Fact and Fiction Behind Too Big to Fail

Unwitting and Unwilling Investors

Friends of ours sold their house and went to Charles Schwab to invest the proceeds until they found a retirement home in a warmer climate. They told the sales representative that they wanted to invest their funds in a money market fund since they may need their equity quickly. Told they could get a little more yield for a little longer maturity, they agreed to invest in YieldPlus. That history is the subject of another blog post to come, but a financial advisor friend made a comment that resonates as I watch yet another derivatives crisis unfold, the JPMorgan Chase Whale-Fail, and the debate over the Volcker Rule.

The advisor said, “The risk of that fund isn’t appropriate for your friends.” (It was over 40% invested in mortgages.) This is essentially how Congress should approach the structure of U.S. financial markets.

When Congress established the FDIC deposit guarantee back in the Great Depression era, it didn’t have guaranteeing trading results in mind. Deposits were invested in home mortgages and personal and business loans. Even as recent as 1999, Alan Greenspan testified to Congress that risky trading should be isolated from the federal deposit guarantee. The FDIC guarantee didn’t back up securities trading or derivatives portfolios — until now.

Jamie Dimon is a brilliant and dynamic man. But the Whale-Fail story is like a Greek tragedy. Once Mr. Dimon began to think of himself as the god of banking prowess, the greater gods served him a reminder of his mortality.

If the biggest banks feel that the government shouldn’t be making decisions about which products they can trade and what profits they can or can’t earn, so be it. I would agree. So the biggest banks should develop a plan to break themselves up. Their current structure presents risks that are inappropriate to the taxpayer.

Fairy Tale Capitalism: Fact and Fiction Behind Too Big to Fail

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Was the mortgage debacle the sole cause of the financial bubble's collapse? Do you believe those who say the elimination of Glass-Steagall barriers didn't contribute to its building? Fairy Tale Capitalism: Fact and Fiction Behind Too Big To Fail places the mortgage mess into a broader perspective. It explains how the Federal deposit guarantee was married to investment banking's trading intensity, why the Fed had no choice but to bail out the biggest banks and how derivatives played a poorly-understood, but equally important role in the crisis. In simple terms Emily Eisenlohr walks with those who live on Main Street down Wall Street's darker alleys.

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