April 16, 2010
The White House and Democrats in Congress have begun pushing in earnest for a package of financial reforms. But will it be enough to stop Wall Street from causing another meltdown?
To find out what real financial reform needs to look like, Bill Moyers turns to Simon Johnson and James Kwak, the co-authors of 13 BANKERS: THE WALL STREET TAKEOVER AND THE NEXT FINANCIAL MELTDOWN.
The problem, according to Kwak, is that the legislation currently doesn't address the central problem of the crisis, that America's banks have grown 'too big to fail.' In fact, the problem has gotten worse, with just six banks holding assets in excess of 63% of the U.S. Gross Domestic Product
. Kwak explains that the crisis actually made the surviving banks more powerful, "I think what's remarkable is that it used to be maybe eight or nine banks. But what's happened over the last two years, as Simon is saying, is that these banks have gotten bigger, because they've bought each other. They've become more powerful. And they have an even stronger market position in some key markets like credit cards, mortgages, equity underwriting, and derivatives."
Johnson argues that for reform to work, policy makers and regulators must reject the belief that Wall Street knows what's its doing, that its interests are always aligned with the nation as a whole, "The idea that we need Wall Street with its current structure and a disproportionate economic power that implies to somehow make this economy work and drive entrepreneurship, that idea is nonsense. This is why we wrote the book, all right? There's plenty of evidence on this issue. We go through it. If you want a faith based economy in this regard, you can disregard the evidence."
Senator Brown and the 'Volcker Rule'
Johnson and Kwak believe Congress should pass a law capping the size of the banks, to keep them from becoming so large that their failure threatens the world economy. This approach has been dubbed the 'Volcker Rule,' after Paul Volcker, the well-respected former Federal Reserve chairman who has pushed hard for its inclusion. Senator Sherrod Brown from Ohio has introduced an amendment
to the bill that would do just that, reading in part that, "No bank holding company may possess non-deposit liabilities exceeding 3 percent of the annual gross domestic product of the United States."
The Six Big Banks
The names of the six banking behemoths are no doubt familiar to most Americans. The four largest by assets Bank of America, JPMorgan Chase, Wells Fargo and Citigroup hold 39 percent of American's deposits
The six biggest commercial banks by deposit:
- Bank of America, $817.9 billion
- JPMorgan Chase Bank $618.1 billion
- Wachovia Bank $394.2 billion
- Wells Fargo Bank $325.4 billion
- Citibank $265.9 billion
- U.S. Bank $151.9 billion
James Kwak is the co-author, along with Simon Johnson, of 13 BANKERS: THE WALL STREET TAKEOVER AND THE NEXT FINANCIAL MELTDOWN, and the co-founder/co-author of THE BASELINE SCENARIO
Kwak is currently a student at the Yale Law School. Previously, he was a management consultant at McKinsey and Company and co-founder of a successful software company. Kwak received an A.B. in Social Studies from Harvard College and an M.A. and a Ph.D. in History from the University of California, Berkeley.
Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management, a position he has held since 2004. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., and co-founder of a Web site on the global economic and financial crisis, THE BASELINE SCENARIO
and "The Hearing
," a new economics blog at washingtonpost.com. He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-09). He is also a contributing editor at the HUFFINGTON POST
From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's economic counsellor (chief economist) and director of its research department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.
In 2000-2001 Professor Johnson was a member of the US Securities and Exchange Commissions Advisory Committee on Market Information. His assessment of the need for continuing strong market regulation is published as part of the final report from that committee.
Johnson is an expert on financial and economic crises. As an academic, in policy roles, and with the private sector, over the past 20 years he has worked on crisis prevention, amelioration, and recovery around the world, in both relatively rich and relatively poor countries. His work focuses on how policymakers can limit the impact of negative shocks and manage the risks faced by their countries.
Johnson has worked with most of the leading research organizations focused on global economic stability. He remains a Research Associate at the NBER, a CEPR Research Fellow, a BREAD affiliate, a member of the Advisory Group at the Center for Global Development (CGD) in Washington D.C., a member of the International Advisory Board of CASE in Warsaw, and a non-resident Research Fellow at the Asian Institute for Corporate Governance of Korea University. In 2006-07, he was a Visiting Fellow at the Peterson Institute for International Economics in Washington, D.C.
Recent papers have appeared or are forthcoming in THE AMERICAN ECONOMIC REVIEW, THE JOURNAL OF POLITICAL ECONOMY, THE QUARTERLY JOURNAL OF ECONOMICS, THE JOURNAL OF FINANCIAL ECONOMICS, and THE JOURNAL OF FINANCE. He is on the editorial board of THE JOURNAL OF FINANCIAL ECONOMICS, THE REVIEW OF ECONOMICS AND STATISTICS, THE JOURNAL OF COMPARATIVE ECONOMICS, and CLIOMETRICA (a new journal of historical economics and econometric history).
His Ph.D. is in economics from MIT, while his M.A. is from the University of Manchester and his B.A. is from the University of Oxford.
Published April 16, 2010.
Guest photos by Robin Holland
Moyers on Banks and Bailouts (stand-alone player)
View our complete coverage of the banking and bailout crisis from early warning from THE NEW YORK TIMES' Gretchen Morgenson in 2007 to date.
William K. Black
The financial industry brought the economy to its knees, but how did they get away with it? With the nation wondering how to hold the bankers accountable, Bill Moyers sits down with William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s. Black offers his analysis of what went wrong and his critique of the bailout. (April 3, 2009)
Former chief economist of the International Monetary Fund (IMF), MIT Sloan School of Management professor and senior fellow at the Peterson Institute for International Economics, Simon Johnson examines President Obama's plan for economic recovery. (February 13, 2009)
Pecora Part II?
Bill Moyers talks about the economy and Wall Street's future with Simon Johnson, former chief economist of the International Monetary Fund (IMF) and a professor at MIT Sloan School of Management, and Michael Perino, professor of law at St. John's University and an advisor to the Securities and Exchange Commission. (April 24, 2009)
"The Magnetar Trade: How One Hedge Fund Helped Keep the Bubble Going"
By Jesse Eisinger and Jake Bernstein, PROPUBLICA, April 9, 2010.
You can listen to the THIS AMERICAN LIFE episode about the Magnetar hedgefund, and watch a video of the broadway song THIS AMERICAN LIFE commissioned to accompany the piece.
THE BASELINE SCENARIO
The influential Web log maintained by Simon Johnson and James Kwak.
Official Web page for 13 BANKERS.
"Finance: Before the Next Meltdown"
By Simon Johnson and James Kwak, DEMOCRACY JOURNAL, Summer 2009.
The Financial Crisis for Beginners
James Kwak and Simon Johnson's guide to the Financial Crisis at THE BASELINE SCENARIO.
BanksterUSA is a project of The Center for Media and Democracy, a nonprofit organization that seeks to strengthen "participatory democracy by investigating and exposing public relations spin and propaganda. Bankster follows the battle for financial regulation.
Goldman Sachs Legal Troubles in the News
In a civil suit filed April 16, 2010
, the Securities and Exchange Commission has accused Goldman Sachs of securities fraud specifically the suit "claims the bank created and sold a mortgage investment that was secretly devised to fail." (NEW YORK TIMES)
Get additional coverage:
- "SEC Charges Goldman Sachs With Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages," The Securities and Exchange Commission, April 16, 2010.
- "SEC Charges Goldman with Fraud," James Kwak, baselinescenario.com, April 16, 2010.
- "U.S. Accuses Goldman Sachs of Fraud in Mortgage Deals," NEW YORK TIMES, Louise Story and Gretchen Morgenson, April 16, 2010.
- "Goldman Sachs hit with fraud charges," MSNBC, April 16, 2010.
- "SEC Cites Emails in Making Case Against Goldman," Joseph Checkler, THE WALL STREET JOURNAL, April 16, 2010.
- "Goldman Sachs Responds to SEC Complaint," Goldman Sachs Press Release, April 16, 2010.
- "Goldman Sachs accused of fraud by US regulator SEC," BBC, April 16, 2010.