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Analysis Last Updated: May 13th, 2009 - 01:04:41

Letting the �too big to fail� fail and why
By Jerry Mazza
Online Journal Associate Editor

May 13, 2009, 00:21

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Let me outline Martin D. Weiss�s vigorous market analysis, The Next Mammoth Failures, because it identifies the big bad idea at the root of our current financial vortex: the so-called �too big to fail� corporations, whether they are banks, car companies, or mega-insurance companies.

Weiss, for starters, feels that companies, especially those poorly managed, should be �free to fail,� this being a notion at the root of capitalism. You screw up and you pay for it -- not the federal government in perpetuity.

Yet, if corporations like Fannie Mae, Freddie Mac, Merrill Lynch, General Motors, Citigroup, AIG and other mammoths take government bailouts, they should be ready to be overhauled by the government to make them solvent and re-privatized. Or if the FDIC, say, after unraveling those companies� knotted masses of debt, feel they are better taken off cash-life-support and sold in pieces to the highest bidders, this to return money to taxpayers, not executives or shareholders, so be it!

If the financially ailing mammoths are allowed to suck up bailouts without any rigorous program for recuperation or burial, they will, as they are, suck the Treasury, the Fed, and taxpayers dry. What�s more, subjecting even the biggest companies, like AIG and their intertwined subsidiaries to intense scrutiny can only help. Finding the money-making divisions and/or those drowning in debt is like a surgeon finding a cancer. Allowed to go on, sooner or later it destroys the corporate patient, prolonging the agony for all.

As to the so-called worse-scenario stress-tests given to these corporate giants, monoliths and mammoths, Weiss reveals in his article, Six Egregious Lies, that �the bank stress tests are based on such blatantly mild premises that the word �stress� itself is a misnomer. Lacking the teeth of depression-like criteria, and offering up a two-year recession model is totally misleading if not fraudulent. The misrepresentation covers five other areas than the testing of the US�s 19 largest banks, though first let�s see its official lie.

The first lie states, �The government is conducting stress tests on the nation�s 19 largest banks, assuming a worst case scenario.� Source: Banking regulators. The truth is as stated; they�re not using �Depression-like criteria but a two-year recession. This is a major departure from traditional stress-testing.�

The second lie is �Most US banking organizations currently have capital levels well in excess of the amounts required to be well capitalized.� The truth, according to Weiss, is that �Six of the nation�s ten largest banks are currently at risk of failure, including JPMorgan Chase, Goldman Sachs, Citibank, Well Fargo, Sun Trust Bank, and HSBC Bank USA.� But the headline statement cleverly hides the truth with the use of the words �most� and �currently.�

The third lie is that �Big Banks made solid profits in the fourth quarter.� The truth is they used a combo of three deceptive accounting techniques to come up with these unreal profits. The truth is many have suffered ongoing losses.

The fourth lie is that �Your insurance is safe. And even if your insurance company fails, your state insurance guaranty association will back it up.� The truth is many insurers are safe, but many are not, including the notorious AIG.

The fifth lie is that �The economy is showing signs of recovery,� which comes from the vagaries of �Washington and Wall Street economists.� The truth is the economy continues to contract in the US and around the world. Weiss includes in his article the full (not just summary or executive summary) version of the International Monetary Fund�s Global Financial Stability Report.

The sixth lie is that �Since your stocks will eventually recover, you should just hold on through thick and thin.� This pap�s delivered by most brokers. Weiss has written a book about this one: The Ultimate Depression Survival Guide, including how this same advice was dispensed copiously from 1929 till 1932 and bankrupted millions.

In fact, each of the lies is rejected with detailed documentation worthy of your inspection. The arguments leave no room for error that the Fed claims are blatant untruths. For additional support that the US can survive faster and more effectively if US mammoths are truly dissected for financial health, Weiss includes Remarks by FDIC Chairman Sheila Bair to the Economic Club of New York on April 27, 2009.

Bair comments that �At the FDIC we have two credos which have pretty much driven our corporate culture over the past 75 years: One: No depositor should ever lose a penny of insured deposits (and none ever has). And two, failed banks should be closed expeditiously. There should be a minimum of disruption, their financial assets quickly sold back into private hands, and the losses first absorbed by their shareholders and creditors to maintain market discipline. This FDIC resolution mechanism has worked in prior eras, when the vast majority of financial activity occurred inside insured depository institutions.� Parenthetically, this was part of the original FDR vision.

Also, Bair sees this formula working with larger depository institutions and corporations. She calls for an �effective resolution and mechanism� for large financial organizations and the �resolution authority� to use it where and when it�s necessary to expeditiously save the savable and bury the gone.

As an example of such an authority, she cites the Resolution Trust Corporation, which Wikipedia tells us �was a United States Government-owned asset management company charged with liquidating assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (S&Ls) declared insolvent by the Office of Thrift Supervision as a consequence of the savings and loan crisis of the 1980s.

�It [the RTC] also took over the insurance functions of the former Federal Home Loan Bank Board. It was created by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), adopted in 1989. In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation. Between 1989 and mid-1995, the Resolution Trust Corporation closed or otherwise resolved 747 thrifts with total assets of $394 billion.� That�s a pretty formidable track record. The Wiki article tells in far greater detail how that was accomplished.

What Bair is doing, besides explaining the �short term pain, long term gain,� is demystifying the process of straightening out entangled financial vortexes which suck up taxpayer money under the banner line �too big to fail.� She makes clear the need and capability of the government to undertake �an orderly transfer or unwinding the firms� positions.� This is not socialism. This is getting in fast to fix or bury; out to re-privatize the newly-shaped institution or sell off the parts of a failed one to the highest bidder for taxpayer relief.

She says in her closing statement �To move forward, we can�t let ourselves be prisoners of out-dated authorities, trapped in a resolution regime which pre-dated the evolution of the �shadow banking sector� -- crafted in a prior era when insured banks overwhelmingly dominated financial services. The sooner we modernize our resolution structure, the sooner we can end too big to fail, and clear the way for a stronger, brighter and more stable economic future,� which sums up a far more optimistic approach to the current Fed/Treasury razzle-dazzle, including Paulson�s original ransom note, �Act now or suffer total system collapse.�

Lastly, Weiss invokes a paper of Thomas M. Hoenig, president and CEO of the Federal Reserve Bank of Kansas City, titled Too Big Has Failed. Hoenig, Weiss points out, �defied his own chairman . . . declaring that the �too-big-to-fail� doctrine has failed . . . recommending regulatory tough love for any failed bank, no matter how big.� Hoenig in particular pointed out how Sweden dealt with the bad assets in those banks. Sweden created well-capitalized asset management corporations or what we might call �bad banks.� �This step allowed the problem assets to be dealt with separately and systematically, while other banking operations continued under a transparent and focused framework.�

Once again, Hoenig, as Bair and Weiss have, demystified the process of untying the Gordian knots of contemporary finance with models that can be copied or originals that can be created by the US government. He quotes a great line from economist Allan Meltzer concerning �too big to fail:� And that is �capitalism without failure is like religion without sin.� And god knows we have seen enough sins from Wall Street to Westwood.

Lastly, Weiss�s article contains a leaked AIG confidential memo. He calls it �AIG�s confessions of a likely insurance industry collapse.� It details the interconnectedness of their 15 myriad businesses spread over 85 countries around the globe. This would appear to be the ultimate Gordian knot. Look for it under �Hard-nosed reality number four� in Weiss�s text. Apparently, AIG itself worried about �Is the Risk Systemic?� -- the title of their memo. This, even as AIG planned to sell off its fleet of for-lease commercial aircraft, both the largest and with �the highest fleet value of any aircraft lessor� in the world. So it goes. The �too big to fail� myth unwinds ever more steadily with the application of economic expertise and ethical will.

The question now is Obama and his administration willing to take this path to shorten the pain and the expense of these bailouts and the remaking of the American economy. One would hope he would pick the path Weiss et al are recommending. In asking readers to sign petitions for that to happen, Weiss received not the 10,000 signatures he expected, but 53,547 with participation from readers in all 50 states. Perhaps the administration should read his article, at the very least for a second opinion, especially considering the gravity of our economic condition. A faster, more durable recovery would benefit, not bankrupt, us all.

Jerry Mazza is a freelance writer living in New York City. Reach him at His new book, State Of Shock: Poems from 9/11 on� is available at, Amazon or

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