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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

Category: Banking
December 11, 2013 at 10:17 AM

The Volcker rule: A good start

Paul Volcker, circa 1980. (AP Photo/Chick Harrity)

Paul Volcker, circa 1980. (AP Photo/Chick Harrity)

The Volcker Rule, named after the cigar-chomping former chairman of the Federal Reserve Board who championed it, is finally in place. It aims to prevent banks from risky speculation, known as proprietary trading. The fact that Wall Street and the big banks fought it so hard shows it’s a good policy. But it is only a start.

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0 Comments | More in Banking | Topics: Volcker rule

December 3, 2013 at 10:56 AM

Number of U.S. banks hits low not seen since Depression

When Heritage Financial of Olympia merged with Washington Banking, parent of Whidbey Island Bank in October, the deal was part of a much larger trend. According to an analysis of FDIC data by the Wall Street Journal, the number of banking institutions in the United States has fallen to its lowest level since at least the Great Depression.

The well-known story of the Great Recession is that the Too Big To Fail banks that did so much to cause it (and got away with it) grew larger still. Now we can see the other side of the coin derivative.

The number of banks peaked at more than 18,000 in the late 1980s. As of Sept. 30, there were 6,891.

According to the Journal, “The consolidation could help alleviate concerns that the abundance of U.S. banks leads to difficulties in oversight or a less-efficient financial system. Meanwhile, overall bank deposits and assets have grown, despite the drop in institutions.”

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October 28, 2013 at 10:53 AM

The costly story of JPWaMu

“Time wounds all heels,” or so the saying goes. The big news lately has been JPMorgan Chase’s $13 billion settlement with the government, and in the case of the London Whale trading disaster, the Too Big To Fail institution was forced to admit wrongdoing.

In the story during and immediately after the Panic of 2008, the House of Morgan under Jamie Dimon was the one big bank that did things right. No wonder it could acquire Washington Mutual after it failed. But the whale episode, which occurred in 2012 and cost $6 billion, showed that all was not actually well inside the bank.

Now it turns out that even the neat tale of how Dimon was smart enough to avoid the trap of subprime mortgages was untrue.

According to the Wall Street Journal, before the crash JPMorgan “dealt with some of the biggest subprime lenders of the time, including Countrywide Financial Corp., Fremont Investment & Loan and WMC Mortgage, a former unit of General Electric.”

It was bundling subprime loans and selling them as securities, including to Freddie Mac, the government-backed agency that had to be saved with $100 billion in taxpayer money.

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0 Comments | More in Banking | Topics: JPMorgan Chase, Washington Mutual

October 17, 2013 at 10:25 AM

Being Jamie Dimon: A little tougher now

I am told that Jamie Dimon was in town for a private talk at the Washington Athletic Club. And I am shocked, shocked, to have been left off the invitation list, after all those years when Dimon wanted to talk to journalists and let us hear his fun, intense, informative, profanity-laced monologues on banking and the economy.

One can guess that the more than 3,400 Seattle employees fired when JPMorgan Chase bought Washington Mutual didn’t come up. Bad form, you know.

These are difficult days for the man who was once “America’s least hated banker.” Last month, the House of Morgan agreed to pay more than $920 million to settle with the Securities and Exchange Commission, Federal Reserve, Comptroller of the Currency and U.K. regulators over the “London Whale” trading gambling fiasco that cost some $6 billion. The SEC reportedly refused to negotiate the fine, impudence to a banker who had led the Dodd-Frank framers around by their noses.

Now the bank has agreed to pay another $100 million in fines to the Commodity Futures Trading Commission and admit its traders acted “recklessly.” A Justice Department investigation continues.

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0 Comments | More in Banking | Topics: Jamie Dimon, London Whale, Washington Mutual

September 20, 2013 at 10:28 AM

Vote: Was justice done with JPMorgan?

So the federal government has imposed a $920 million fine on JPMorgan Chase in connection with the fraud known as the “London Whale,” which led to $6 billion in losses to this institution which is ultimately backed by American taxpayers. The event is noteworthy for several reasons. First, the settlement required the bank to admit wrongdoing, a significant departure from the usual “neither admitting nor denying” guilt. Unfortunately, the Securities and Exchange Commission failed to name a single senior individual as being responsible. As a result, as Michael Santoro wrote in the New Yorker, “the S.E.C. will be supporting the bank’s own narrative about the Whale missteps.” As for the size of the fine, it represents about 13 days of profits.

The London Whale episode is remarkable, too, because it happened in 2012, not in 2007. It’s disheartening enough to know that every executive that built the house of cards that brought on the Great Recession — and personally profited handsomely doing so — got away with it. None went to prison or even on trial. None was forced to return even some of the compensation they received for engaging in risk hustles and derivative grifting. It was left to American taxpayers, most of whom are making less than they did in 1989, to pay the bill. The poor kid who gets caught knocking over a convenience store should be so lucky. No, the Whale came in 2012, a reminder that not only did the Too Big to Fail banks get bigger in the crisis, but their dangerous gambling continues. And remember, Jamie Dimon was considered the statesman of finance (still is) and the House of Morgan (buyer of Washington Mutual) the most prudent institution.

What do you think about the settlement?

Read on for some of the best business and economic stories of the week, and the haiku:

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0 Comments | More in Banking | Topics: banking, JPMorgan Chase

September 13, 2013 at 10:27 AM

Vote: Is the financial system fixed?

Five years ago this weekend, the giant investment bank Lehman Brothers collapsed, ushering in a financial crisis and economic contraction the likes of which hadn’t been seen since the Great Depression. Less than two weeks later, but before regulators decided to back every big financial institution, Seattle’s Washington Mutual was allowed to become the biggest bank failure in American history. Some would say it was pushed, but that’s another story.

Most of the causes of the catastrophe are well-known: Deregulation, “innovations” such as exotic derivatives, shadow banking, securitization of massive numbers of subprime loans, high executive compensation rewarding excessive risk-taking, too much leverage, regulators captured by the industry and a massive bubble enabled by the Federal Reserve. The costs went well beyond those to the financial system. A Federal Reserve Bank of Dallas report estimates that the Panic of 2008 and resulting downturn cost each household between $50,000 and $120,000. Unemployment remains high. Inequality is worse. Beyond the money, trust in institutions and the equal application of the rule of law has been shredded.

In its typical inviting way, Ezra Klein’s Wonkblog offers 13 charts showing what’s fixed and what isn’t five years later. On the Atlantic’s site, James Kwak argues that policymakers have learned little if nothing from the crash. So it’s time for your say:

Read on for some of the best business and economic stories of the week and the haiku…

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0 Comments | More in Banking, Federal Reserve, Great Recession | Topics: banking, Great Recession

July 12, 2013 at 10:25 AM

A new Glass-Steagall: A good start

A bi-partisan group of senators wants to bring back Glass-Steagall. Good on Elizabeth Warren, John McCain, Maria Cantwell and Angus King. The proposed legislation would separate federally insured banks that offer checking accounts, loans, etc. from institutions that want to do risky investment banking, as well as hedge funds, private equity, swaps and insurance. It won’t solve the too big to fail problem, but it’s a good start. At the least, it would cut back moral hazard, where bankers know their profits will be privatized but losses socialized, that another crisis will bring another bailout.

The old Glass-Steagall was passed in 1933 after risky bank practices, especially selling stocks and gambling in the market, helped bring on the crash of 1929 and the Great Depression. The bill established the Federal Deposit Insurance Corp., putting an end to the runs on banks that had characterized the frightening period from 1929 to 1933. But as importantly, it prohibited federally insured banks from risky investment banking. Thus, a firm such as Goldman Sachs couldn’t count on taxpayers bailing out their bad bets. Glass-Steagall prevented another major banking crisis through the rest of its existence. Slowly eroded, it was finally repealed entirely in 1999 by legislation not only pushed by Republicans Phil Gramm and Jim Leach but Democratic President Bill Clinton and his Treasury Secretary Robert Rubin, a former investment banker. This was a generation of leaders that had no memory of the Depression, but had received plenty of money from the banks and Wall Street.

This deregulation provided no protection against a return to the dangerous practices that helped detonate the Depression. Indeed, the rise of risky derivatives trading, although highly profitable, was barely regulated at all. Regulators were co-opted by the lobbying might of the “financial services industry.” It took only seven years to create another massive crisis that brought the world financial system to the edge of collapse. Had Glass-Steagall remained in place, we’d still have Washington Mutual.

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0 Comments | More in Banking | Topics: banking, Elizabeth Warren, Glass-Steagall

July 8, 2013 at 11:17 AM

Happy birthday, Dodd-Frank, toothless reform

Remember when AIG was saved by the government during the Panic of 2008, receiving a $180 billion bailout and essentially becoming nationalized? The insurer that enabled so much fraud by the banksters turned around and gave its top executives hundreds of millions of dollars in bonuses and retention pay. The public outrage, further stoked by revelations of how the Wall Street Boyz received outrageous compensation packages as a reward for taking risks that would tank the economy and cost taxpayers, caused a provision to be inserted into the Dodd-Frank bill. It required companies to disclose how much their chief executives made compared with other employees.

Like most of this giant “reform” bill, it remains to be enforced. It’s one of the simplest portions of the legislation, but the Securities and Exchange Commission still hasn’t brought it into force, as we mark the third anniversary of Dodd-Frank’s passage.

The problem, as the Washington Post reports, is a vast and successful pushback by corporate power. “What the agency did not count on was the resistance mounted by big business. A lobbying campaign waged by business executives and the nation’s most prominent corporate associations undercut the momentum and effectively brought the agency’s work on the rule to a standstill.”

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0 Comments | More in Banking | Topics: AIG, banking, CEO compensation

June 13, 2013 at 10:23 AM

What’s going on with the markets

Japan’s Nikkei has entered bear territory. Other Asian markets have suffered sell-offs, too. The Dow Jones Industrial Average swooned Tuesday and is staging only a cautious recovery today. The Wall Street Journal’s estimable David M. Wessel wrote, “The tectonic plates of the world economy are shifting, moving the yield on the 10-year Treasury to the highest level in more than a year and shaking financial markets from Tokyo to Mumbai and Johannesburg to São Paulo.” Is the world returning to something like normal, where America grows again, China does a soft landing to slower growth and the Japanese economy can finally find its footing?

Or is it a harbinger of more volatility in financial markets—perhaps the result of a misreading of the Federal Reserve’s policy intentions by the markets or a premature move by the Fed to cut back on easy money—that yields an unwelcome increase in market interest rates before the U.S. economy achieves what Fed Chairman Ben Bernanke once called ‘escape velocity’?

The question of what the Federal Reserve will do is rightfully a preoccupation. Can it make the pivot to slightly tighter money without tanking the markets? And can emerging markets continue to thrive on the “hot dollar” trade now that Treasuries are becoming more appealing? A couple of charts explain what is not happening.

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0 Comments | More in Banking, China economy and business, Federal Reserve, Inflation, Interest rates | Topics: Japan

May 29, 2013 at 10:29 AM

The economy this summer

Laying down some markers to watch now that Memorial Day has passed and summer is almost upon us:

Will the recovery hold and expand? Housing prices are finally making a solid move upward. Consumer confidence is at a five-year high. They’re also taking on more debt again. This morning’s correction notwithstanding, stock prices are surging. Banks recorded their best profits on record. Some of the worst outcomes haven’t happened — a double-dip, eurozone contagion and war on the Korean peninsula. All this translates into a widening of the very slow recovery. On July 31st, the government will release its second-quarter gross domestic product report. Unfortunately this will contain revisions that make the economy seem to be growing faster than it is. The best metric of the strength of the recovery will continue to be unemployment. Eleven million Americans are still without jobs and although corporate profits are at a record, hiring has been fairly weak.

Will the stock market keep rocking? Stocks have been a good investment, especially in companies that came through the recession with healthy balance sheets. And where else could investors put their money with the pitiful returns from fixed-income? The big question is how long the run can last. You’ll find predictions across the spectrum. Average investors are just bystanders in this drama. With high-speed trading and huge institutions driving the action, even small macro warnings might trigger at least a modest correction. The big enchilada will be…

What does the Federal Reserve do? The Fed’s QE-eternity bond purchases and expansion of the money base have been a huge factor in the bull run. How Fed Chairman Ben Bernanke would respond to a real recovery has been for years a hypothetical question. Now it’s becoming smash-mouth real, as in the way today’s rise in Treasury yields has tanked the market. Even though he coined the metaphor, Alan Greenspan was never willing to take away the punch bowl as the party was getting going. Will Bernanke? And if so, how will the Fed’s pivot be handled — and received by the markets. Like much since 2007, this is unknown territory.

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0 Comments | More in Aerospace/Boeing, Banking, Boeing, Federal Reserve, Jobs/Unemployment

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