit. Runaway profits and bonuses in the financial sector were transmuted into political power through campaign contributions and the attraction of the revolving door. But those profits and bonuses also bolstered the credibility and influence of Wall Street; in an era of free market capitalism triumphant, an industry that was making so much money had to be good, and people who were making so much money had to know what they were talking about. Money and ideology were mutually reinforcing.

This is not the first time that a powerful economic elite has risen to political prominence. In the late nineteenth century, the giant industrial trusts— many of them financed by banker and industrialist J. P. Morgan— dominated the U.S. economy with the support of their allies in Washington, until President Theodore Roosevelt first used the antitrust laws to break them up. Even earlier, at the dawn of the republic, Thomas Jefferson warned against the political threat posed by the Bank of the United States.

In the United States, we like to think that oligarchies are a problem that other countries have. The term came into prominence with the consolidation of wealth and power by a handful of Russian businessmen in the mid-1990s; it applies equally well to other emerging market countries where well-connected business leaders trade cash and political support for favors from the government. But the fact that our American oligarchy operates not by bribery or blackmail, but by the soft power of access and ideology, makes it no less powerful. We may have the most advanced political system in the world, but we also have its most advanced oligarchy.

In 1998, the United States was in the seventh year of an economic boom. Inflation was holding steady between 2 and 3 percent, kept down by the twin forces of technology and globalization. Alan Greenspan, probably the most respected economist in the world, thought the latest technology revolution would allow sustained economic growth with low inflation: “Computer and telecommunication based technologies are truly revolutionizing the way we produce goods and services. This has imparted a substantially increased degree of flexibility into the workplace, which in conjunction with just-in-time inventory strategies and increased availability of products from around the world, has kept costs in check through increased productivity.”8 Prospects for the American economy had rarely seemed better.

But Brooksley Born was worried.9 She was head of the Commodity Futures Trading Commission (CFTC), the agency responsible for financial contracts known as derivatives. In particular, she was worried about the fast-growing, lightly regulated market for over-the-counter (OTC) derivatives— customized contracts in which two parties placed bets on the movement of prices for other assets, such as currencies, stocks, or bonds. Although Born’s agency had jurisdiction over certain derivatives that were traded on exchanges, it was unclear if anyone had the authority to oversee the booming market for custom derivatives.

In 1998, derivatives were the hottest frontier of the financial ser - vices industry. Traders and salesmen would boast about “ripping the face off ” their clients— structuring and selling complicated deals that clients did not understand but that generated huge profits for the bank that was brokering the trade.10 Even if the business might be bad for their clients, the top Wall Street banks could not resist, because their derivatives desks were generating ever-increasing shares of their profits while putting up little of the banks’ own capital. The global market for custom derivatives had grown to over $70 trillion in face value (and over $2.5 trillion in market value)† from almost nothing a decade before.

The derivatives industry had fought off the threat of regulation once before. In 1994, major losses on derivatives trades made by Orange County, California, and Procter&Gamble and other companies led to a congressional investigation and numerous lawsuits. The suits uncovered, among other things, that derivatives salesmen were lying to clients, and uncovered the iconic quote of the era, made by a Bankers Trust employee: “Lure people into that calm and then just totallyf——’em.” Facing potential congressional legislation, the industry and its lobbying group fought back, aided by its friends within the government. The threat of regulation was averted, and the industry went back to inventing ever more complex derivatives to maintain its profit margins. By 1997, the derivatives business even had the protection of Greenspan, who said: “[T]he need for U.S. government regulation of derivatives instruments and markets should be carefully re-examined. The application of the Commodity Exchange Act to off-exchange transactions between institutions seems wholly unnecessary— private market regulation appears to be achieving public policy objectives quite effectively and efficiently.” In other words, the government should keep its hands off the derivatives market, and society would benefit.

But Born was not convinced. She worried that lack of oversight allowed the proliferation of fraud, and lack of transparency made it difficult to see what risks might be building in this metastasizing sector. She proposed to issue a “concept paper” that would raise the question of whether derivatives regulation should be strengthened. Even this step provoked furious opposition, not only from Wall Street but also from the economic heavyweights of the federal government—Greenspan, Treasury Secretary (and former Goldman Sachs chair) Robert Rubin, and Deputy Treasury Secretary Larry Summers. At one point, Summers placed a call to Born. As recalled by Michael Greenberger, one of Born’s lieutenants, Summers said, “I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.”

Ultimately, Summers, Rubin, Greenspan, and the financial industry won. Born issued the concept paper in May, which did not cause a financial crisis. But Congress responded inOctober by passing amoratorium prohibiting her agency from regulating custom derivatives. In 1999, the President’s Working Group on Financial Markets— including Summers, Greenspan, SEC chair Arthur Levitt, and new CFTC chair William Rainer— recommended that custom derivatives be exempted from federal regulation. This recommendation became part of the Commodity Futures Modernization Act, which President Clinton signed into law in December 2000.

We don’t know which thirteen bankers were meeting with the deputy treasury secretary when he called Brooksley Born; nor do we know if it was actually twelve or fourteen bankers, or if they were in his office at the time, or if Summers was actually convinced by them—more likely he came to his own conclusions, which happened to agree with theirs. (Summers did not comment for the Washington Post story that reported the phone call.) Nor does it matter.

What we do know is that by 1998, when it came to questions of modern finance and financial regulation, Wall Street executives and lobbyists had many sympathetic ears in government, and important policymakers were inclined to follow their advice. Finance had be - come a complex, highly quantitative field that only the Wall Street bankers and their backers in academia (including multiple Nobel Prize winners) had mastered, and people who questioned them could be dismissed as ignorant Luddites. No conspiracy was necessary. Even Summers, a brilliant and notoriously skeptical academic economist (later to become treasury secretary and eventually President Obama’s chief economic counselor), was won over by the siren song of financial innovation and deregulation. By 1998, it was part of the worldview of the Washington elite that what was good for Wall Street was good for America.



The aftermath is well known. Although Born’s concept paper did not cause a financial crisis, the failure to regulate not only derivatives, but many other financial innovations, made possible a decade-long financial frenzy that ultimately created the worst financial crisis and deepest recession the world has endured since World War II.

Free from the threat of regulation, OTC derivatives grew to over $680 trillion in face value and over $20 trillion in market value by 2008. Credit default swaps, which were too rare to be measured in 1998, grew to over $50 trillion in face value and over $3 trillion in market value by 2008, contributing to the inflation of the housing bubble; when that bubble burst, the collapse in the value of securities based on the housing market triggered the financial crisis. The U.S. economy contracted by 4 percent, financial institutions took over one trillion dollars of losses, and the United States and other governments bailed out their banking sectors with rescue packages worth either hundreds of billions or trillions of dollars, depending on how you count them.

Brooksley Born was defeated by the new financial oligarchy, symbolized by the thirteen bank CEOs who gathered at the White House in March 2009 and the “thirteen bankers” who lobbied Larry Summers in 1998. The major banks gained the wealth and prestige necessary to enter the halls of power and sway the opinions of the political establishment, and then cashed in that influence for policies— of which derivatives nonregulation was only one example— that helped them double and redouble their wealth while bringing the economy to the edge of a cliff, from which it had to be pulled back with taxpayer money.

The choices the federal government made in rescuing the banking sector in 2008 and 2009 also have significant implications for American society and the global economy today. Not only did the government choose to rescue the financial system— a decision few would question— but it chose to do so by extending a blank check to the largest, most powerful banks in their moment of greatest need. The government chose not to impose conditions that could reform the industry or even to replace the management of large failed banks. It chose to stick with the bankers it had.

In the dark days of late 2008—when Lehman Brothers vanished, Merrill Lynch was acquired, AIG was taken over by the government, Washington Mutual and Wachovia collapsed, Goldman Sachs and Morgan Stanley fled for safety by morphing into “bank holding companies,” and Citigroup and Bank of America teetered on the edge before being bailed out— the conventional wisdom was that the financial crisis spelled the end of an era of excessive risk-taking and fabulous profits. Instead, we can now see that the largest, most powerful banks came out of the crisis even larger and more powerful. When Wall Street was on its knees, Washington came to its rescue— not because of personal favors to a handful of powerful bankers, but because of a belief in a certain kind of financial sector so strong that not even the ugly revelations of the financial crisis could uproot it.

That belief was reinforced by the fact that, when the crisis hit, both the Bush and Obama administrations were largely manned by people who either came from Wall Street or had put in place the policies favored by Wall Street. Because of these long-term relationships between Wall Street and Washington, there was little serious consideration during the crisis of the possibility that a different kind of financial system might be possible— despite the exhortations of prominent economists such as Paul Krugman, Joseph Stiglitz, and many others. There was no serious attempt to break up the big banks or reform financial regulation while it was possible— when the banks were weak, at the height of the crisis. Reform was put off until after the most powerful banks had grown even bigger, returned to profitability, and regained their political clout. This strategy ran counter to the approach the U.S. Treasury Department had honed during emerging market financial crises in the 1990s, when leading officials urged crisis-stricken countries to address structural problems quickly and directly.

As we write this, Congress looks likely to adopt some type of banking reform, but it is unlikely to have much bite. The measures proposed by the Obama administration placed some new constraints on Wall Street, but left intact the preeminence and power of a handful of megabanks; and even these proposals faced opposition from the financial lobby on Capitol Hill. The reform bill will probably bring about some improvements, such as better protection for consumers against abusive practices by financial institutions. But the core problem—massive, powerful banks that are both “too big to fail” and powerful enough to tilt the political landscape in their favor— will remain as Wall Street returns to business as usual.

By all appearances, the major banks— at least the ones that survived intact— were the big winners of the financial crisis. JPMorgan Chase, Bank of America, and Wells Fargo bought up failing rivals to become even bigger. The largest banks increased their market shares in everything from issuing credit cards to issuing new stock for companies. Goldman Sachs reported record profits and, through September 2009, had already set aside over $500,000 per employee for compensation. Lloyd Blankfein, CEO of Goldman Sachs, was named Person of the Year by the Financial Times.

The implications for America and the world are clear. Our big banks have only gotten bigger. In 1983, Citibank, America’s largest bank, had $114 billion in assets, or 3.2 percent of U.S. gross domestic product (GDP, the most common measure of the size of an economy). By 2007, nine financial institutions were bigger relative to the U.S. economy than Citibank had been in 1983.21 At the time of the White House meeting, Bank of America’s assets were 16.4 percent of GDP, followed by JPMorgan Chase at 14.7 percent and Citigroup at 12.9 percent. A vague expectation that the government would bail them out in a crisis has been transformed into a virtual certainty, lowering their funding costs relative to their smaller competitors. The incentive structures created by high leverage (shifting risk from shareholders and employees onto creditors and, ultimately, taxpayers) and huge one-sided bonuses (great in good years and good in bad years) have not changed. The basic, massive subsidy scheme remains unchanged: when times are good, the banks keep the upside as executive and trader compensation; when times are bad and potential crisis looms, the government picks up the bill.

If the basic conditions of the financial system are the same, then the outcome will be the same, even if the details differ. The conditions that created the financial crisis and global recession of 2007–2009 will bring about another crisis, sooner or later. Like the last crisis, the next one will cause millions of people to lose their jobs, houses, or educational opportunities; it will require a large transfer of wealth from taxpayers to the financial sector; and it will increase government debt, requiring higher taxes in the future. The effects of the next meltdown could be milder than the last one; but with a banking system that is even more highly concentrated and that has a rock-solid government guarantee in place, they could also be worse.

The alternative is to reform the financial system now, to put in place a modern analog to the banking regulations of the 1930s that protected the financial system well for over fifty years. A central pillar of this reform must be breaking up the megabanks that dominate our financial system and have the ability to hold our entire economy hostage. This is the challenge that faces the Obama administration today. It is not a question of finance or economics. It is ultimately a question of politics— whether the long march of Wall Street on Washington can be halted and reversed. Given the close financial, personal, and ideological ties between these two centers of power, that will not happen overnight.

We have been here before. The confrontation between concentrated financial power and democratically elected government is as old as the American republic. History shows that finance can be made safe again. But it will be quite a fight.

Table of Contents

Introduction: 13 Bankers 3

1 Thomas Jefferson and the Financial Aristocracy 14

2 Other People's Oligarchs 39

3 Wall Street Rising: 1980- 57

4 "Greed Is Good": The Takeover 88

5 The Best Deal Ever 120

6 Too Big to Fail 153

7 The American Oligarchy: Six Banks 189

Epilogue 223

Notes 233

Further Reading 287

Acknowledgments 291

Index 293

What People are Saying About This

From the Publisher

"Erik Synnestvedt reads with a strong and clear voice and an appropriate edge of indignation at the hubris of our nation's most powerful bankers." —-Publishers Weekly Audio Review

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13 Bankers 3.6 out of 5 based on 0 ratings. 57 reviews.
RolfDobelli More than 1 year ago
This intriguing study concludes that for all the talk of a new world order after the devastating 2007-2009 financial collapse, Wall Street looks remarkably the same. Money and power are concentrated in fewer hands, but the Street's fundamental philosophy, favoring light regulation and markets dominated by a few huge banks, survives. In this eye-opening account, former chief economist of the International Monetary Fund (IMF) Simon Johnson and former McKinsey & Co. consultant James Kwak argue that Wall Street has gotten what it wants for too long, and that the time has come to break up big banks. While the authors cover oft-trod turf, their novel premise that the government must break up the big banks counters conventional wisdom. getAbstract recommends this book to taxpayers and policy makers seeking insight into how Wall Street works.
duluoz_beat More than 1 year ago
I tip my hat to anyone brave enough to try to explain the multi-tiered derivative investments with sub-prime loans buried in them and stepped on several times before insurance companies insured what was uninsurable- or something like that. With great clarity we learn of the intellectual disparity between Wall Street financers and beltway regulators. Same for the legislators more concerned with financing their next campaign than the risks of financing sub-prime mortgages. I sensed a left-leaning viewpoint where Wall Street is taken to the woodshed (as of course it should be) while the government officials are let go with a wink and a nod. Criticism is piled on Wall Street while the government actions are related in a neutral, factual reporting style. The regulatory changes in 1999 during Clinton's administration that allowed banks to merge with and into other financial institutions and offer an array of products are discussed in detail. It seems to me that these changes in conjunction with the Community Reinvestment Act ("CRA") were the catalyst for the subprime crisis as many of the newly formed institutions fell outside the regulations as called for by the CRA. So why are the officials that created the environment for subprime lending not treated as villains the way the "13 Bankers" of the title are? I wanted to learn more about these 13 Bankers in a similar manner as the authors of "Barbarians at the Gate" offered in their book. A character expose within the financial details would make for a more compelling read. I found the title of this book to be misleading in that sense. The first half of the book is gripping but it bogs down and loses its forward motion toward the middle and ends more like a text book than a non-fiction narrative. Given the complexity of the bundled investments created by the evil investment bankers it was probably inevitable. In the wake of the crisis we are seeing a round of "angry parent grounding obstreperous child" regulations- yet the intellect at work on Wall Street is already beyond this and certainly has a new bundle of investments that Washington can't envision or ever understand.
Anonymous More than 1 year ago
An excellent and well researched history of what lead up to the current financial crisis. While the authors seem to have part of the right solution in breaking up the big banks by limiting them to a fixed percentage of GDP, they may miss or avoid two key points: 1.) The Federal Reserve is a private banking cartel that acts in its own self interest, and any regualtion by it only serves the interests of those being regulated. Central banking, with fiat currencies, itself is a significant root cause of booms and busts. Bubbles and their deflation will continue as long as central banking drives the economy. 2.) GDP is really a measure of spending, and measures consumption rather than production, and can be misleading in that standard of living is going down, even though GDP may be going up. Looking at the ratio of Debt or Bank Assets to GNP tells more of the real story regarding economic decline. The growing domination of the economy by the financial services industry gives a false sense of value and growth. If 60% of the S&P 500's earnings are financial services companies, the quality of its index and earnings are much weaker than those when industrial production were their bases decades ago.
pianoplayerVA More than 1 year ago
This book is revealing and interesting If you want another viewpoint,read this.
jackND More than 1 year ago
If you'd like to know the history of American finances, and what we can do about it for the future, you should seriously pick up this book. The cycles of politics, and the growth of the largest banks and the understanding that breaking up big banks and hard limits on size and regulation is a fight America has met before. Essential reading!
jcbrunner on LibraryThing More than 1 year ago
This is an important but not great book about the current financial crisis. The main flaw of the book is that it tries but only partially succeeds to mesh two stories. The first story is the rise of the financial oligarchy and its influence on Washington, DC. Wall Street has always had tremendous influence on and in Washington. A quick look at past treasury secretaries shows their Wall Street pedigrees. The authors' case is (not yet) backed up with sufficient data. I'd venture the idea that Wall Street's influence has grown mostly at the cost of other oligarchic industries (such as automotive, remember McNamara?). The dirty secret of US history is that the country has been run by an oligarchy since its inception. The foundling fathers were filthy rich (and didn't like to pay taxes for the common good). The poor and populist founding fathers like Thomas Paine and Samuel Adams were quickly pushed aside (and erased from history) by the planters, bankers and manufacturers. The control of Washington is the result of power struggles among different groups of oligarchies.The authors are on firmer ground regarding the methods of influence which they divide into campaign contributions, lobbying/human capital and cultural capital/ideas. The last element is the most pernicious: Masquerading as free market capitalism, crony capitalism has been established in the public mind set as the only alternative. The health care and stimulus debates illustrate perfectly how the American media and public are trained to disregard other solutions. It is an interesting question if regime change and winning the intellectual battle can be achieved without displacing the dead-enders currently occupying all important positions.It took 30 years for them to establish their hegemony ...Their second story is the evolution of banking in the United States from Jefferson/Hamilton to the robber barons to the Great Depression to today. While they provide some international context, I wonder how well the book will hold up against Reinhart's Eight Centuries of Financial Folly (which I have yet to read). Overall, it is a good survey of how the deregulation happened. An awful lot of dismantling existing and not providing new regulation happened under the Clinton administration. During the Bush years, the last vestige of integrity and feelings of responsibility were disposed off too.Johnson and Kwak recommend better regulation (especially customer protection), stronger supervisors and breaking up the Too Big To Fail banks into smaller entities (which would still have been giants a few years ago. One key demonstration of this book is the concentration in the financial sector and its supporting industries such as auditing and rating). Proposals which should not be controversial in a sane world.Even a casual reader of the authors' blog will not learn much in this book which has not already been extensively treated on their blog. Buying the book is thus more a way of saying thank-you for their efforts to create a better America.
annbury on LibraryThing More than 1 year ago
This is one of the most enlightening books about the financial crisis that I have read. It focusses on the extent to which, in advance of the crisis, the financial services industry captured the regulatory apparatus designed to control it. This happened by direct deregulation, and by covert deregulation (e.g., understaffed regulatory agencies). It happened under Democrats as well as under Republicans, and it is no coincidence that it happened as the share of financial services in U.S. corporate profits rose from around 10% in the 1970's to over 30% in the mid-2000's. Financial power gave the bankers political power, and political power helped them to extend their financial power. It's not necessarily a conspiracy in the "let's all get together and take over Congress" sense, but it certainly worked like one. The author's evidence is compelling, and his arguments are strong. And now we seem to be doing it all over again ---
justindtapp on LibraryThing More than 1 year ago
Johnson and Kwak's blog was essential reading during the financial crisis, and is still quite educational. This book is also required for Money & Banking in the fall. (I'm a bit sad because I went way over the Amazon clipping limit, so 314 of my highlights are invisible via the website.)Johnson approaches the U.S. financial crisis from the point of view of a former Chief Economist of the IMF. That perspective allows him to see the irony of how the U.S. and the IMF advised East Asian countries through their financial crises in 1997-1998 compared to how the U.S. handled its own.Johnson gives a history of banking and regulation in the U.S., from the first central bank charter of 1791 to Jacksonian populism, to the Panic of 1907 to the Great Recession. All of this is great, concise history.Johnson comes down on the side of Thomas Jefferson--a distrust of centralized power of bankers as a threat to the Republic. He sees what the U.S. has now-- an oligarchy of a few large politically-influential financial institutions-- as little different from the cronyism of developing nations that the U.S. has been quite critical of. The U.S. advice to Asia in the 1990s was that no bank should be "too big to fail," and the big state-backed monopolies should be broken up. Johnson offers that same advice to the U.S. today-- find a way to break up the banks, just as Republican Teddy Roosevelt did with the Trusts of the early 1900s.About 1/3 of this book is bibliography-- a treasure trove of sources and references. You always hear of the growth of finance, but it's nice to have specific data. The undeniable fact is that the deregulation of the financial sector in the 1970s and 80s did nothing to boost U.S. productivity and therefore did not result in an obvious better allocation of capital. The financial sector replaced manufacturing 1-for-1, and commercial & investment banking and insurance profits grew to be a much larger portion--almost 50%-- of all U.S. corporate profits by 2007. The amount of leverage taken on by financial sector firms became enormous over this time period: "in 1978, all commercial banks together held $1.2 trillion of assets, equivalent to 53 percent of U.S. GDP. By the end of 2007, the commercial banking sector had grown to $11.8 trillion in assets, or 84 percent of U.S. GDP. But that was only a small part of the story. Securities broker-dealers (investment banks), including Salomon, grew from $33 billion in assets, or 1.4 percent of GDP, to $3.1 trillion in assets, or 22 percent of GDP. Asset-backed securities such as collateralized debt obligations (CDOs), which hardly existed in 1978, accounted for another $4.5 trillion in assets in 2007, or 32 percent of GDP.* All told, the debt held by the financial sector grew from $2.9 trillion, or 125 percent of GDP, in 1978 to over $36 trillion, or 259 percent of GDP, in 2007...In 1978, the financial sector borrowed $13 in the credit markets for every $100 borrowed by the real economy; by 2007, that had grown to $51.14 In other words, for the same amount of borrowing by households and nonfinancial companies, the amount of borrowing by financial institutions quadrupled....by the third quarter of 2009, financial sector profits were over six times their 1980 level, while nonfinancial sector profits were little more than double those of 1980."The private sector began to wade where only the GSE's had tread before-- securitizing mortgages. Deregulation allowed the lines to blur between banks and non-banks, until the lines were at last removed in 1999. Greenspan and other regulators intentionally decided not to regulate various activities. For example, Greenspan declined to look at the books of mortgage brokers owned by bank holding companies-- even though it was in the Fed's realm to do so. If there were bad practices or "liar loans" piling up, he clearly said the problem would take care of itself (and later regretted his belief in market self-regulation).The story is that of "big
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willyvan More than 1 year ago
This is a very useful book on the causes of the current slump. Johnson and Kwak focus on the role played by the 13 leading bankers who dominate Wall Street. Between 1998 and 2008, Wall Street spent $1.7 billion on election campaigns and $3.4 billion on lobbying. Its people moved into Washington. Its ideology that a large finance sector was vital for the USA became all too widely accepted. As a US Senator said, "the banks . frankly own the place." Yet, as the authors point out, finance is a rent-seeking activity, shifting wealth, not creating it. Finance, at best, assists wealth creation, not destroys it. So in the crisis, the bankers blackmail us - pay up or we go under, dragging you all down with us. Their mantra is - socialise losses, privatise gains. The governments give the banks whatever they want, instead of writing down the banks' debts. So we the taxpayers have been made to give the bankers blank cheques, up to $23.7 trillion. The slogan is 'save the economy'; the reality is saving the banks, the bankers and the bankers' bonuses. These guarantees (subsidies) allow the biggest banks to borrow more cheaply than their rivals, so they grow even bigger. But this is to go the wrong way. As the authors state, "The right solution is obvious: do not allow financial institutions to be too big to fail; break up the ones that are." Even Alan Greenspan, Chairman of the Federal Reserve, said, "If they're too big to fail, they're too big." And these bailouts allow the bankers to take ever-bigger risks, which will cause the next crisis. As Johnson and Kwak conclude, "With the same conditions in place that led to the last financial crisis, it would be folly to expect any other result." One sign of madness is to do the same thing and expect a different result. Are people going to allow yet another crunch, causing an even worse slump? We need to defeat this financial oligarchy before it ruins us all.
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Bernadetteb13 More than 1 year ago
I would like to start by saying that I am seventeen years old and was only a freshman when our market experienced our grave recession. When first stumbling upon the novel I was intrigued to learn more about the actions of our power elite and government officials. But as I read further into the novel I began to realize that my little experience in banking, when I say little I mean I just opened a savings account this summer for college, would unfortunately prevent me from grasping the depth of the novel. Between derivatives, capital, liquid funds, and equity not even a dictionary could sort out the large numbers and terms that make up our banking system. So I do believe that Simon Johnson and James Kwak were appealing to an audience with in-depth background of they complicated logistics of our banking system, which would inevitably appeal to an older and more financially well-off audience. Although I cannot say that I didn't enjoy comprehending what I could about our countries banking history and learn even more about the root of our bank failure in 2008. I believe any American citizen would like to know the truth about regulations and restrictions put on bankers to secure their money. It was tragic to find that the government officials that we elect to properly operate our country deregulate policies for their large campaign contributors and are essentially Wall Street's puppets. The authors even admit that it is hard for our government to reprimand such a deep pocketed machine in our country, so instead our government has grown dependent and only passes legislation to ensure re-election. Even Rahm Emanuel, chief of staff for the Obama administration said," Rule one: Never allow a crisis to go to waste. There are opportunities to do big things."Yet Obama never could pass his sweeping overhaul of the financial regulatory system after the recession hit in 2008. As you read through the novel you begin to see the mentality that developed through the hundreds of years of U.S. banking. Coming alarmingly close to Jefferson's ultimate fear of an "oligarchy" that had complete control over the quality of life of the average "Joe". After scouring through all the numbers of what seemed pointless and unreadable information, James and Simon presented an unveiling of our financial system. A congressional staff says it best when he described banking efforts after the 2008 bailout as, "an orchestrated, well-funded, effort by the banks to manipulate our legislations and leave no fingerprints."I highly recommend for you to expand your banking knowledge and find the truth in this novel.
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