By Michael Hirsh | Newsweek Web Exclusive
Feb 12, 2009



It was a classic populist spectacle, reminiscent of William Jennings Bryan's "Cross of Gold" speech or Huey Long's mid-Depression campaign to "Share the Wealth." There, arrayed before Rep. Barney Frank and other voices of the people's outrage, sat the former titans of Wall Street, each of them trying desperately to convince their congressional questioners, and the world, that they deserved some fate other than oblivion.


And these were the survivors! The hardy ones. The eight CEOs who appeared before the House Financial Services Committee on Wednesday—among them Jamie Dimon of JPMorgan Chase, Lloyd Blankfein of Goldman Sachs and John Mack of Morgan Stanley—were actually the bankers who have best navigated the financial turmoil in recent months after taking money from the "Troubled Asset Relief Program," or TARP. That may help explain why some of the angrier congressmen, like Gary Ackerman of New York (who last week roared to former SEC officials: "You couldn't find your backside with two hands if the lights were on!") were a little calmer this time. But it was a striking display of the new balance of power in America. One by one, the former "captains of the universe," as Rep. Maxine Waters described them, genuflected before their congressional masters. "I feel more like a corporal of the universe," Bank of America's Ken Lewis joked weakly. The CEOs described how much they've slashed their salaries and bonuses, how hard they've tried to lend out the billions of taxpayer dollars, and how quickly they'll try to get off the federal dole.


Truth is, this is all mostly whistling past the graveyard—which is where most of these giant banks are headed someday. Or at least let us hope so, while Washington still has the power to make it happen. With a couple of possible exceptions, these financial behemoths can't be allowed to survive and securitize us to the brink again, only to have to be rescued because they're too important to the economy to be permitted to go bankrupt. This is still the heart of the crisis—the problem that President Obama's stimulus package and Treasury Secretary Tim Geithner's financial plan don't even touch. If it weren't for the fact that too many of these banks are too big to fail—"systemic risks," in the jargon—we would have been through a lot of the worst already. Bankruptcy and oblivion is supposed to be the fate of market players who make bad choices. That's how capitalism works. The system gets cleaned out, the survivors deservingly pick up their failed rivals' business and get richer, and the economy comes back to life quickly. But that's what is not working now. Oversize screw-ups like AIG and Citigroup survive on, zombielike, with Fed and Treasury "commissars" on the inside watching their every move, because no one can bear the thought of how many other institutions they would take down if they failed.


Among those who appear to understand this is Federal Reserve Chairman Ben Bernanke. " 'Too big to fail' is an enormous problem," Bernanke said in his own congressional testimony on Tuesday. "We are very unhappy with this problem, and we think that it should be a top priority to fix it as we go forward, so that … the situation doesn't arise again." One of the most telling moments at the CEO hearing came when one congresswoman asked if any of them had grown too large. All were silent. At other points, the CEOs tried to make the case that, with a thaw in lending barely under way, the issue is not with them but with the "nonbank" sector that was responsible for most of the worst mortgage-lending practices during the bubble. What they didn't say is that some of their own companies, among them Bank of America, actually went out and bought the most predatory and seamiest nonbank lenders, like Countrywide Mortgage. Just swallowed them whole. They're incorrigible.


This is the main reason why, to the market's chagrin, Geithner declines to provide details on how to unwind the bad loans and assets at these big companies. Geithner's predecessor, Hank Paulson, dithered over this problem as well. The indecision has been dragging on for five months. That's because the problem is all but insurmountable. If you value those toxic assets at actual market levels, most of these banks would become insolvent. Letting them fail would almost automatically trigger the depression the government has been trying to avert. But if instead the government artificially inflates the assets' values, it commits itself to spending trillions more in public money at a time when Congress and the public are fed up with bailouts (the IMF estimates that potential losses are still $2.2 trillion; Bernanke countered Tuesday that only half of those are with U.S. institutions, but he admitted the banks still have yet to write down about $500 billion in losses). And if the government declines to do either of these things—if it neither values the bad assets at market level nor buys them up at inflated prices—bank stocks will continue to be suspect and private capital will stay on the sidelines. The economy will remain frozen.


In other words, there are no good choices. According to a Treasury source, Geithner knows what a lot of these assets are worth. "The government has gone through these assets very carefully," Citigroup's Vikram Pandit told the House committee. But knowing the value doesn't help. So the Treasury secretary is trying to finesse his way through, probably case by case, hoping he can gradually nudge asset values higher by restoring confidence to the market.


Geithner may be too optimistic. As one senior economic official in Washington said to me the other day, "the Obama administration has got as much political capital as it's ever going to have. This is the time to lay it all out." In other words, tell everyone just how bad the problem really is. It's more than a matter of how much public money to commit. The "fundamental reshaping" of the financial system that Geithner referred to on Tuesday has to be part of the solution as well. The Citigroups and AIGs should be carefully broken up as soon as possible.

True, you're not going to place artificial limits on a firm's size; that's a bridge too far into socialism. But as John Kay of the Financial Times wrote on Wednesday, there's no reason why we can't rediscover the wisdom of Senators Glass and Steagall during the Depression. "Tension between the buccaneering culture appropriate to trading and investment banking and the meticulous processing and caution needed for retail banking is perpetual," Kay wrote. Indeed, as Joseph Stiglitz wrote in 2003, the wisdom behind Glass-Steagall goes "back even further to Teddy Roosevelt and his efforts to break up the big trusts." Let's simply acknowledge that. Yes, finance marches on. We're not going back to 1933. But some things about human nature never change. Now that we understand the fallacy of the "dispersion of risk" idea—which Wall Street, with a big assist from Alan Greenspan, sold us on before the crash—we should arrive at about the same place as Glass, Steagall and Teddy Roosevelt did. We can't have a free-market economy dominated by institutions so huge that they don't have to play by free-market rules. And yet we still do.

Good read. I agree pretty much 100%. We can't allow so many mergers and acquisitions to occur that the whole economy depends on a handful of companies. I'm incredulous that this lesson hadn't been learned a long time ago. Although, I think business learned and just didn't care, but people should've figured this out in the robber baron days. The first ones, not these days.

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1984 300TD

Companies just have a natural tendency to grow as big as possible. I don't think that anybody thought that ten of twelve large banks was a trust. I agree that we need to get them back under control, however putting the CEOs up in front of Barney 'Che' Frank for a tongue lashing was not helpful.
Maybe Rep. Franks should have just had the Sargent at Arms just shoot them all in the rotunda...

We need constructive solutions not finger pointing right now.
Maybe letting Citi just go under would have been the best solution

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While it's true companies tend to grow, I think it's clear that this was directed growth. It's not an accident AIG or Merrill for ex. are large and into several businesses. It was planned, and the first part of the plan was to repeal Glass Steagall.

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Companies do have a tendency to grow, but they also will die at some point. We are messing up capitalism and allowing these monster banks to form because the government won't allow the weak giants to die off.

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I don’t agree that growing a company as big as possible is normal. I've worked as a consultant for many small and mid-sized businesses over the last 20 years. The idea of growth to a point is normal, but not of necessity a model. Most seasoned business owners I work with know what market share is about.

I guess the question is: how to kill the cancer that these banks have become without destroying the house of cards that is the banking industry, and by extension our economy?

Killing the bankers won’t do anything positive.

Anyone have a suggestion beyond what is being attempted?

Is a new fed bank to buy up toxic debt the only solution?

What is a positive goal of having the fed own more vast swaths of over valued housing? Other than perhaps forestalling the failure of capitalism, which itself, is a positive goal…..

The entire collapse of the US economy can be laid at the feet of the non-enforcement of the Sherman Anti-trust Act which began in the '80s. This law was put in place to prevent exactly this from happening.

I think I still like "killing the bankers".

There used to be a time when the federal government broke up large monopolies. When was the last time that happened?

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Ma Bell. Wasn't that during Reagan's admin?

And all this time I thought more deregulation was the answer.

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Judge Greene. 1984.

Is a New Cabinet Level position...
"Vlad the Impaler" (Of Wall St.)

5,000 of those bastards "On Sticks" all over Manhattan.

(Nothing Like a Little "Bonus" type encouragement to the rest of the profession
out in the Hinterlands.)

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Yes, and if you ignore history link and kirk are 100% correct. Post great depression the fed did not allow---banks to be small and the economic evolution stuck us with big banks who woulda thunk?