Break Up The Big Banks! End Too Big To Fail! Where's The Transparency? (Dallas Fed)

Finally, some good news out of the Federal Reserve system. The Dallas Fed wants to break up the big banks, which is the main topic of their annual report. I don't understand why there aren't online "social" Wall Street banks yet where people actually have control over the credit market. Google should create a social bank. Look, the same players who made hundreds of millions or billions shorting subprime CDOs via credit default swaps, John Paulson, Greg Lippmann, Kyle Bass, and Goldman Sachs, are back in the game: Goldman Bets on Property Rebound With New Fund: Mortgages; Big Long Is New Big Short as Bass Joins Subprime Bet: Mortgages. And even AIG is buying mortgages, is this a joke?

"Goldman Sachs Group Inc. (GS) and American International Group Inc. (AIG) have also emerged as buyers this year as trading more than doubled for non-agency mortgage notes." (Bloomberg)

Why aren't Fab Tourre, Greg Smith, and thousands of other investment bankers, brokers, and analysts that worked during the mortgage bubble period leading a multi-trillion dollar investment banking revolution? If online infrastructure like SecondMarket (revise the accredited investor rule), Prosper and Covestor, combined with these investment bankers, analysts, and transparent real-time credit data, it would create Wall Street banks that have incentives to fuel non-fraudulent credit growth and manage systemic risk, and would be held accountable in real-time.

It seems like these bailed out too-big-too-fail Wall Street banks only exist to mis-allocate billions of capital for fees, create illiquid, opaque weapons of mass destruction derivative products that fuel systemic risk, which hedge fund clients used to fuel the mortgage bubble AND bet against it at the same time (ahah), and screw over clients. These banks bought and packaged toxic debt, and then cooked up OTC (over-the-counter) derivatives (credit default swaps) in a crack lab that allowed hedge fund clients, or own credit trading desks, to bet against the toxic garbage (subprime mortgage-backed securities or CDOs) they were securitizing in the first place! "Sophisticated" CDO managers, too-big-to-fail investment banks, and AIG kept fueling levered long exposure (and counterparty exposure) to toxic mortgage securities until they completely destroyed the financial system. Some heavily shorted CDOs, with structures heavily influenced by hedge funds, were found in retirement fixed income mutual funds at Morgan Keegan. Are CDO managers, banks, and these fund managers that lost billions, honestly considered "accredited investors", and still have licenses to sell these products?!

"Small pieces of Squared, as well as Magnetar's CDO Norma, also ended up in mutual funds run by Morgan Keegan, a regional investment bank based in Memphis, Tenn." (ProPublica)

I don't understand why the U.S. doesn't use the "Danish fix for the U.S. mortgage system", as George Soros mentioned on 8/11/2008. Right now covered mortgage bonds trade on the NASDAQ OMX Nordic with charts and quotes available on its website, and there are also Danish Mortgage Bond Futures. Why isn't this being adopted in the U.S.? 

In my opinion, if there were "retail" credit default swap products available (via futures), maybe money would have flowed out of the housing market and into ABX Index ETNs (subprime mortgage credit default swap index ETNs) or something in 2006 to capitalize on the rising trend of mortgage delinquencies. The Gold ETF was nice in 2005, but I'm pretty sure retail products betting against the mortgage market along side hedge funds would have put a natural break on the toxic mortgage origination/securitization assembly line even without regulation. Instead risk was hidden from public view, and as you can see below, the mortgage bubble was engineered by shorts to keep inflating. Regardless if everything that happened was legal or not, look what the Federal Reserve and government BAILED OUT!

Below are quotes from the Dallas Fed's report:

Sludge on the Crankshaft

"A fine-tuned financial system requires well-capitalized banks, with the resources to cover losses from bad loans and investments. In essence, bank capital is a key lubricant in the economic engine (see Exhibit 6). Insufficient capital creates a grinding friction that weakens the entire financial system. Bank capital is an issue of regulatory policy, not monetary policy. But monetary policy cannot be effective when a major portion of the banking system is undercapitalized."

"The TBTF survivors of the financial crisis look a lot like they did in 2008. They maintain corporate cultures based on the short-term incentives of fees and bonuses derived from increased oligopoly power. They remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation. Just as important, their significant presence in  dozens of states confers enormous political clout in their quest to refocus banking statutes and regulatory enforcement to their advantage."

"The only viable solution to TBTF lies in reducing concentration in the banking system, thus increasing competition and transparency. The road to prosperity requires recapitalizing the financial system as quickly as possible. The safer the individual banks, the safer the financial system. The ultimate destination—an economy relatively free from financial crises—won’t be reached until we have the fortitude to break up the giant banks."

Read the report here.

Here's a related post I did a while back: Accredited Investor Rule is Nonsense (Exposed in 2008), Knock Down Existing Financial Infrastructure


  1. here's another article 
    Exclusive: The $1.3 billion bond deal haunting Goldman" Fortune has learned there's a good chance the SEC's case will focus on Fremont Home Loan Trust 2006-E, a bundle of more than 5,000 mortgages that has cost investors, including mortgage guarantor Freddie Mac and by extension U.S. taxpayers, an estimated $545 million."

  2. Also read this FT article: Another troublesome feature of CDS usage ("empty creditors").


    Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund (June 2007)

    "The beauty of Wall Street is they put lipstick on a pig.''


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