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First Thing We Do, We Break Up All The Big Banks

Of all people, Alan Greenspan just gave a speech advocating the break-up of the TBTF (aka Too Big To Fail) banks. Since Greenspan is not exactly among the most popular folks these days, it seemed odd for him to even rear his head. This does, however, provide some modicum of comparative redemption, as well as red meat to the masses looking for someone to blame. “Hey, I may have made some bad decisions, but nowhere near as many or as bad as these guys.” This strategy reminds me of Henry Kissinger’s front-page review in the NYT Book Review of a Dean Acheson biography.

Henry the K started his review of Robert L. Beisner’s “Dean Acheson: A Life in the Cold War” like this:

Dean Acheson was perhaps the most vilified secretary of state in modern American history.

Most vilified except for whom, Henry?

Now even if Greenspan’s flaws are legion, and motivations are transparent, that does not automatically disqualify his assessment. After all, even broken clocks are right twice a day, and Greenspan’s batting average is indeed higher than a busted Timex.

As this site has repeatedly emphasized, banks have hoarded their TARP money to shore up their books, instead of loaning out the funds. They keep the bad loans on their books with values that have no bearing on reality. Were they to engage in genuine mark to market accounting practices, which Uncle Sam undid this year, many of them would explode. April 9, 2009 is a date which will live in banking infamy: On that day, the Financial Accounting Standards Board (FASB) granted banks wide latitude in determining the value of their assets. With this great power, came great irresponsibility.

Banks are chartered by the Office of Comptroller of Currency. Once chartered, they may borrow money from the government at a rate close to zero. They, in theory, then lend this money to borrowers at significantly higher rates of interest to generate revenue.

Under OCC guidelines, a bank can lose its charter if it fails to lend what percent of its deposits:

A) 50%

B) 30%

C) 10%

D) 1%

E) None of the above

The answer, dear reader, is E. If a chartered bank does not opt to lend money, it can continue to hoard that money to cover its toxic assets. When the time comes for the bank to mark its toxic assets to market, all that money will go toward self-preservation. Both Professor Ann Graham, an expert on banking law, and a high-ranking employee at the OCC, confirmed this to me today. In fact, the OCC official told me that one national bank immediately came to mind, but that bank was never in danger of losing its charter. (Under the Community Reinvestment Act, a bank has to satisfy credit needs to lower income communities in order to maintain the right to open additional branches.  Expansion, however, does not seem to be as much of a priority for banks as is survival.)

In the words of Russian grandmaster and political activist Garry Kasparov, Obama needs to do more than print money and make speeches. He needs to strengthen the FDIC, and force the big banks to lend the money they’re supposed to be lending. If they don’t, they lose their charter. Uncle Sam is printing mass quantities of money, and giving it to the banks at virtually zero percent interest. He can certainly stop distributing the largesse unless the banks lend out a verifiable percentage of their booty. If they don’t, the threat of break-up and charter revocation will certainly motivate good behavior.

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