Wall Street Isn’t Fixed: TBTF Is Alive And More Dangerous Than Ever

Practically since the day Lehman went down in September 2008 Washington has been conducting a monumental farce. It has been pretending to up-root the causes of the thundering financial crisis which struck that month and to enact measures insuring that it would never happen again. In fact, however, official policy has done just the opposite.

The Fed’s massive money printing campaign has perpetuated and drastically enlarged the Wall Street casino, making the pre-crisis gamblers in CDOs, CDS and other derivatives appear like pikers compared to the present momentum chasing madness. At the same time, the giant regulatory diversion known as Dodd-Frank has actually permitted the TBTF banks to get even bigger and more dangerous.

So now the regulators, who have spent four years stumbling around in the Dodd-Frank puzzle palace confecting thousands of pages of indecipherable regulations, slam their wards for not having sufficiently robust “living wills”. C’mon! This is just another Washington double-shuffle.

The very idea that $2 trillion global banking behemoths like JPMorgan or Bank Of America could be entrusted to write-up standby plans for their own orderly and antiseptic bankruptcy is not only just plain stupid; it also drips with political cynicism and cowardice. If they are too big to fail, they are too big to exist. Period.

Indeed, it is utterly amazing that adult legislators and regulators could even take the idea of a “living will” seriously—-let alone believe that they could possibly thwart the recurrence of another outbreak of so-called “financial contagion”.Yet so thick is the beltway cynicism and so complete is the K-Street domination of policy-making that a trite bureaucratic gimmick like the living will has become a major component of so-called macro-prudential policy.

So there is nothing to do except go back to the fundamentals. First and foremost, the September 2008 meltdown was not a main street banking problem; it was a crisis confined to the canyons of Wall Street, owing to the fact that the gambling houses domiciled there had massively bloated their balance sheets with toxic assets and risky derivatives trades, and then funded these balance sheets leveraged at 30:1 with huge amounts of “hot money” in the form of repo and unsecured wholesale money.

As I demonstrated in the Great Deformation, the “bank run” was almost entirely in the Wall Street wholesale market—there was never any danger of retail runs at the corner branch bank offices, and the overwhelming majority of the 7,000 main street banks did not own the kind of toxic securitized assets that were roiling Wall Street. In fact, the wholesale market runs in the canyons of Wall Street were actually a positive, economically therapeutic event. They had already taken out three of the reckless gambling houses—- Bear Stearns, Lehman and Merrill Lynch—-and were fixing to finish off the remainder, that is, Goldman and Morgan Stanley.

Had the market been allowed to finish off the work of the economic gods in late September 2008, the TBTF problem would have been substantially alleviated.  Today there might have existed a half dozen “sons of Goldman” in the form of M&A, trading, investment banking and asset management boutiques—run by chastened veterans who lost their lunch during the 2008 Wall Street cleansing.

The excuse for the Washington’s massive intervention against the free market in the form of TARP and the Fed’s massive flood of liquidity, of course, is that the US economy was about to be annihilated by something called financial”contagion”.  But that is a specious urban legend invented by the crony capitalists who controlled the Treasury and the money-printers who had fueled the housing and credit bubble at the Fed.