Jimmy Stewart is dead: Break up the banks

The Automatic Earth

It promises to be an interesting week, the one we’re entering. 44 House Democrats have signed a petition for criminal investigations against Goldman Sachs. Goldman’s executives (including Fabrice Tourre?!) will be heard on Tuesday by Carl Levin and his Permanent Subcommittee on Investigations. Levin released tons of internal Goldman emails over the weekend, which at the very least appear to contradict former statements by the firm that it did not profit from the housing and financial collapse.

It’s not hard to predict that Blankfein c.s. will be insulted, furious and indignant. These are people for whom $10 million is NOT a lot of money. And however you think about that, it is still a sharp contrast with the millions of American citizens who’ve come to rely on foodstamps and emergency extended unemployment checks, to a large extent because of the financial crisis. For them, $10 million is an enormous amount of money, so large they can’t even fathom it.

I think the undoing of Goldman will be that its execs, just like those at Morgan Stanley, or GE, or GM, have failed to understand that their own personal wealth can only last as long as the “lower classes” have at least a decent life. A chance to feed their kids and send them to a proper school, to get proper medical treatment for their families if and when required, and, when they age, to draw sufficient retirement funds not to suffer from hunger and cold.

The Blankfeins and Jamie Dimons of the planet have no idea who these people are, or what they think, what they’re going through, many hundreds waiting in line for an entire day for a handful of low-paid jobs. See, if you make $20,000 a year, and many wish they’d make that much, you have to worth for 500 years to get to that $10 million. Lloyd Blankfein made over $400 million in the past decade. John Paulson, the hedge fund man who Goldman devised the Abacus deal with that the SEC has stated is fraudulent (on Goldman’s part, Paulson is not mentioned in the civil case), mae $1 billion on that deal alone. The American low-paid worker would need to work for 50,000 years to get to $1 billion.

And still, this could go on, or could have gone on, for much longer, provided the wealthy part of society had remained aware of how the poor were doing. They didn’t, they look only at the next $10 million. It’s a common gambler’s affliction, or an alcoholic’s: forget the world around you exists.

I’d say Barry Ritholtz has it just about right (and he’ll bet anyone he does). The SEC’s case against Goldman has been called weak or worse from all sorts of corners, but director of SEC enforcement Robert Khuzami is not a two-bit fool. The case has been prepared over a long period of time, way more even than the 9 months since Goldman was told there was an investigation going on. Now, as I said before, it may be that Khuzami, who can only file civil cases, is just handing a handy set of tools to anyone wanting to go after Goldman in criminal court. Carl Levin and his committee may use Khuzami’s research. There are at least two complaints filed vs Goldman in criminal court that are derivative cases, meaning the lawyers who filed them represent not themselves, but groups of clients.

Really, all Khuzami may have wanted is to shake the barrel, confident that this would draw out the snakes. But, as RItholtz says, he may have a whole army of additional evidence that he hasn’t yet published, simply because the initial filing didn’t require it.

The call to break up the big six banks is getting louder all the time. The New York Times is not an anti-elite paper by any stretch, but today, its new hero Gretchen Morgenson (she had the scoop on SEC vs Goldman) phrases it like this:

It is a shame that Congress is moving forward with financial regulations that do not eliminate the heads-bankers-win, tails-taxpayers-lose mentality that has driven most of the bailouts during this sorry episode. Companies that are too mighty to fail must be broken up.

And incentives in the nation’s regulatory system that reward size with subsidies should not be enshrined into law. They should be eliminated. Only then will America be safe from toxic banking practices and the burdensome rescues they require.

Good morning! She cites that even a man like Richard Fisher, president of the Dallas Fed, calls for the big banks to be broken up. Now, you may have noticed that what Morgenson is saying is radically different from what President Obama said in his speech last week. He said nothing about breaking up banks, or about restricting their use of swaps and other derivatives, he asked them to join “us” (it wasn’t very clear who “us” included). It sounded something like: “Join us in taking your money away from you (if you don’t, we won’t, promise), it’s good for the country and ultimately it’s good for you too (who needs all that money?).

What needs to happen, and soon, if anyone is to be left with a few pennies to their name, is easy to formulate. Just for starters:

* Break up the big banks
* Take away -investment- banks’ access to Fed discount windows
* Separate consumer banking and investment banking (Glass-Steagall)
* Deal with outstanding derivatives positions at the expense of shareholders and bondholders (including China)
* Eliminate corporate (not just banks) funding for A) Washington lobbyists and B) Election campaigns

As for the last point, the present bunch of representatives will never agree; their livelihood depends on it. Still, it will get increasingly harder to call for banks to be broken up on the one hand, and throw Wall Street fundraising events on the other. They may well fall in their own sword, raised to take advantage of the shift in public mood.

As McClatchy’s David Lightman pointedly writes:

What do both parties have in common? Wall Street donations

In recent days, critics and journalists have been asking lawmakers to return certain funds, notably those from Goldman Sachs. Most lawmakers find the suggestion ridiculous. “This is our system,” [Sen. John Cornyn of Texas, the chairman of the National Republican Senatorial Committee] said.

“I think the system needs more transparency, so people can more easily reach their own conclusions. But if you didn’t have this system, the alternative would be to have taxpayers fund elections, and I’m not in favor of that.”

Well, US election campaigns are either going to be funded by the taxpayer, or they’ll be funded by Goldman Sachs. Which would you prefer? Which sounds more democratic? Please realize that taxpayer funded means much more sober; just imagine the amount of nonsense that would disappear from view.