More Punditry On Next Steps for US Banks

The Wall Street Journal carried two editorials this week concerning the ongoing difficulties of the larger US banks. Specifically, Nouriel Roubini and Matthew Richardson, both of NYU, wrote on Tuesday that, at some point, "government has to show it can handle major insolvencies."

They also made the point that, thanks to overly-generous bailouts of equity investors in the past six months,

"The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors."

Roubini and Richardson also note that current levels of several factors, unemployment being one, are already higher in actuality than in the stress test. So, what assurance do we have that these so-called 'stress tests' are really using stressful assumptions in the first place?

Wednesday's Journal contains an editorial by economist Glenn Hubbard and colleagues which argues the same point. They phrase it as a surfeit of carrots and a lack of sticks for bankers. Hubbard's piece follows with a fairly complex and unwieldy formulation of old banks, new banks, good banks, bad banks, and debt and equity holders swapping places in the various banks.

Contrary to Hubbard's contention that there is nobody left to buy a seized large, failed bank, I have argued in prior posts that such a contraction of existing, inept lending expertise should draw forth new, better-managed capacity from the likes of private equity and hedge funds. By purchasing problem assets on the cheap, buying branch systems and inheriting deposit bases, these new entrants would represent the first significant new capital to set up shop as large commercial banks in quite some time.

But what drew my attention, of course, is that both pieces begin by bemoaning the lack of bank closures, and too much risk being taken by the federal government on behalf of taxpayers.

It seems that more observers are concluding that the path on which our financial sector was placed last fall, beginning with the ill-conceived TARP program, has resulted in no normative measures by which to navigate subsequent developments. No banks apparently will be allowed to fail. Could this be why the market prices of so many bank equities have recently skyrocketed?

The implications are fairly clear. Even if the current administration continues to verbalize a reluctance to nationalize banks, its actions contribute to that effective result. No large commercial bank is seen as vulnerable to failure. Short-term trading as speculation is relatively safe.

By altering the normal path for failed banks, last used, or threatened, in the case of Wachovia, government has indicated that it sees bank insolvency as a temporary valuation mismatch, not a sign of ineptitude. Reality is being held at arms length by newly-improvised programs, tests and procedures so that no more large financial entities will be judged bankrupt.

Even if they actually are.

Somehow, this seems a recipe for disaster on a large scale. Rather like the Japanese approach to banking at the start of its infamous 'lost decade.'

Freely-trading capital markets are all about discovery of information and the accurate pricing thereof. How are markets to do that job when several large remaining banks are suspect of really being insolvent?

Corporate Governance for Dummies: Ken Lewis & BofA

There are plenty of topics on which I could opine this morning. Originally, I was going to comment on Holman Jenkins' column in yesterday's Wall Street Journal regarding GM's and Chrysler's looming bankruptcies. But, really, the major point of that was to highlight Jenkins' review of the realities of how government regulation fed the UAW's bloated compensation demands, while GM, Ford and Chrysler, to varying degrees, acquiesced.

That, in itself, is a sort of corporate governance story. Jenkins and I agree that the UAW and the federal government are both getting the just desserts of their earlier behavior.

But yesterday's news featured a much more sharply-defined example of corporate governance. And not a good one.

Ken Lewis was rejected by shareholders as Chairman of BofA but, for now, remains CEO. Personally, I agree with the Journal columnists who noted Lewis' gigantic mistakes of late, i.e., overpaying for Countrywide, then foolishly buying a dying Merrill Lynch, all the while contending that both were fabulous deals for BofA.

As the details of Lewis' intimidation by Bernanke and Paulson have come forth, one wonders why any shareholder would trust Lewis to run anything material anymore. He's clearly a seat-warmer without principles or much common sense.

But, faced with three examples of clear cut, anti-shareholder behavior, the morons who still hold BofA stock seem unable to get rid of him.

How is this possible? Is this appropriate 'corporate governance?'

Jason Zwieg, a columnist in the Wall Street Journal, wrote a piece a few months ago castigating those who, like me, take the position that one should simply sell the shares of companies whose behavior varies from what one would desire.

Is there any clearer case today of a company run ineptly by a clueless CEO? One who has now publicly admitted being guilty of Sarbanes-Oxley felonies?

But they still can't get rid of him. Some say that Lewis only has 'one more chance' left.

My God! I wish the rest of us had so many chances to screw up at several million dollars per year of total compensation.

My point is, Zwieg is wrong, and I am right. For the average shareholder, rather than, say, Carl Icahn or Eddie Lampert, there's just no leverage or percentage in holding the equity of a poorly-run company. Hoping that, over time, you and a few thousand other, unknown shareholders will somehow, magically, nominate another candidate to be CEO, or replace all of the board members, who will then fire the sitting CEO, only happens in a movie. If then.

In a fair world, Lewis would be gone. But the board is in his pocket. That they are insensitive to shareholder wishes is clear by their support for Lewis as Chairman, while the owners whom they are supposed to represent voted to split the job from CEO.

You just can't, in my opinion, get a clearer example of a company in which the CEO should be fired, and then probably charged with a felony, yet he continues to hold his job.

That's what you get for believing in the fairy tale of 'corporate governance.'

Here's the reality- you don't like what's going on at a company? Sell the shares. Period.

An Update On Citigroup

It's been a while since I've written about Citigroup's troubles. Since that post late last month, the big news is the federal government's imminent conversion of its preferred equity stake in Citi into a 40% or so common equity position.

Last night, my business partner and I ran into an old friend, while playing squash, who works for Citigroup. Given the bank's problems, and his position in one of the planning groups, he'd been scarce for months.

Suppressing jokes about offering to buy coffee with a few shares of Citigroup stock, we asked him how things are on the inside. There wasn't that much he could say. Other than the allowable teasing about becoming a government employee, it was just a sad situation.

Drawing back from the personal anecdote, I recall a few articles in the Wall Street Journal cataloguing Vik Pandit's recent travails trying to get some direction from his new, largest shareholder. Geithner's evidently been reduced to cryptic, late night phone calls to Pandit, vaguely urging that 'something' be done soon.

Pandit is reported to be begging for a chance to fix the unwieldy financial conglomerate, despite its continued slide since the waning days of Chuck Prince's misguided leadership in 2007.

The more I ponder the status of the large US commercial banks, the more I'm taken back to the Journal interview with Anna Schwartz in October of last year, about which I wrote in this post. It's becoming increasingly clear that she is correct.

Better for the FDIC, Federal Reserve, and OTC to have enlarged the capacity to close insolvent banks, transfer deposits to other banks, writedown the bad loans and sell them back into the market.

Like it or not, the way in which our financial system functions, allowing banks to accumulate bad loans results in taxpayers eating those losses. This is why government oversight of lending practices is so critical. When a bank is closed, we can't expect another bank to buy bad assets at face value, when they are clearly impaired.

I believe it's past time for us to lose our attachment to specific organizations and put badly-managed, bankrupt firms to death.

Those outside the financial services sector may not realize it, but commercial banking became a commodity business long ago. Aside from their names, there's not much difference between large banks. Why keep a Citigroup, but close a WaMu or Wachovia?

I remain convinced that Schwartz is correct in observing that the key to repairing the health of the US commercial banking sector is to close insolvent banks. If there is more demand for banking than there is capacity, new capital will flow into the sector, either through existing, healthy banks, new banks, or banking units created by private equity firms.

Geithner's fuzzy private-public asset holding trust doesn't, on the face of it, get the job done. It simply continues to dance around the issue, unaddressed since late 2007, of modifying mark-to-market to allow for economic valuation, if it is higher than a non-existent market price, and taking losses.

Until this is done, capital won't flow into existing banks. And until the federal gorilla stops lumbering through the sector in a haphazard fashion, capital won't flow into the sector at all.

Paul Romer's "New" Bank Scheme

Stanford Institute for Economic Policy Research senior fellow Paul Romer wrote a succinct piece in Friday's Wall Street Journal arguing for the the creation of new banks, rather than allocating Federal assets to shore up existing, crippled banks. It is reminscent of the Journal's similar article by Dennis Berman back in November, about which I posted here.

I didn't think much of Berman's idea then, and I don't feel Romer's prescription is actually any better. Or different, for that matter.

But Romer points out why a new bank might be better than Federal support for a crippled one, i.e., no messy valuation problems going forward.

That brought me to Anna Schwartz' comments in the interview with her in the Journal back in October, which elicited this post.

Schwartz asserted, correctly, I believe, that the current problem, unlike the Depression, is not liquidity, but discerning which banks are healthy. Investors won't buy into banks whose assets are of questionable value.

Thus, putting the two streams of thought together, one arrives at the unmistakable conclusion that, whether by straightforward write-offs, or modified mark-to-market policies reflecting actual economc value, impaired assets should be properly valued, insolvent banks closed and/or merged, and the results allowed to either decrease excess banking capacity, or allow existing, healthy banks to take up the slack.

Either way, it's really unclear now why we need Federal investment in banks, short of an explicit nationalization policy. Having had time, since September's bank panics, to see that the largest US commercial banks now fall into one of two groups.

Citi and BofA sell at as much as a 70% discount to their values back in September of last year. Wachovia and WaMu don't even exist now.

Chase and Wells Fargo track the S&P fairly closely, indicating less concern over their viability and asset valuations.

Doesn't this indicate that banking, in general, is not at risk. Just the two most problematic commercial banks.

If the Feds simply enforced sensible valuation at Citi and BofA, then determined capital adequacy, and closed either or both, if necessary, we'd probably be out of the woods, with respect to commercial banking stability, right now.

If more capacity is required in the sector, we'll know by growing loan profit margins and growth rates. And fresh capital will naturally seek out these businesses and compete the excess profits away. Without undue goverment manipulation and interference.

About Creating "Bad" Banks

There is much ado this week about a putative 'bad bank' asset disposition plan from Treasury.

Well, sort of. Despite having months to conceive his plans for the financial sector and the economy at large, Treasury Secretary Tim Geithner apparently still needs a few more months to figure all that out. Heavens knows what he was doing since November.

Regardless, let's take a step back and consider just what it means to create a 'bad bank.'

First, it's basically Bill Seidman's RTC redux. Back in the late 1980s, in the aftermath of the S&L crisis in which those institutions borrowed short, lent long and low, and largely went insolvent. The thrifts were closed, loans collected into the Resolution Trust Corporation, and sold off to investors at deep discounts, providing many of the latter healthy returns. The 1980s S&L/RTC crisis was more about stupid funding strategies than bad loans.

Now, however, the nature of the 'bad bank' is different. This time, our largest commercial banks, as well as smaller ones and specialized lenders, e.g., Golden West and Countrywide, with Federal and state regulatory tacit approval, lent mortgages on only 5%, or less, down.

Consider two banks with different approaches to loan or securities value loss recognition.

Bank A, like Merrill Lynch, promptly begins to clean up its books by writing down questionable asset values. It rapidly erodes its capital, becoming nearly insolvent. It is taken over and merged with another institution, its shareholders losing everything. There may, or may not, be Federal loss-limiting guarantees on some of the loan portfolio.

If there are such guarantees, then not only investors, but all taxpayers, have just shared the losses of the badly-managed bank.

Bank B, however, holds out and avoids writing down its losses for months. Eventually, Treasury creates a 'bad bank' to buy bad loans from commercial banks. The theory is that, once freed of the bad loans they chose to make, these ailing commercial banks are now healthy and able to make new loans.

But before we know that, we need to know at what general price level the assets were transferred to the Treasury's 'bad bank.' I wrote about this dilemma back in late September of last year, in this post, when Bernanke and Paulson first unveiled their TARP plans. Specifically,

"Further, if Treasury bids such high, close-to-maximum-economic value prices for these securities, then there is virtually no chance of the US taxpayer realizing any gain on subsequent sales. At best, they may breakeven.

At the other extreme, though, also described by Bernanke, if Treasury's bid is a little above the fire sale price, but well short of the economic, or 'hold to maturity' value, then the selling bank receives little extra capital, and not much more in the form of marking similarly-held securities up to the bid, either.

What is it that I am missing? This isn't going to work!"

In fact, it didn't work that way, and was never actually implemented as stated. Now, Geithner's Treasury faces the same dilemma in creating a 'bad bank.'

If Treasury pays face value for the loans, fully recapitalizing the banks, then Bank B's management was smart in playing for time. In effect, by gaming the regulatory system, Bank B lives to make more bad loans, while Bank A was closed for the same offenses.

If, however, Treasury buys the bad loans at economic, or lower, value, which might be as low as the 37%-or-so value Merrill accepted in its funding deal last year, then the banks aren't sufficiently recapitalized to survive. Bank B is determined to be insolvent and, like Bank A, closed and/or merged with another institution.

In the latter case, taxpayers end up owning the bad loans at distress prices, so they don't share in the losses of the inept lending institutions.

From this little mind experiment, we've learned something valuable.

If Treasury pays at or near face values for the bad loans that will fill the 'bad bank,' then taxpayers, who individually may have chosen not to own equity in the ailing lending institutions, effectively find our government buying the losses from those banks anyway. And society is penalized for the sins of a few inept lenders, while the lenders get to remain in business and, in fact, are encouraged to lend again.

If Treasury pays economic, or lower, values for the bad loans to fill the 'bad bank,' then incompetent lenders and their institutions pay a price for their mistakes, and taxpayers don't subsidize them.

Either way, however, there is a net loss of recognized value to society, in the sense that the merry-go-round of overvalued assets stops and those values are forcibly reduced.

In the case of the RTC, the private, publicly-owned financial sector was not recapitalized by the government. Instead, weak and failing thrifts were eliminated, capacity removed, and a healthier, if temporarily smaller financial sector remained.

If Treasury creates the 'bad bank' by compensating existing publicly-held, private financial institutions at or near face value for recognized 'bad loans,' this will not be at all like the 1980s RTC solution.

Instead, Treasury will, in effect, be recapitalizing shareholder-owned institutions with public money, making taxpayers effectively own the mistakes, while rewarding the incompetent management that managed to hold on long enough to get this ultra-sweet deal.

Talk about moral hazard!

This would be among the worst things to happen to capitalism that ever occurred in the US.

Private financial companies are relieved of their mistakes and given money to err again. Taxpayers are socked for the losses, despite their perhaps not having chosen to ever buy equity in the incompetent financial institutions.

And to pay for all of this, Treasury prints or borrows money, thus either devaluing the dollar or saddling the entire society with the interest and principle costs associated with the stupid lending decisions of some publicly-held, privately-owned banks.

That scenario makes no sense. The only defensible course of action is the creation of a 'bad bank' through loan purchases at lower, economic prices, resulting in bank closures, a reduction in lending capacity, and stronger resulting institutions. Which is what Anna Schwartz advocated last fall.

The Problem Facing Chase & Wells Fargo

There's an interesting problem now facing Chase and Wells Fargo banks.

How do they price and take risks when their two largest competitors, BofA and Citigroup, are effectively nationalized banks?

Citigroup's net market value is now less than Federal infusions.

So if BofA's, if my arithmetic is correct. The bank's current market value is roughly $31B, but it has been given two $20B TARP infusions, plus an open-ended $115B loan loss line for the Merrill purchase.

And we've seen that Vik Pandit sold off his brokerage unit to a joint venture with Morgan Stanley under pressure from the Feds. Ken Lewis was forced to consummate a bad merger with Merrill Lynch because of Federal coercion.

How do John Stumpf and Jamie Dimon compete against a force even larger and prospectively more coercive than the organized crime?

Specifically, while Citi and BofA might actually take fewer new market risks now, they alsom might be coerced into accepting losses on consumer loans or mortgages as part of a Congressionally-mandated 'forgiveness.'

Further, as Bill Siedeman noted on CNBC a few weeks ago, as soon as a bank is seen as being backed fully by the Federal government, its capital costs decrease, its need for capital disappears, and, thus, a key cost component is subsidized.

When competing for loan business, will Chase and Wells Fargo use higher internal capital costs, thus making them less competitive?

Chase and Well Fargo, though performing better over the past six months than Citigroup and BofA, per the nearby price chart, have each still lost roughly 40% of their equity price.

How long before investors abandon the latter two banks, fearing pre-emption by the Federal government, to which Ken Lewis acquiesced at BofA?

It's a very interesting and unusual situation never before seen in US financial services. One can't help but think that heavy governmental intervention, to the point of essentially owning two of the nation's largest banks, by assets, will have to have a damaging impact on competition in the sector going forward.

CitiGroup Becomes Our First (or Third?) US National(ized) Bank

Last week's events concerning Citigroup and Bank of America are surely historic and momentous.


Let's consider Citigroup's situation first. Citi was the first of the large banks to be given the sweetheart deal of US government investment beyond the initial TARP funds, with the government taking losses above some maximum level.

Friday's Wall Street Journal reported that,

"The rescue didn't shake Mr. Pandit's confidence in his strategy. He framed the chaotic week as a reflection of the overall financial industry, not Citigroup. "He had a spring in his step," said a Wall Street veteran who met with Mr. Pandit on Nov. 25. "You could not tell that he is a CEO that's under pressure." "

Maybe he wasn't. Pandit never seemed to really, seriously embrace the reality of the crippled institution he had been allowed to lead.


Yet, only a few months later, we see Citi dismantling itself with a rapidity only those like me and other observers of the long-ailing bank for years, have previously advocated.


Pandit, the bank's CEO of only a little more than a year, has suddenly reversed course on the subject of preserving Sandy Weill's treasured financial supermarket, both by shedding the brokerage unit via a joint venture with Morgan Stanley, and the creation of a 'bad bank,' to free what's left to become, again, Citibank.


What caused the sudden change of mind? Vik's newest, large governmental shareholder used some muscle, indicating that the cookie jar of bailout money was closed until and unless Citi finally did something to resolve its mess of an operating structure and business mix.


According to the Journal article,


"By mid-December, Mr. Pandit and his team realized the company was heading for a big fourth-quarter loss, according to people familiar with the matter. Over the course of a week of meetings, it dawned on them that they needed to at least symbolically break with Mr. Pandit's past insistence on preserving Citigroup's business model, these people said."


Indeed.


But let's be clear about what has transpired. After years of flattened returns under Rubin, Weill and Prince, nobody thought to actually fix Citigroup by undoing Weill's tangled business conglomeration.

No, instead of letting market forces, via its mediocre total return performance, push it into either divestiture, or a merger with a healthier bank, the federal government first bought preferred equity in it. Then gave it even more money, and backstopped some of its potential losses.

Then the Feds began to exert the sort of influence that they promised only last fall that they would not, in fact, use.

If you had any doubts about Citigroup, or the other large commercial banks effectively being nationalized, this should dismiss them. Taxpayers, via the Treasury, now own the real market value of Citigroup. It's basically our bank.

So our government is now calling the shots. How long before my various posts on the evolving nationalization of our commercial banking sector are realized?


The Journal article ends with the incredible observation,


"As word of the looming fourth-quarter loss surfaced earlier this month, Citigroup's shares tumbled to their November lows. Colleagues said Mr. Pandit remained in high spirits, pressing his lieutenants to remain focused on their work."


Maybe Vik should change his name to Chance Gardener, the equally-clueless and improbable protagonist of Jerry Kozinski's "Being There."

Sheila Bair's Mixed Signals

Friday's Wall Street Journal's Money & Investing Section carried a lead article entitled "Banks Told: Lend More, Save More." With a picture of FDIC's Chairman, Sheila Bair, accompanying it, the piece explored the mixed, opposite signals now being given to US banks- lend what the Federal government has invested in them, but, at the same time, build capital cushions.

As Brian Wesbury pointed out recently, about which I wrote in this post,

"In a related argument, Wesbury noted something genuinely novel and elegant. He opined that, with the Fed pushing rates to nearly zero, there was no way bank lending could expand.

He pointed out that, at a time when risk in the economy, among borrowers, is still so high, and rates are now so low, there is absolutely no way lending can be cost-justified. The risk-adjusted returns to ultra-low interest loans are negative. Wesbury thus observed that the problem isn't a lack of borrowers, but a lack of lenders willing to effectively take a loss on new loans.

He then pointed out how ludicrous was the situation in which banks have been placed by Treasury and the Fed. They are pilloried if they don't lend out the new, unwanted TARP-based 'capital' bestowed upon them by Hank Paulson.

But, if they do make loans at market rates in this environment, those loans will surely go bad, too, resulting in even more balance sheet damage and reprimands from regulators."

It's never fun to have to note a situation of governmental incongruity and wrong-headedness. In this case, Wesbury called this a full two weeks ago.

This is why, in my opinion, if we're going to nationalize the banking sector, we should do it correctly. Lending standards should be articulated from Washington, with clear, quantitative guidelines. If Federal money is going to back the banking system, let's not have loose, prone-to-misinterpretation signals.

If Treasury, the Fed and FDIC all want more bank lending, they should clearly express that in a formal regulatory message, complete with guidelines and a statement of responsibility for subsequent loan performance.

This is why it's not a great idea to mix Federal funding with private funding of banks. Now we have Federal directives to private shareholders that their bank employees should be doing more lending, though, as Wesbury notes, the chances of getting rates to compensate the risks are nil.

Gee, didn't we just spend about a dozen years doing this in the housing sector, via Fannie, Freddie, Barney Frank and two Presidents?

We could be in for a long, long learning period under the new, quasi-nationalized banking system the US now possesses.

American Express: That's No Bank!

Now we have yesterday's announcement that the TARP will be unfurled to cover $3.39B of American Express assets. CIT is also in for $2.33B.

According to the Journal article,

"Both CIT and AmEx need stable funding sources to make loans to businesses and consumers, but the credit crunch has made raising funds in public markets expensive."

No kidding!

But neither of these firms are part of the deep, crucial web of bank deposits and monetary system. They are simply standalone credit companies.

We had private sector excess which led to the TARP. Now we have the TARP itself going to excess.

If ever there were two firms which should be shotgun-merged with some other companies, or simply closed, via Chapter 11, these two are them.

Ken Chenault should be fired, on the way to American Express' acquisition by a commercial bank, or the sale of its profitable pieces to other firms.

To some extent, with the decline of the travelers check business, the very raison d'etre of AmEx has evaporated. Its former perfect funding/lending hedge is gone.

So, evidently, should the firm.

Dennis Berman's Bad Banking Idea In Yeseterday's WSJ

Dennis Berman, a writer for the Wall Street Journal, typically pens thoughtful, well-reasoned articles. A search of his name on this blog will provide several mentions, most notably this post on his excellent editorial concerning online social networking websites, here, from September of last year. When Berman and I agree, which is more rather than less often, he's usually confirming my earlier insights and conclusions.

Berman's piece in yesterday's Journal is an unusual exception. Entitled, "One Cure for Financial Mistrust: Create New Banks," is one of the worst columns I've ever read. By anyone. Frankly, coming from Berman, I am shocked. Here are the salient portions of his article,

"The financial system is in tatters. It is time to build from scratch.

One provocative, and perhaps inevitable, path is for the government to directly fund the formation of new banks. It could give incentives to private investors to form banks free from the taint of the old economic order.

The benefits of new banks are immediate. They could begin lending at once, freed from the worries of coming write-offs and off-balance-sheet shenanigans that have paralyzed Citigroup and others. They also would represent a psychological turning point, separating the future from our current period of panic. It is the kind of step that seems custom-made for President-elect Obama.

"What we need are new bankers, not new banks," says economic historian Richard Sylla of New York University.

It would, of course, be impossible to instantly duplicate the deposit base and infrastructure of large banks such as Citi or Bank of America. A new bank -- let's call it Hamilton Bank -- could take as long as a year to get off the ground, say bankers.

And there would be plenty of room for Andrew Jackson-style worry about new institutions, especially leverage ratios and management. Perhaps the best path would be to start with two or three government grubstakes of $10 billion, with the hope that private investors would push the capital base to $50 billion each. Leveraging that at a conservative ratio of six or seven times would form a group of solid medium-size banks for attracting deposits. The next step would be to provide incentives to private investors -- with, say, dollar-for-dollar matching sums or tax credits -- to start their own institutions.

Strict deadlines would be necessary to get the banks started quickly. And much like its recent preferred-stock investments, the government would sell its bank stakes over time, eventually returning the banks to private hands."

There are, in my opinion, several serious errors of fact, analysis and judgment in Berman's piece.

Let's begin with the simplest one. It's not at all difficult to start a commercial bank. The sheer number of small and medium-sized banks currently existing, and the large number of financial service consulting and software firms is all the evidence you need to understand this point.

Perhaps the most time-consuming task in beginning a bank from scratch is common to all retail businesses; choosing a site, building the structure, hiring and training employees. Everything else can basically be outsourced and bought turnkey or off the shelf- software, hardware, furnishings, etc. This alone tells you our problem is too many undifferentiated, badly-run banks, not too few.

As for new banks being free of old, bad loans and other purchased toxic waste, new banks are far from necessary to achieve this end. Treasury just used the TARP on Monday to do this for Citigroup, backstopping $306B of asset value. Whether it is formally spun into a separate entity now, or not, hardly matters. What does matter is that the Federal government, as the representative of our entire society, has begun to take possession of hundreds of billions of dollars of questionable assets, the better to free the inept banks which ended up with these assets to continue business without the burdens of their prior, enormous mistakes.

But the most important reason why Berman's idea is flawed involves management. Look at the collapse of Wachovia, Washington Mutual, and Citigroup. These were highly-regarded, large, seemingly-unassailable commercial banks.

If asset concentrations of such size were, in fact, susceptible to inept (mis)management and poor leadership, where are we to magically find new, green executives now suddenly capable of doing a better job? And with taxpayer money, to boot?

If anything, you should worry that Berman's new, small banks will run into massive trouble as the senior executives hurry to grow their new institutions as quickly as possible. This is precisely what led to our current troubles.

Instead, we need, if anything, to simplify the existing banking structures, without government backing, or encourage further concentration of them, with explicit governmental ownership, heavier regulation, and effective conversion of them to financial utilities.

In neither case does Berman's vision of pristine, newly-minted banks run by mystery CEOs with sterling credentials, experience and qualifications, fit the needs of an effective future US banking system.

Vikram Pandit's Failure At Citigroup

It's a measure of the abject failure of Vikram Pandit's reign as CEO at Citigroup for nearly a year that his most recent measures for fixing the ailing, failing bank, described here, just a week ago, have had the perverse impact of requiring a Federal rescue, as I described here, earlier today.

I wrote, in last week's post,

"Pandit clearly has no clear grasp on the severity of Citigroup's problems. He's been in the job nearly a year, yet look at the firm's performance, as seen in the third Yahoo-sourced chart.
Citigroup has declined by about 70%, while the S&P has lost a relatively modest, by comparison, 40% over the past twelve months.

Yet Pandit has offered nothing in the way of strategic change at Citigroup. It's entirely possible that, like Rick Wagoner's GM, Pandit's Citigroup won't make it long enough to see those 'future opportunities.'"

Here's a view of just how badly investors reacted to Vik's warm words that morning.

By Friday afternoon of last week, as seen in the nearby Yahoo-sourced 5-day price chart, his bank's equity price had fallen more than 50%, while his erstwhile-competitors of size, Chase, Wells Fargo and BofA, held steady with the S&P.

After yesterday's rescue announcement, Citigroup's equity popped back up to only a 20% loss since last week.

What's really amazing is this chart from today's Wall Street Journal article in the 'Heard On The Street' column. Citigroup isn't even in the top four of US banks by market capitalization any more. The almost-unheard of US Bancorp is now ahead of it.

Even newly-minted 'commercial' bank Goldman Sachs, a fraction of the employee and business volume size, is within $6B of Citigroup.

The longer term view of Pandit's continued mismanagement of Citigroup, begun under Sandy Weill and left on autopilot by his successor, Chuck Prince, appears below. For the past year, Citigroup again underperforms its (now) larger, one-time rivals, having lost far more than 50% of its value in the timeframe.

Unfortunately, the only thing worse than Pandit's misguided actions at Citigroup- too little action, sans a strategy, too late- is the firm's do-nothing board. Headed by greatly-enriched, do-nothing non-executive chairman, Bob 'he started this mess' Rubin.

A more responsible board would not have handed this overwhelming job to Pandit in the first place. But, having done so, might have at least relieved him this summer, when it was clear he wasn't waking up to the fact that Citigroup is a simply unworkable conglomeration of businesses and assets. Failing that, they would use yesterday's rescue to end Pandit's reign of futility and clear the decks for someone to break the firm up into manageable chunks.

As usual, don't hold your breath for that outcome. Instead, count on shareholders continuing to be punished for the board's inaction.

The US Banking System's Nationalization Proceeds with Citigroup's "Rescue"

It's official. The US government has formally nationalized Citigroup by taking a larger equity position than the today's net worth of the bank.

Further, as taxpayers, we've agreed to absorb the losses, beyond $29B, on some $306B of the bank's questionably-valued assets.

With this action, which is very similar in effect to Paulson's original plan of buying troubled assets with the TARP, Citigroup has been rewarded for its inept and inappropriate lending, buying and securitization behavior of the past few years under ex-CEO Chuck Prince.

The moral hazard risk has been completely removed with this act, in an attempt to prevent worries that the bank's equity would become of such little market value as to leave the bank in violation of various regulatory capital requirements and, of course, subject to further speculation, both verbal and financial, that it would shortly be bankrupt.

Then, this morning, Henry Paulson also announced the TALP for government purchase of shorter termed assets for which markets are currently 'frozen,' including car and student loans.


Back in October, I wrote this post regarding the past and probably nationalized future of US banking.

In that post, I contended, in part,

"Simply put, you cannot have a system dependent upon an illusive, nearly non-existent resource: the well-informed, experienced, competent bank CEO. There simply are not sufficient, qualified business people available to staff each of hundreds of US banks. So allowing that many banks to exist is to invite the next financial panic, courtesy of thousands of bad credit and investment decisions on the part of hundreds of inept, boneheaded, mediocre small- and medium-sized bank CEOs.

Far better to so rigorously nationalize core banking via draconian regulation of allowable businesses, lending standards, etc., and government ownership of preferred shares, as to reduce this sector to a barely-disguised government-guaranteed conduit for safekeeping savings and making consumer mortgage and revolver loans.

Further, each of the classical Glass-Steagall era bank functions can be largely reduced to automated, pre-determined, quantitative standards with little or no room for subjective judgment.

To achieve a truly safe, well-regulated US core banking system, I believe you need the following (there are more, I've just included one for this post):

-Federal government guarantee of all core banking businesses, i.e., deposits, credit card balances, mortgage balances, trust accounts. In short, by forcible, draconian regulation of lending and deposit-investment practices, the government will be able to insure all banking activity, because it will all be reduced to ultra-safe, near-riskless levels.

That's a financial sector in which you could place trust. Core banking functions would be safe, heavily-regulated and totally guaranteed by society, i.e., our government. Riskier financial functions would be totally firewalled from core banking and well-capitalized. Trading of financial instruments would be safely confined to exchanges."

And that is nearly where we are. The strict confinement of trading important, widespread instruments, such as mortgages, mortgage securities and CDSs still require exchanges. But, other than that, Paulson, Bernanke and Bair have pretty much arrived at my prediction in just a month.

Will these steps be eventually retracted by the next administration, or a subsequent one?

I doubt it. Like a new stake in a garden supporting plant growth, new financial services structures will develop around these programs, necessitating their continuing existence.

Whether we ever formally identify these steps as nationalization of the US banking sector, it's what we've done. And, as I argued in that linked post, and others, probably a good thing.

A Strange Duality: Government Bailout of Banks Which Shorted Each Other's Equities

Rick Santelli of CNBC raised a very interesting point this morning regarding today's Wall Street Journal front page piece on the bear raid on Morgan Stanley in September.

Without trying to recount all the detail in the very long and well-written story, suffice to say that it has now been shown that Morgan Stanley's equity price was, indeed, affected by a sort of squeeze created by hedge funds and other investment banks buying credit default swaps, CDSs, on Morgan Stanley debt, along with shorting or buying puts on the firm's equity.

This activity pre-dated the TARP, and Treasury investments. However, Santelli noted the parallel of Morgan Stanley's troubles with those of Citigroup's recent problems, and wondered aloud how much taxpayer money was engaged in far-from-transparent speculation and similar squeezes on Citigroup's shares.

Upon being challenged by Squawkbox's Joe Kernen for suddenly being for more regulation, Santelli sensibly replied, to paraphase him (since I can't recall his exact words),

'Free and fair market capitalism doesn't mean no regulation. You need some regulation to keep things fair, and avoid insider and crony capitalism. We read today about the goings-on regarding Morgan Stanley's CDSs and equity in September. How about some transparency for today's activity in Citgroup instruments?'

As I wrote here last Thursday, in reference to AIG's troubles, the swaps market needs to become far more transparent, via a regulated, explicit exchange. Santelli raises an equally-valid reason for such an exchange.

As tools for squeezing and manipulating markets have multiplied, the old regulatory model of the 1930s is hopelessly, laughably outdated. The Journal piece indicated how a small purchase of CDSs to drive their prices up would yield outsized gains on short positions or puts of the same company's equity. Yet the former markets is completely opaque, consisting of phone calls and even IMs as its method of operating.

Santelli's concluding point was that, with taxpayer money in practically every large, remaining commercial bank, we can no longer risk having these institutions use 'our' money to engage in the activities which nearly triggered Morgan Stanley's demise and, certainly, forced its conversion to a Federally chartered commercial bank.

Lloyd Blankfein's Goldman Sachs: Same As It Ever Was?

In this post two weeks ago, I wrote about how merely obtaining a Federal commercial bank charter hardly makes Goldman Sachs and Morgan Stanley real, functioning commercial banks.

This past week, two articles in the Wall Street Journal demonstrated how these two former investment banks are already parting ways.

Goldman CEO Lloyd Blankfein was quoted as saying,

"We're going to consider everything," but won't do "something rash."

The article further noted, regarding Goldman Sachs developing a consumer banking business,

"Mr. Blankfein seemed to knock down that idea, stressing that Goldman has little, or no exposure to credit cards, auto loans, home-equity loans or other consumer loans, all of which could suffer if the U.S. falls into a significant recession."

On the subject of a merger, Blankfein remarked that he'd consider one,

"only if the deals keep Goldman's focus and culture intact."

Understanding that Goldman Sachs currently looks a lot like a hedge fund, it's difficult for me to see how Blankfein expects his firm to be able to simply exist unchanged.

If, as most observers expect, the FDIC and Federal Reserve mandate that the firm reduces its leverage and business mix to more closely resemble those of commercial banks, Goldman will have a very hard time finding non-consumer banking business volumes sufficient to retain its current size, expense and infrastructure bases.

If, on the other hand, it tries to merge with a commercial bank, there's just no way the vaunted Goldman culture will remain intact. Apparently, Blankfein's bid to outs Pandit at Citigroup and merge with that money center bank, came to naught.

Maybe, with the rumors of Citi's board's split over Pandit, Blankfein may have another shot at that merger. Maybe not.

Either way, it's just hard to see how Goldman can tread water and remain as profitable as it has been in the past, with a similar business mix.

Morgan Stanley, on the other hand, was written up on Thursday's Journal as cutting more than 2,000 employees while hiring two outside commercial bankers; Cece Sutton and Jonathan Witter, both formerly of Wachovia.

The two Wachovians are to become Morgan Stanley heads of retail banking and CEO of the retail banking group, respectively.

While in obvious contrast to Goldman Sachs, Morgan Stanley's more aggressive move to build a consumer business calls into question just what it can ever hope to add in an already-consolidating market.

Note that Mack hired two executives from a bank that essentially failed, due to its retail-oriented mortgage banking strategy. And Morgan Stanley took its own licks from mortgage finance, too.

As a consumer, would you have much reason to suddenly drop your current bank and take new credit cards, a mortgage, and open checking accounts with the former investment bank?

New entrants in a product market typically offer some new or unique value proposition. Morgan Stanley's seems to be something like,

'Hi. We used to be a highly-leveraged investment bank-cum-hedge fund. But that didn't turn out so well.

Now, we've decided to try to be a commercial bank, because we might survive that way.

Won't you please do business with us?'

Hardly compelling, is it? Somehow, the former loss-making investment bank is hardly in a position to cross-sell it's asset management/high net worth business skills anymore.

Which brings me to the point I made in that prior, linked post,

"Either way, if Goldman and Morgan Stanley don't soon sell themselves to some decent-sized banks, or buy various consumer loan and deposit-taking operations, they will lose their independence as federally-chartered entities the harder way, in forced marriages arranged for them."

Growing its own consumer banking from scratch is unlikely to do much for Morgan Stanley. Eschewing the segment totally probably won't help Goldman Sachs, either. Right now, based on existing information, I'd say neither is in particularly good, long term shape.

Immelt's Mistakes Come Home To Roost: GE Takes Government Money

Tuesday's Wall Street Journal described GE's capitulation to market forces by registering "to sell as much as $98 billion of CP (commercial paper) to the government."



The article even ends with the observation,



"Buying a large bank might be an option. But it might come with assets GE wouldn't want and could force change in GE's overall corporate structure- perhaps even requiring the finance business to be spun off."



Bingo!



As I have written most recently in this blog here and here, Immelt brought GE to this impasse by foolishly retaining the unwieldy, value-destroying diversified conglomerate structure. In the latter piece, I wrote,



"There are several businesses in GE's portfolio that would not, on their own, suffer so badly as GE's financial units. But, thanks to Immelt's insistence on keeping these units needlessly shackled to each other, shareholders don't get to select which they wish to own, and which they do not.


It's likely that, somewhere in GE's business portfolio, there are units which have not lost 40% of their value in the past 12 months.


Thanks to Immelt's poor stewardship and lack of leadership of GE, his shareholders won't get to know which those are, and benefit from their performance."



Look at the nearby price chart for GE and the S&P500 Index for the past three months.

Even with two of the worst months in the S&P's history, Immelt's GE still managed to fall by even more. And not just a little, but a full 10 percentage points, or 33% more than the index.

That's the penalty Immelt has imposed on his shareholders in order to retain an outdated, useless conglomeration of unrelated businesses under the GE moniker.

Now, things have become so dire that Immelt must go, hat in hand, to the US government in order to sell commercial paper to fund its financial services unit.

GM is nearly dead. GE, the other once-mighty US industrial firm, is reduced to government intervention in order to fund itself.

Nice going, Jeff. Any chance, given how much damage you've inflicted on your shareholders this year, that you'll forego any bonus for 2008?

Shareholders, don't hold your collective breaths.

Your Next New Bank: American Express

It seems that almost under the radar, and a month late, American Express decided to come in from the cold and convert its status to that of a Federally-chartered commercial bank. As I wrote in this post last month, it seems odd to think of your neighborhood bank as GMAC, Goldman Sachs or Morgan Stanley.

Now, I'll grant you that an Amex store is more ubiquitous than, say, a GMAC location. At least I've never seen a GMAC site. And existing Amex travel stores are more retail in nature than your typical Morgan Stanley or Goldman Sachs location in a major city.

Still, once again, it's hard to visualize Amex being a full service commercial bank. In fact, in the old days, it never would have needed a banking charter, because its Travelers Cheques and credit card businesses nearly perfectly hedged each other. The former took cash deposits against to-be-written cheques, while the credit card paid cash on the cardholder's behalf, for a fee.

Evidently, the model is no longer remotely like that of the old days. Or perhaps the credit card giant's management simply want to avoid standing out in a crowd of Federally-owned financial institutions, lest that difference cause a mass sell off of their equity and a shunning of the firm as a supplier of credit.

My business partner wondered aloud what possible risk to our financial system Amex represents, being primarily a high-end credit card issuer.

No matter. Now even a major standalone revolving credit provider is running into the arms of the evolving US National Bank. And then, immediately upon gaining bank status, puts it hand out for a $3.8B loan from the Fed.

Truly the only financial sector executives who feel capable of running their own businesses will be private equity shops and privately-owned asset managers. And, in time, perhaps those executives sufficiently prudent and confident of their risk management expertise to open up publicly-held loan and investment companies.

Bernanke's Next Step To US Bank Nationalization: MBS Insurance

This weekend's Wall Street Journal reported on Fed chairman Ben Bernanke's comments, delivered to a mortgage finance conference via video link, on a continuing Federal role in housing finance.

My business partner and I have reasoned, since the Fannie and Freddie takeovers, that the government is unlikely to allow the past levels of profitability in mortgage finance to continue in the future. It's the simplest way to avoid a repeat of the excesses of the past few years and recent real estate lending cycle.

I've written a few posts on the nationalization of US banks, both recent, and, ideally, in the future.

Part of those futuristic musings of mine came a step closer to reality with Bernanke's comments. I actually saw part of his address live on Friday, but didn't know the context of what I was viewing.

In his remarks, Bernanke sketched out a continued role for the Federal government in housing finance in at least one of three ways: heavily regulated covered bonds to back mortgages; a 'public utility' model which featured a cooperative between private mortgage originators and GSEs, or; Federal mortgage bond insurance.

Taken in conjunction with Bernanke's comments concerning the difficulty in making the current GSE model function, it's not clear how the 'public utility' model is really any different than the current one.

But his description of government-issued mortgage bond insurance sounds like the sort of step that will further cement a nationalized banking system into place.

Can you imagine trying to sell mortgage-backed bonds in a market without such Federal insurance, when all the competing, similar bonds carry the Federal insurance? It would seem foolish.

About the only way you could do so would be to market the mortgage equivalent of high yield, or junk bonds. And we just saw what has happened to those in the past year. Much like the original junk bonds, such a mortgage-backed variant, even without the CDO overlay, would only be attractive during periods of risking markets.

But, back to Bernanke's comments. Introducing government-sourced mortgage bond insurance would encroach upon the conventional, private-sector bond insurers, such as MBIA and AMBAC. However, observing their disastrous plunge into insuring CDOs, it's unclear whether they could credibly re-enter the non-municipal bond insurance market again and offer simple mortgage-bond insurance.

With government provision of mortgage bond insurance, there would likely be a permanent foreclosure of the market to private enterprise, much like the effective elimination of private mortgage conduits when Fannie and Freddie were allowed to dominate that market.

We are probably seeing, therefore, the next concrete step along the road to heavy governmental regulation and de facto nationalization of core banking and lending functions in the US.

Must Bankers Always Be Stupid and Overly Opportunistic?

I wrote a post about a month focusing on how regulation won't ever prevent stupidity and excessive opportunism, from running amok in business- even financial services.

This came to mind because of a discussion I had with my business partner and several acquaintances on Saturday morning. We are all involved in some facet of the financial sector, and were discussing the origins of the current crisis, and what would eventually resolve it.

One salient topic was the 'too big to fail' nature of US commercial banks. My acquaintances felt that had to somehow be remedied by the spread of banking assets among other organizations. I, to the contrary, felt that technology has made banking concentration inevitable, as I wrote here, recently,

"With technology and market concentration of banking, we have probably crossed an important Rubicon years ago. Ben Bernanke's answer to a question at yesterday's lunch at the Economic Club of New York, where he spoke, did not, to me, seem to acknowledge the obvious.

At this point, I think Bernanke would do well to accept that the speed with which financial markets can process data and trade, and, thus, the degree to which they have relied on large investments in information technology systems and software have been a significant factor in the concentration of financial assets in just a handful of large US banks.

This will not change now. So, yes, I believe, contrary to Bernanke's assertion, that each of those banks into which Treasury has invested some of its initial $250B is, indeed, 'too big to fail.'"

Perhaps the scariest moment of the conversation on Saturday, however, was when we discussed bank lending officer stupidity in making mortgage loans based on marginal borrower capacities to repay or, worse, no data.

How, I asked, are we to prevent future systemic problems like we are now experiencing, if bankers are too stupid to know what kind of loan to deny?

My colleagues alleged that, if a given banker said "no," another one at the next bank would simply say "yes."

Thus, my argument, which I then voiced, for Federal regulation of core bank lending so heavy as to put the sector on the equivalent of thorazine. They laughed, but then they actually agreed.

You have to ask yourself, how can we ever design and operate a 'safe' banking system if we have to constantly worry that misguided, stupid bank CEOs will push for growth in a sector in which that always means taking excessive risks?

I think it is by clamping down on core, insured and quasi-government-owned banks with inflexible guidelines for loan qualifications.

Cramer On US Sovereign Investing

Leave it to Jim Cramer to accuse the US of sovereign investing, but get it wrong. And further claim it was his idea first. Then nearly break his arm patting himself on the back about it.


All yesterday morning, CNBC played clips of the grinning, bald former hedge fund maven claiming that he had personally first come up with the idea of the US Treasury investing in several commercial banks, so to restore investor, depositor and borrower confidence in them.

Cramer then pronounced this concept 'US sovereign fund investing.'

Sorry, Jim. You evidently don't understand the concept of sovereign investing.

The idea is typically for a wealthy country to organize a fund, by which they invest in businesses of another country. Hopefully, for long term profits.

Treasury's mandatory investment in nine large US commercial banks, and, subsequently, many smaller ones, is to provide stabilizing capital, against which the banks are supposed to write off or sell questionably-valued CDOs or loans.

The primary object of the investments is to provide capital which nobody else stands ready to invest. Whether taxpayers will profit, beyond the rate of interest paid on the preferred, is anybody's guess.

But conventional sovereign investing, it isn't.

Maybe you should read up on how foreign governments actually operate their sovereign wealth funds, Jim. I don't think they use them to avoid the dissolution of their own banking systems.

Designing Banking & Finance Systems for Real Human Behavior

With this week's nationalization of US commercial banks, via Treasury's purchase of $250B of preferred equity in a collection of the country's largest publicly-held financial institutions, we have the occasion of a radical redesign in our banking and finance sector.

Rather than do this willy-nilly, would it not be more sensible to articulate a blueprint for how banking and finance will, going forward, be organized and regulated so as not to allow a repetition of the last few years' harmful practices?

I outlined some thoughts on this topic in this recent post. In that post, my remarks were geared toward the design of a safe, nationalized core banking sector in the US.

There is a concept that I have only heard John Bogle, founder of the Vanguard Group, espouse. Within it are the seeds of both the recent financial markets crisis and its solution.

Bogle has observed that, to use my words, because I don't have his exact quote,

'Banking and finance cannot, in aggregate, over time, grow faster than the economy of which they are a part. Banking doesn't provide sustained, increasing added value over time beyond the growth rate of the economy.'

When (dumb) banking executives, and/or politicians, attempt to grow parts of the financial sector too fast, risk is typically assumed out of prior or reasonable proportions.

Further, that risk is almost always underpriced. Especially because when the risk begins to rise, it rises so far and so fast that almost no prior pricing could have anticipated it, and, if it had, it would have been prohibitively expensive.

Why not redesign the core banking sector to be that part of our nation's finance which is to remain ultra-safe, with little or no risk taken, and no excess profitability, due to risk, allowed.

With technology and market concentration of banking, we have probably crossed an important Rubicon years ago. Ben Bernanke's answer to a question at yesterday's lunch at the Economic Club of New York, where he spoke, did not, to me, seem to acknowledge the obvious.

Last November, I wrote this post upon seeing a CNBC interview with perpetual doomsayer and former Salomon Brothers economist, Henry Kaufman, on his 80th birthday. In that post, I referenced this post, written two weeks earlier. In it, I contended,

"As recently as 1996, when I was Research Director for then-independent financial services consultant Oliver, Wyman & Co., which is now the financial consulting division of Mercer Management Consulting, there were five independent credit card issuers (First Card, MBNA, Advanta, and two others whose names now elude me), a number of mutual fund companies, and several mortgage banks (Countrywide & Golden West, to name two), and retail discount brokers (Schwab, Quick & Reilly).

In the decade since, commercial banks, contrary to accepted financial theory that an investor can diversify his/her own holdings better than a company can do it for him/her, sought these types of businesses to attenuate variation in their reported earnings, as well as pursue the mythical 'cross sell' opportunity amongst various retail businesses.

The results have not been impressive, as I noted in this post two months ago.

The price that US consumers have paid for financial services innovation and cost reductions over the past five decades has been the concentration of many financial services into fewer, larger entities, which concentration has increased risks to the banking and credit system.

Failures such as First Pennsylvania Bank, Continental Bank, SeaFirst, and numerous banks weakened by loan losses, which were acquired during the 1980s and '90s, such as BofA, Shawmut, First Interstate, and a clutch of Texas energy-lending dependent banks, provide examples.

So, in conclusion, I'm not at all certain that Kaufman's warnings are even correct. Most of our financial system's largest failures have been committed by non-diversified banks or financial services companies.

In fact, one of the few benefits, besides technological innovation, that recent consolidation affords is larger capital bases with which to absorb the effects of mistakes.

Looking back over nearly 50 years of US financial system innovation and evolution, I think one could fairly say that the benefits we have enjoyed have far outweighed the realized risks that have accompanied such changes."

At this point, I think Bernanke would do well to accept that the speed with which financial markets can process data and trade, and, thus, the degree to which they have relied on large investments in information technology systems and software have been a significant factor in the concentration of financial assets in just a handful of large US banks.

This will not change now. So, yes, I believe, contrary to Bernanke's assertion, that each of those banks into which Treasury has invested some of its initial $250B is, indeed, 'too big to fail.'

Thus, the point of the title of this post, by combining historical trends in banking with John Bogle's observation.

Real human behavior is for CEOs of publicly-held companies to seek growth. Growth in revenues, profits, assets, market value and total returns to shareholders.

When banking and finance companies do this, they tend, in the aggregate, to increase systemic risk, if they succeed in growing faster than the long run growth rate of our economy.

What happens next is what has occurred in our financial system since Congress passed the CRA and pushed Fannie and Freddie to pass through subprime mortgages lent to low-income homeowners.

One way to remedy this is to take the largest portion of the sector, i.e., core banking functions, and nationalize the heck out of it with both choking regulation and government (societal) ownership.

These are the key elements of our money and banking system which, in aggregate, are, indeed, 'too important- and big- to fail.'

The remainder of the finance sector- loan companies, investment banks, hedge and mutual fund companies, etc., may still exist. And will, on balance, be too small to have their failures threaten the entire US banking and financial system.

But our current financial situation begs us to observe and acknowledge the obvious. Banking behavior as usual will only return us, eventually, to this same point.

So let's reimpose Glass-Steagall, de facto. And nationalize the ownership of our large, core banks and banking functions. Finally, regulate those nationalized banking functions to not lose money, but to provide strictly-followed lending guidelines to provide credit to the credit worthy.

Anything less only invites further abuse of risk-taking in banking and finance sometime down the road. It happened in 1929, but was avoided by decent, if not perfect, regulation, until the late 1990s, when it happened again.

Without meaningful, serious separation of core banking from risk-taking finance, we'll get there again- eventually.