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Too Big to Fail then Too Big to Survive

James | Nov 11, 2009 | Comments 6

With all this talk surrounding the stability of the banks man are still using the same claim that they are “Too Big to Fail.” To me, this is a cop-out. No one isimage too big too fail and if so then they are too big to survive. I think what the government needs to do is allow some banks to fail in order to return to the way it use to be. Right now we are in a way different situation as last year and are in better position to allow them to drop off the map. A year ago I would disagree saying if we allowed these big banks to fail then the markets would have tanked and dropped way further than they already did. The question is now how do we regulate the banks to stop another crisis from happening? More regulation, should we have a government enforcement agency that overseas the banks? I say NO to any government regulation. The last thing Wall Street needs is to have the politicians making the calls. Instantly that will shut down huge growth opportunities and destroy the profitability of the banks. I believe there are no perfect answers to this question and how to control the amount of risk these banks take on. One thing that needs to happen is to stop mixing in personal banking and private banking. Last year we saw the risk shift from the trading of exotic products to the mortgages, loans, etc. We need to be able to differentiate these two parts of business for the banks and make sure they don’t cross over again. As for any government agency overseeing the operations, I believe that is an awful idea. Wall Street breeds innovation and that’s why they pay top dollar for the talent they attract. Having a government-controlled agency overseeing all operations would limit the profitability of the banks and hold them back from reaching their full potential. Plus who says we can even trust the government as a watchdog. Since 1998 the SEC investigated Bernie Madoff eight times and all eight times they found nothing, I think something is wrong with their judgment.

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Filed Under: Consumer Goods | Financials | U.S. Politics | World Politics | Other Investment Related News • Featured

Tags: Banks • Banks to Big to Fail • Crisis • Government Control

  • Greg M

    thevoice@voicedup.com, Great point!
    Have you ever read “House of Cards” by William Cohen?
    Basically exotic securities were valued by the averages of counter-party estimates. This would then affect companies by mark to market. Basically company A has exotic assets, they then call Company B and Company C. Company B says its there worth .97 on the dollar company C says .80 on the dollar BAM its assets is now worth .885 on the dollar.
    A LOT OF ROOM FOR MANIPULATION…. which btw Goldman Sachs was accused of.
    Another important thing to remember is under the historical price rule… most companies value their assets at the price paid minus any depreciation…. Yet inventory is valued at the lower of either price paid or market value…
    Whose is to say what is inventory for one company and an asset of the other.

    Agreed Mark to market artificially depressed values…
    by taking into account unrealized losses…
    READ HOUSE OF CARDS… great book… youd love it…

    As for too big to fail james…. I dont think firms should be able to leverage themselves 75-1 I mean I would never do that in my trading account… But again I’m not an expert in business management. So maybe there is an important reason for that….idk.

  • http://voicedup.com/ thevoice@voicedup.com

    The history seems clear. Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.
    Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.
    Two things are absolutely essential when fixing financial market problems: time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away. Because these accounting rules force banks to write off losses before they even happen, we lose time. This happens because markets are forward looking. For example, the price of many securitized mortgage pools is well below their value, based on cash flows. In other words, the market is pricing in more losses than have actually, or may ever, occur. The accounting rules force banks to take artificial hits to capital without reference to the actual performance of loans.

    • http://stocksonwallstreet.net James

      Good points we cannot continue to leverage the future for todays profits.

  • http://voicedup.com/ thevoice@voicedup.com

    James,

    Lets not forget what caused the entire financial collapse, the FASB changing account rules that were in place since the great depression. If this continues to occur we are in for more of the same. Unfortunately FASB will most likely be making a few more changes over the next few months which could be implemented early 2011…if you get a chance read this:

    http://www.voicedup.com/index.php/thevoice-on-the-next-mark-to-market-debacle/

    When the housing bubble burst, the market for all those mortgage-backed securities vanished, leaving bank balance sheets larded with assets that no one wanted. So at the end of each quarter, banks had to write down billions of dollars of “toxic assets”—even though their value might’ve been artificially, and only temporarily, depressed. But if banks never intended to sell an asset in the current market, they reasoned, why should they be forced to value it as if they did?

    • http://stocksonwallstreet.net James

      The whole valuation system was wrong and part of the problem that led to our collapse.

  • http://stocksonwallstreet.net James

    What are your thoughts on Banks being too big too fail?

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