STOCKMAN'S CORNER

Busting The Banksters—-The Case For Super Glass-Steagall, Part 1

by David Stockman • August 19, 2016

NOTE TO READERS

I am in the throes of finishing a book on the upheaval represented by the Trump candidacy and movement. It is an exploration of how 30 years of Bubble Finance policies at the Fed, feckless interventions abroad and mushrooming Big government and debt at home have brought America to its current ruinous condition.

It also delves into the good and bad of the Trump campaign and platform and outlines a more consistent way forward based on free markets, fiscal rectitude, sound money, constitutional liberty, non-intervention abroad, minimalist government at home and decentralized political rule.

In order to complete the manuscript on a timely basis, I will not be doing daily posts for the next week or two. Instead, I will post excerpts from the book that crystalize its key themes and which also relate to the on-going gong show in the presidential campaigns and in the financial and economic arenas. Another of these is included below.

I am also working with my partners at Agora Financial on a new version of Contra Corner. More information on that will be coming later this month.

……..The mainstream narrative about “recovery” from the financial crisis is a giant con job. And nowhere does the mendacity run deeper than in the “banks are fixed” meme—an insidious cover story that has been concocted by the crony capitalist cabals that thrive at the intersection of Wall Street and Washington.

That’s not to say that the Wall Street cover story is hiding anything. In recent months even the mainstream media has published stunning evidence of malefactions and abuse at the great megabanks—especially Bank of America (BAC) and Citigroup (C).

Indeed, a recent Wall Street Journal expose about the depredations of Bank of America shows that the latter is in a class all by itself when it comes to bankster abuse and criminality.

Not surprisingly, at the center of this latest malefaction is still another set of schemes to grossly abuse the deposit insurance safety net and enlist the American taxpayer in the risky business of financing high-rolling London hedge funds.

In this case, the abuse consisted of BAC funded and enabled tax avoidance schemes with respect to stock dividends—–arrangements which happen to be illegal in the US.

No matter. BAC simply arranged for them to be executed for clients in London where they apparently are kosher, but with funds from BAC’s US insured banking entity called BANA, which most definitely was not kosher at all.

As to the narrow offense involved—-that is, the use of insured deposits to cheat the tax man—-the one honest official to come out of Washington’s 2008-2009 bank bailout spree, former FDIC head Sheila Bair, had this to say:

“I don’t think it’s an appropriate use…….. Activities with a substantial reputational risk… should not be done inside a bank. You have explicit government backing inside a bank. There is taxpayer risk there.”

She is right, and apparently in response to prodding by its regulator, BAC has now ended the practice, albeit after booking billions in what amounted to pure profits from these illicit trades.

But that doesn’t end the matter. This latest abuse by BAC’s London operation is, in fact, just the tip of the iceberg; it’s a symptom of an unreformed banking regime that is rotten to the core and that remains a clear and present danger to financial stability and true economic recovery.

And it’s not by coincidence that at the very epicenter of that untoward regime stands a $2 trillion financial conglomerate that is a virtual cesspool of malfeasance, customer abuse, operational incompetence, legal and regulatory failure, downright criminality and complete and total lack of accountability at the Board and top executive level.

In short, BAC’s seven-year CEO, Brian Moynihan, is guilty of such chronic malfeasance and serial management failures that outside the cushy cocoon of Too Big to Fail (TBTF) he would have been fired long ago. Indeed, it is hard to believe that he would have survived very long even running a small chain of car washes in east Nebraska.

Bank Of America—-The $100 Billion Financial Miscreant

Since 2009, in fact, BAC has been the number one employer of criminal and regulatory defense attorneys in the USA and the armies of accountants, consultants, forensic specialists, etc. which support them. So vast is the dragnet of lawsuits and legal actions that have been brought against it that BAC’s defense team amounts to an entire industry that should have its very own SIC code at the Commerce Department’s data mills!

Already BAC has agreed to a stupendous disgorgement of fines, settlements and penalties that totals upwards of $100 billion.

These stem not only from the mortgage abuses, where its Countrywide subsidiary was a lead perpetrator, but nearly every other aspect of its banking operations as well. The pejorative term “bankster” does well and truly apply perfectly to the BAC house of malfeasance and corruption.

So the question at hand is not simply BAC’s dodgy dividend-tax-trading strategies or why Brian Moynihan still has a job. The real question is why a monumentally reckless, abusive and predatory behemoth like BAC even exists in the first place.

In addressing those questions we get to the meat of the matter. That is, the urgent need to repudiate the “banks are fixed” meme and to replace it with a sweeping new regime based on a Super Glass-Steagall operational and regulatory framework.

Moreover, this new deal must start with a macro-economic truth that is completely ignored and denied by the beltway lobby driven narrative about the banking crisis.

To wit, the US banking sector is vastly bloated, inefficient, unstable and destructive owing to agovernment policy regime that subsidizes and privileges banks in a massive and plenary manner. Accordingly, there is monumental over-investment and malinvestments in the banking system. BAC is only a leading poster boy.

This truth is the very opposite of the erroneous mainstream predicate that ever more debt is the lynch-pin of capitalist growth and prosperity. By the lights of the Wall Street and Washington racketeers who dominate the debate, America’s $18 trillion economy can’t do without cheap and easy debt. Indeed, main street jobs and prosperity purportedly require more and more of it each and every quarter

In fact, the only reason that—–eight years after what is claimed to have been a near Armageddon event—–we are still plagued with TBTF, the regulatory monstrosity known as Dodd-Frank and the continuing tenure of the likes of BAC and Brian Moynihan is the tyranny of this wholly misbegotten “moar debt” predicate.

In that context, it needs be further recognized that root and branch reform won’t hurt the main street economy in the slightest—notwithstanding the self-serving protestations of Wall Street princes like Jamie Diamond. To the contrary, it will liberate inefficiently deployed people, capital and technology for use in more productive parts of the economy.

At the end of the day, it is the false belief in the debt elixir that undergirds the inexhaustible pettifoggery and cowardice displayed by Washington politicians and regulators alike when it comes to fixing the banks. The latter simply threaten a lenders’ strike, and any resolve to get to the root of the problem promptly dissolves.

Nevertheless, direct evidence of the degree to which banking abuse and corruption flows from the current government policy regime can be found in the whistleblower’s BAC narrative pieced together by the WSJ. The offending activities took place at Merrill Lynch’s “prime broker” offices in London—and that kind of broker’s office, of course, deals not with dentists and barristers but the billionaire titans of the global financial casino.

The essence of the scheme was to scalp huge profits from BAC’s cheap insured deposits by transporting them across the Atlantic so they could be deployed in risky trades by the high roller clients of its London prime broker.

Moreover, the transport of these insured deposit based funds to London from an entity called BANA did not involve an innocent mix-up way down in the bowels of the bank. The funds were transferred on orders from BAC’s top executives at the holding company level. As the WSJ succinctly explained:

One afternoon in February 2011, bankers, traders and others crowded into a Bank of America auditorium in London for a “town hall” meeting….(about) changing the way they loaned money to certain clients….. The money for the loans now would come through BANA rather than Merrill Lynch International.

(Executives) told attendees that increasing the use of lower-cost cash (i.e. insured deposits) would give Bank of America a new edge over competitors….. the funding would allow the bank to extend more loans to more hedge funds, including those with hard-to-sell investments, in turn generating more profits for the bank, according to internal documents and people involved in the discussions.

“…….. can we make sure all new clients, where possible, are loaded right on to BANA? Where we can’t I’d like to understand why,” a senior investment-banking executive, Sylvan Chackman, wrote in an email to employees in January 2012.

Here’s the thing. Never, ever should an insured deposit bank be operating a prime brokerage subsidiary in the wild west arena of the London financial markets. Stated differently, it is absolutely nuts that BAC even owns Merrill Lynch, and it is even more preposterous that it does so because its former executives were forced to acquire Merrill Lynch at the point of a gun in December 2008.

The gunslingers, of course, were the two highest economic officials in the land, Ben Bernanke and Hank Paulson.

And the latter were commanding this action in pursuit of a crony capitalist scheme to rescue Wall Street and prevent economic justice and efficiency from happening. That is, the shotgun marriage of BAC and Merrill was designed to prevent Mr. Market’s determination to liquidate the utterly bankrupt and corrupt gambling house that Merrill Lynch had become in the run-up to the so-called financial crisis.

Self-evidently, this latest BAC scheme to abuse and arbitrage the deposit insurance safety net would not have happened had Glass-Steagall not been repealed in the first place.

Indeed, as we elaborate further below, the great financial statesman, Senator Carter Glass, had been totally opposed to deposit insurance owing to its potential for exactly this kind of abuse.

Unlike the debt enthralled statists of the present era—-such as Bernanke, Paulson, Geithner and all the rest of the Obama entourage—-Senator Glass knew that gambling and banking do not mix; and that an endless stream of Sylvan Chackman’s would arise and order that “we make sure all new clients, where possible, are loaded right on to BANA (aka the US taxpayer).”

Actually, however, mere restoration of the old Glass-Steagall is not nearly enough. A banking regime that can produce $100 billion worth of sanctions against a single institutions needs to be replaced root and branch.

If not, it is only a matter of time before the next contagion of London Whales and tidal wave of toxic products and trades arising from Wall Street’s financial meth labs triggers another financial panic and meltdown.

Citigroup And The Cromnibus Caper

That’s because Bank of America is no outlier. The egregious gambling dens that have metastasized on Wall Street over the past three decades remain almost wholly intact, and Citigroup is another poster boy.

At the time of the 2008 crisis, it is was completely and hopelessly insolvent. Its giant web of holding company gambling and money churning operations should have been put in Chapter 11, and the underlying insured bank should have been put into FDIC receivership. No insured mom and pop depositor would have lost a dime.

Yes, the depositor payoffs would have been “ costly” to Uncle Sam, but that cost was created long before September 2008. It was a product of the whole Federal deposit insurance scheme and its abuse by giant banking supermarkets that should never have been permitted in the first place.

Unfortunately, insult has been added to injury by subsequent developments. To wit, the Washington/Wall Street policy elite has actually doubled-down. They flooded the banking system with even cheaper money via ZIRP and QE, while establishing a regulatory counter-point under Dodd-Frank that is worse than useless.

Needless to say, the hard-pressed taxpayers of America should never again be forced to bailout the crony capitalist plunder that was enabled by the Fed’s free money machine in the run-up to the 2008 financial crisis. Yet for eight straight years the madmen (and women) of the Eccles Building have pegged the cost of bank deposit money at essentially zero, thereby enabling the banks to earn spread profits on the backs of main street savers and retirees.

At the same time, Washington has pretended to be fixing the banks via an opaque regulatory shitstorm called Dodd-Frank. The latter ignores all the underlying causes of Too Big to Fail, and, instead, has blanketed the financial system in the kind of regulatory spaghetti that causes vast deadweight compliance costs, but does absolutely nothing to stop the Wall Street banksters from perpetrating their toxic schemes.

Indeed, the reason that structural reform, including breaking up the giant financial conglomerates, is so imperative was crystalized two years ago by a naked Wall Street power grab in the Congressional backrooms. It involved a Citigroup-drafted sneak attack on Washington’s tepid effort to curtail one of the more egregious gambling habits of some of the big banks.

These incorrigible larcenists had been trying to gut the “push out” provisions of Dodd-Frank for more than three years prior to what became the Cromnibus appropriations bill in the lame duck Congressional session after the 2014 election.

The provision under attack boiled down to a simple and urgently necessary injunction to the banks. Namely, that you can’t roll the dice in the “derivatives” gambling halls with taxpayer guaranteed deposits.

In light of the inherent dangers of what even Warren Buffet once called “financial weapons of mass destruction”, it is self-evident that no bank—not even the mighty Citigroup—–should be allowed to bring these incendiary devices within a country-mile of the taxpayer enabled FDIC guarantee program.

So what Dodd-Frank proposed was actually quite sensible. It said to the giant Wall Street banks—-go ahead and swing for the fences, but do it in a holding company subsidiary. If something subsequently goes boom in the night, it’s on your earnings and bonuses—–not the taxpayers’ hard earned bucks.

If there was anyone left on Wall Street with a sense of decency and a modest comprehension of what free market capitalism is about, they would not have been looking a gift horse in the mouth.

The Dodd-Frank provision which came under its furious attack, in fact, was hardly a slap on the wrist. If Congress had really meant to fix the system that supposedly brought us to the cusp of Armageddon in September 2008 it would not have bothered with Dodd-Frank at all.

The Original Glass-Steagall And Its Demise

Instead, Washington should have gone to the root of the problem and passed a Super Glass-Steagall that would have dismembered the giant banks by statutory edict, and kicked the Wall Street based gambling houses like Citigroup out of the FDIC entirely.

The fact is, deposit insurance has been coopted and abused by the Wall Street mega-banks for decades. It now stands as a vast perversion of what had actually been intended—-misguided or not—way back in the dark hours of 1933-34.

Back then there were three people in Washington who counted when push came to shove—–President Roosevelt, Senator Glass and Congressman Steagall. FDR was against deposit insurance because he thought it would be abused by Wall Street, and for once he was right.

Senator Glass was against it, too. As one of the true financial statesman of modern times he did well and truly understand the dangers of moral hazard and fractional reserve banking propped up by the state.

Alas, Congressman Steagall was a demagogic foe of Wall Street. But he also wanted deposit insurance to protect the red-neck depositors of Alabama, who had been taken to the cleaners by banksters of local origin.

So we got deposit insurance for the proverbial “little guy” and a sharp separation of banking and commerce at the insistence of Senator Glass. FDR went along for the ride after actually threatening to veto the bill on account of his belief that someday, in fact, it would be egregiously abused by the banks.

For at least a generation, as it happened, Wall Street kept its distance and its lobbyists at home. After all, for the next several decades it was still run by the chastened survivors of the 1920s gambling orgies and the Crash of 1929

By contrast, today we have almost the opposite history. Wall Street is run by a generation that has been bailed-out too many times to count and that has been blatantly and egregiously coddled by perverse central bank theories and practices that have turned the nation’s capital and money markets into veritable gambling casinos.

As we have previously explained, this includes such practices as the stock market “puts”, the “wealth effects” doctrine and years and years of ZIRP.

The latter is nothing more than free gambling money that can be used to fund the carry trades. That is, it’s free overnight money to buy anything with a yield or prospect of short-term gain—–and that can be rolled over day after day with the assurance from the Eccles building that the cost of carry is fixed and subject to change only upon ample notice.

Michael Corbat—-Crony Capitalist Poster Boy

In fact, the spoiled rotten generation now running Wall Street is personified by the current Citigroup CEO. The unconscionable raid on the taxpayers described above did not occur because the banks hirelings were sitting around K-Street looking for an issue on which to bill their client.

No, the command to mount this deplorable attempt to take the entire budget of the United States hostage in the middle of the night came straight from the C-suite at Citigroup. So just consider the monumental hutzpah of Michael Corbat and his Wall Street confederates.

In point of fact, these unvarnished crony capitalists had been trying to gut Dodd-Frank and especially the Volcker Rule and the “push out” standard for years.

But their case was so threadbare and self-serving that they could not even buy the necessary votes through the normal legislative process. And that’s notwithstanding millions of PAC contributions and every accouterment of the lobbying trade at their disposal. Their attempt to gut the “push out” provision was, in fact, a dead letter on Capitol Hill.

So during the lame duck session in December 2014 they resorted to the low road. Owing to its usual dysfunction, Congress had once again failed to pass the appropriations bills for the current fiscal year which had been underway for 80 days.

Therefore it had again resorted to an eleventh hour punt via a giant omnibus appropriations bill. The latter authorized $1.1 trillion of spending in 1600 pages of fine print bedecked with prodigious helpings of pork. No one could have possibly read or comprehended it in the several days between the vote and when it had been fashioned in the backrooms during the wee hours of the night.

In short, the so-called “Cromnibus” caper was appalling enough in its own right. But the fact that the CEO of Citigroup had ordered his henchman to pile-on is stark testimony to the insuperable arrogance of the generation which now runs Wall Street; and to their sheer sense of “entitlement”.

That is to say, Wall Street’s movers and shakers have come to believe that Washington is there to do “whatever it takes” to insure that Wall Street profits are fattened one more quarter. After all, the share prices of the gambling halls which operate there, and the executive options and bonuses of the executives who run them, must never fail to advance.

Yes, Michael Corbat is a Citigroup “lifer” and is just doing his corporate duty in behalf of shareholders. But that’s precisely the problem.

There should be no Citigroup “lifers” whatsoever—— because there should have been no Citigroup left standing. In fact, “C” is testimony to the financial folly of the last three decades.

Indeed, Michael Corbat is a “lifer” from this whole misbegotten chapter, going back to his days at Salomon Brothers and his rise through the Sandy Weill machine and all the departments and far-flung operations of Citigroup after it finally came together.

We have no clue about what he learned about banking along the way. But there is absolutely no doubt that what he did learn over that journey is that Washington exists to do Wall Street’s bidding.

The truth is, the generation represented by Michael Corbat knows nothing about the idea of the “public interest” as opposed to private advantage. It is steeped in the practice of crony capitalism, but it knows nothing of free markets.

After all these years of Washington’s rank servility, in fact, Wall Street leaders like Corbat now think taking the people of America hostage in the middle of the night is all in a corporate day’s work.

Forget Dodd-Frank—–It’s A Crony Capitalist Puzzle Palace

That’s also why Dodd-Frank is a crony capitalist regulatory puzzle palace that will not do one bit of good . Instead, its incomprehensible 1,700 pages of legislative pettifoggery has become a beltway lawyers, accountants and lobbyists full employment act.

Rather than market based financial discipline and efficiency, what it has given rise to is 10,000 pages of obscurantist rule-makings that are suffocating mid-sized and community banks with compliance trivia while anesthetizing Washington’s sleepwalking politicians— until the next crisis.

By contrast, a Super-Glass/Steagall would entail a legislated breakup of the multi-trillion behemoths like Bank of America, Citigroup, Wells Fargo and JPMorgan. It would also encompass a sharp rollback of FDIC insurance to only “narrow” banks which take deposits and make loans, and it would eliminate the Fed’s discount window privileges for any financial institution involved in trading, underwriting and proprietary risk-taking.

The Key To Banking Reform—-Hog-Tie The Fed

………Most importantly, Super Glass-Steagall would also hog-tie the Fed by ending discretionary interest rate pegging and the entire gamut of FOMC market interventions and securities price falsification.

The latter point, in fact, is the sine qua non of true banking reform. As we demonstrated in Chapter 4, our debt saturated economy——with $64 trillion of credit market debt outstanding representing an unsustainable leverage ratio of 3.5X national income—does not require artificially priced credit to rejuvenate growth and prosperity.

Nor is there any point whatsoever in perpetuating ZIRP and the Fed’s long-standing and destructive regime of financial repression. The major consequence of 90 months on the zero bound has been a massive transfer of income—upwards of $250 billion per year—-to the banking system from the hides of savers and depositors.

The relevance here is that BAC and most of the other giant financial conglomerates would be insolvent without these arbitrary transfers.

Given BAC’s $1.2 trillion deposit base, in fact, the Fed’s financial repression probably reduced its funding costs by at least $30 billion last year compared to a free market pricing environment.

Needless to say, that wholly unwarranted and economically wasteful subsidy amounts to more thandouble the $14.6 billion of net income BAC posted in the most recent 12 months, and is more than 8X the size of its dividend distributions.

And, no, in the face of free market interest rates, BAC and other banks would not have automatically made up the difference via higher yields on its loans and assets.

The fact is, BAC’s loan book today is smaller than it was on the eve of the crisis because as we demonstrated in Chapter 6, US households and businesses have reached a condition of “peak debt”.

Accordingly, in a free market the current central bank driven deformation of pricing would be unwound. Interest rates on savings would rise more than yields on borrowings because demand for market rate debt—-as opposed to Fed subsidized rates—–would fall sharply.

Stated differently, BAC and most other giant banks are solvent only because the lion’s share of their earnings have been indirectly manufactured by the monetary central planners in the Eccles Building.

Yet no matter how interest rates and profit spreads might ultimately shake out on the free market, one thing is certain. To wit, there is not a snowball’s chance in the hot place that BAC could have earned the $75 billion in dividends and share repurchases it made over the last decade. Not even close.

So what real banking reform would do is strip the giant banks like BAC, Citi, JPM, Wells Fargo, and the next tier as well, of the deposit cost subsidies which accrue from Fed financial repression, as well as their access to the discount window and FDIC insurance. .

By the same token, once the mega banks were stripped of these state conferred privileges and subventions, they would be free to operate any financial business they wished. And they would be free to employ whatever balance sheet arrangements their at-risk depositors, bond investors and equity holders would permit.

The banking behemoths keep demanding less government interference and regulation. Well, Super-Glass/Steagall would provide the free market they claim to desire.

Getting from here to there requires one more super-Glass-Steagall feature. The nation’s handful of megabanks have operated so long in the corrupt world of bailouts and state conferred moral hazard that they are inherently unstable and prone to the errors and abuses for which BAC and C are the poster boys.

Moreover, none of them would have gotten to their current size without the serial M&A campaigns and roll-ups that were enabled by the current rotten banking regime. Giant, multi-trillion banking conglomerates would not arise in a free market because there are simply no demonstrated economies of scale in banking beyond a few hundred billion in balance sheet footings, at most.

So cap their size at 1% of GDP or about $200 billion during the transition period when they are being weaned from their state crutches, subsidies and privileges and finding their sea-legs in the free market.

At the end of the day, cesspools like BAC and C need to be completely drained. And the only way to get them out on the free market where this could actually be accomplished is through the enactment of the kind of Super Glass-Steagall described below.

Super Glass-Steagall—-A Model For Sweeping Change

As indicated, Super Glass-Steagall would consign today’s handful of giant financial services conglomerates to the arena of pure free enterprise where they would live or die at the hands of competition and their value to customers. There would be no bailouts of alleged Too-Big-To-Fail institutions because this proposed enactment would strip the statute books of every vestige of authority to rescue banks with assets greater than $200 billion (<1% of GDP).

To remove any doubt, it would also impose multi-million fines and jail time on top officers of the Federal Reserve and U.S. Treasury if they tried to circumvent any of the new Super Glass-Steagall restrictions. So doing, it would reassure the American public that the larcenous crony capitalism of the last two decades has been abolished and that the ability of the racketeers of K-Street to corrupt the halls of government has been drastically curtailed.

In order to further purge the hoary myth of “systemic importance” and “financial contagion” from the Washington excuse bag, banks with more than $200 billion in assets would be denied access to the Fed’s discount window. Likewise, they would be ineligible to have their deposits backed by FDIC insurance.

Accordingly, the failure of a behemoth like Citigroup would not threaten to bankrupt FDIC as it did during the 2008 crisis. Even more crucially, the giant banking conglomerates would not become a pretext for the power-hungry bureaucrats at the Fed to yell “contagion!” during a time of financial dislocation, thereby giving themselves an excuse to bailout their Wall Street wards.

That’s because under a new Super Glass-Steagall type regime most banks below the $200 billion threshold would drastically limit their counter-party risk exposure to the dozen or so Too-Big-To-Insure banks in the US.

Today giants like JPMorgan, Bank of America, Citi, Well Fargo and the other usual suspects including the charted banks of Goldman and Morgan Stanley are viewed as privileged wards of the state. But without the implicit backing of Uncle Sam, smaller banks would be forced to put a market based risk discount on their exposures to such free market behemoths.

This would leave approximately 6,000 commercial banks and thrifts below the size threshold to offer FDIC insurance to all currently covered depositors. There could be no demagogic claim that ordinary citizens were being consigned to potential financial ruin.

So the argument that blue haired widows and financially uninformed wage workers need the protection of universal deposit insurance just doesn’t cut it. They could still obtain FDIC coverage on their deposits and savings, but only at what would be thousands of “narrow” banks engaged solely in the business of deposit taking and lending.

At the same time, the public could be assured that taxpayers were not unwittingly underwriting Citigroup’s $53 trillion of derivative exposures or the $51 trillion at Goldman and JPM. Likewise, the risky multi-trillion trading books of the big banks would be sequestered in a pure free market arena.

Finally, to insure that the Fed’s discount window and deposit insurance was not abused even by smaller banks, the 6,000 remaining Federally privileged institutions would also be prohibited from engaging in trading, underwriting, investment banking, private equity, hedge funds, derivatives and other activities outside of deposit taking and lending.

The overwhelming share of midsize and community banks do not participate in these activities today, anyway. But if their customers demanded such services in the future, and they wished to remain in competition with the big free market banks under Super Glass-Steagall, they would have to spin-off such activities to separate, independent companies—– just as did the big wall street banks after the original Glass-Steagall was passed in 1934.

In short, these latter inherently risky economic functions would be performed on the free market by at-risk banks and financial services companies. The latter could never get too big to fail or to manage because the market would stop them first; or, after the fact, they would be disciplined by the fail-safe institution of bankruptcy.

No taxpayer would ever be put in harms’ way by trades like those of the London Whale.

Today’s Banks Are Wards Of The State, Not Free Market Enterprises

Besides, severing the big bank’s pipeline to the Federal bailout trough and putting the big Wall Street banks back on a free market based level playing field is the right thing to do. Today’s multi-trillion banks are simply not free enterprise institutions entitled to be let alone.

Instead, as we have shown, they are wards of the state dependent upon its subsidies, safety nets, regulatory protections and legal privileges. Consequently, they have gotten far larger, more risky and dangerous to society than could ever happen in an honest, disciplined market.

Foremost among these artificial props is the Fed’s discount window. The latter provides cheap, unlimited funding at a moment’s notice with no questions asked. The purpose is to insure banking system liquidity and stability and to thwart contagion, but it also nullifies the essential bank management discipline and prudence that comes from fear of depositor flight.

Likewise, FDIC insurance essentially shields banks’ balance sheets and asset management practices from depositor scrutiny. Whatever its merits in behalf of the little guy, there is no doubt that deposit insurance is a fount of moral hazard and excess risk-taking in the bonus-driven executive suits.

Indeed, the function of maturity transformation—–borrowing short and lending long—-which is the essence of fractional reserve banking is inherently risky and unstable. Once upon a time the state attempted to limit banks’ propensity for excesses by permitting injured depositors to bring suit against stockholders for double their original investment. That tended to concentrate the minds of bank boards and stock owning executives.

The opposite incentives prevail in today’s bailout regime. Under current legal and regulatory arrangements shareholders and boards face no liability at all—let alone double liability—-for mismanagement and imprudent risk taking.

Instead, insolvent or failing institutions are apt to be bailed-out; and even if share prices are permitted to plunge, boards and executives are likely to be given new stock options struck at the post-collapse price. That happened in every big bank in America after the 2008 meltdown.

Likewise, prior to the establishment of the Fed and its bailout windows, the big New York money center banks were required to remain super liquid by holding cash reserves equal to 20% or more of despots. In that regard, the post-Keynesian history books have been stripped of the fact that even at the peak of the infamous banking crisis on the eve of FDRs inauguration in March 1933 none of the big New York City banks had lines at their teller windows or were in any way illiquid or insolvent.

By contrast, one of Greenspan’s most deleterious actions was to essentially reduce cash reserve requirements to zero. Owing to the release of such immobilized assets and the costs of carrying them, of course, banks became more profitable.

Yet the ultimate cost of keeping the banking system liquid was not eliminated; it was just transferred to public institutions including the Fed, FDIC and eventually the US Treasury via TARP.

Two Decades Of Bank Merger Mania Made It Worse

All of these violations of free market discipline have had a cumulative historical effect that’s no longer tolerable. And these distortions, disincentives and moral hazards were immensely compounded by two decades of monstrous bank merger roll-ups that resulted in incomprehensible and unmanageable financial services conglomerates like Citigroup and BAC.

Indeed, the worst excrescence of that trend—-the merger of Travelers and Citibank—–happened only after the old Glass-Steagall was repealed in 1999.

Once these unnatural and inherently unstable multi-trillion financial services conglomerates came into existence after the turn of the century, the subsequent regulatory acquiescence in the 30:1 leverage ratios achieved by the Wall Street brokers, including the vast investment banking operations inside Citigroup, Bank of America and JPMorgan, only added insult to injury. So did the regulatory lapse which enabled Citigroup and others to establish trillion dollar off-balance sheet SIVs during the run-up to the financial crisis.

Indeed, as we indicated above, the Citigroup style of rogue financial behemoths should have been put out of their misery by the FDIC when they failed in 2008. But their screaming insolvency—–including that of Goldman, Morgan Stanley, Bank of America and others—- was covered up by multi-trillion bailouts from the Fed’s alphabet soup of liquidity infusions and TARP.

Indeed, Washington’s desperate thrashing around in the bailout arena resulted in the worst of all worlds. The problem caused by too-big-to-manage government enabled financial conglomerates was made far bigger by Washington sanctioned and directed mega-mergers. These included the shotgun marriage of Bank of America and Merrill Lynch, the Federally subsidized takeovers of Bear Stearns and Washington Mutual by JPMorgan and the rescue of Wachovia by Wells Fargo.

These mergers were outright madness. As shown in the chart below, we now have five Federally subsidized and underwritten behemoths that control $7 trillion of assets and nearly 50% of the banking market. And these figures do not include Goldman Sachs and Morgan Stanley, which also have bank charters, and would add another $1.7 trillion of assets and bring the concentration level to upwards of 60%.

By contrast, before the age of Bubble Finance really got underway in 1990, the combined balance sheet footings of the five largest US banks were only $400 billion or barely 5% of today’s level; and their collective market share was just 10%.

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Again, this is not about bigness per se or anti-trust populism, but about dangerous financial conglomerates that would not even exist without the dispensations of government, and would not persist if they did not hire half of the K-street lobby complex to protect their privileges.

At the end of the day, the destructive form of central banking carried out by the Fed, ECB, BOJ and other major central banks need to be eliminated entirely. But in the interim, bringing the worst excesses of Wall Street to heel under a Super Glass-Steagall regime would go a long way toward preventing another financial meltdown like that of September 2008.

And that gets us to the 2016 campaign. By embracing this kind of Super Glass-Steagall Donald Trump would consolidate his base in the flyover zones and reel in some of the Bernie Sanders throng, too.

The latter will never forgive Clinton for her Goldman Sachs speech whoring. And that’s to say nothing of her full-throated support for the 2008 bank bailouts and the Fed’s subsequent giant gifts of QE and ZIRP to the Wall Street gamblers

To be sure, the big Wall Street banks will whine that they face unfair competition from giant foreign banks which are protected, subsidized and privileged by their governments. But there is a simple answer to that strawman argument.

If the free market does not reward giant financial conglomerates for the risk/reward equations buried in their derivative books or opaque holdings of junk bonds, OTC bilateral trades or the maturity mismatches in their funding accounts, then they do not add to efficient economic production or wealth creation.

Foreign socialist governments are more than welcome to bear the losses, even as their crony capitalist banksters scalp the windfall profits.