The Grand Banking Scheme

The first guest on Bill Moyer's Journal on Friday evening was Simon Johnson, former chief economist at the International Monetary Fund and teaches global economics and management at MIT's Sloan School of Management. He presented a quite sobering view of the state of our economy. Bang off he stated:

"I think I'm signaling something a little bit shocking to Americans, and to myself, actually. Which is the situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we've seen many times in other places.

But they're places we don't like to think of ourselves as being similar to. They're emerging markets. It's Russia or Indonesia or a Thailand type situation, or Korea. That's not comfortable. America is different. America is special. America is rich. And, yet, we've somehow find ourselves in the grip of the same sort of crisis and the same sort of oligarchs."

Oligarchy, he said. A small knot of very influential and wealthy people who wield tremendous power. They run America's banking system. And they have no intention of giving up their power nor their money, Johnson said. But, he added, they will take tax-payer dollars to shore up their banks and continue to accumulate more wealth and power in the process.

It was a bleak 20-minute segment to watch. Moyers asked, "Are you saying that the banking industry trumps the president, the Congress and the American government when it comes to this issue so crucial to the survival of American democracy?"

Although Johnson could not give a straight yes or no answer, he said, "I have this feeling in my stomach that I felt in other countries, much poorer countries, countries that were headed into really difficult economic situation. When there's a small group of people who got you into a disaster, and who were still powerful. Disaster even made them more powerful. And you know you need to come in and break that power. And you can't. You're stuck."

Then Johnson added,

"The correct people you should be asking this question to are people at the IMF. And I can tell you what they're saying is the policy that we seem to be perusing, of being nice to the banks, is a mistake. The powerful people are the insiders. They're the CEOs of these banks. They're the people who run these banks. They're the people who pay themselves the massive bonuses at the end of the last year. Now, those bonuses are not the essence of the problem, but they are a symptom of an arrogance, and a feeling of invincibility, that tells you a lot about the culture of those organizations, and the attitudes of the people who lead them."

Here is the full text of the final portion of the interview. Mr. Johnson tells Moyers that a process similar to the one used by the IMF could help with this banking fiasco:

Johnson: That's where you go and you check the bank's books, and you say, okay, not only do we use market prices, not pretend prices, not what you wished things were worth, what they're really worth, okay, in the market today. We use that to value your loans and the securities that you have, your assets, right?

And we also assess what will happen to the value of the things you own if there's a severe recession. So that's the idea, it's a stress test, like when you go to see the doctor, they put you on a treadmill, and make you run to see how your heart is going to behave under stress.

So you're looking at how the bank's balance sheets will look under stress. And then you say to them, "This is our assessment of the amount of capital you need to cover your losses, and to stay in business, and be able to make loans, through what appears to be a severe recession."

And, as the president said, we may lose a decade. So we've got to be very hard headed, and all the officials forecasters are still too optimistic on that. This is the amount of capital you need. Now you have a month, or two, to raise this amount of capital privately.

And when this was done in Sweden, by the way, in the early 1990s, they did it to three big banks. One of the three was able to go to its shareholders, raise a lot more capital, and stay in business as a private bank, same shareholders. That's an option. Totally fine. However, the ones that can't raise the capital are in violation of the terms of their banking license, if you like.

We have no problem in this country shutting down small banks. In fact, the FDIC is world class at shutting down and managing the handover of deposits, for example, from small banks. They managed IndyMac, the closure of IndyMac, beautifully. People didn't lose touch with their money for even a moment. But they can't do it to big banks, because they don't have the political power. Nobody has the political will to do it.

So you need to take an FDIC-type process. You scale it up. You say, "You haven't raised the capital privately. The government is taking over your bank. You guys are out of business. Your bonuses are wiped out. Your golden parachutes are gone." Okay? Because the bank has failed.

This is a government-supervised bankruptcy process. It's called, in the terminology of the business, it's called an intervention. The bank is intervened. You don't go into Chapter 11 because in that's too messy. Too complicated. There's an intervention, you lose the right to operate as a bank. The FDIC takes you over. I think we agree, everyone agrees, we don't want the government to run banks in this country.

BILL MOYERS: Never done it before.

SIMON JOHNSON: Never done it before. It's not gone well anywhere in the world. And the idea of getting your money out of the bank being like visiting the DMV to get your driver's license, it's not appealing, okay?

That's not what we're going to do. That's not what the Swedes did. That's not the state of the art - it's not what the real banking experts are going to tell you to do. They're going to say, you set it up, you set up the government intervention, and there's various technical ways to do this, so that you re-privatize very quickly.

Now, it might take three months, it might take six months. It'll depend on the overall macro economy turning around. But there's a lot of private money out there. Let's call it private equity.

These people would like to come in and buy these re-privatized banks. You would attach antitrust provisions to this, so the banks are broken up as part of this transaction. Senator Sanders has a great saying. He says, "Any bank that is too big to fail is too big to exist."

And he's exactly right. So, in this transformation, you're bringing in private equity. You're using, I think this is, to me, the right idea, and what we've learned in our country, is you're using part of the powerful financial lobby against another part. You're using private equity, that would do very well in this, against the inbred insider big bankers. And you're doing this in a way so that the taxpayer decides who the new owners are.

The new owners come in and do a lot of the restructuring. They're going to fire all of these managers. I can honestly assure you that. They're going to put in new risk management systems. They're going to have to make the banks smaller. And the taxpayer is going to retain a substantial equity interest. So as these banks recover the value of our investment goes up. And that's how we get upside participation.

BILL MOYERS: So you're not talking about nationalization, are you?

SIMON JOHNSON: I'm talking about a scaled up FDIC intervention. I think we need the FDIC to be empowered. And to have the political support necessary to get this job done.

BILL MOYERS: Splitting this one powerful interest group into competing factions, and taking them on one by one.

SIMON JOHNSON: That is classic oligarchy breaking strategy. Now I do admit that once you've done that, you have to worry about the new oligarchs. That's why you're breaking up the banks. You don't want to just change the owners of banks that are too big to fail, because they'll be coming around in five years for another handout.

The structure or banking system, the concentration of power in big financial institutions has to change. There's a lot of appeal to FDR and what he did in the Great Depression.

I would go back to Teddy Roosevelt 100 years ago, and think about trust busting. Okay? Now, the banks don't violate existing antitrust laws. That's 'cause our antitrust laws are 100 years old and need to be changed, okay? We need to break them up for exactly the same reason that Rockefeller and the oil interests, standard oil, at the end of the 19th century, was too powerful, economically and politically. And it had to be broken up. And breaking it up was the right thing to do. That's where we are with the banks today.

BILL MOYERS: Simon Johnson, thank you for being with me on the Journal.

SIMON JOHNSON: My pleasure.