Understanding ‘Too Big To Fail’ Banks

Said another big investment, Wall Street fraud scam story. This time was Bank of America. Basically was just doing almost the same thing Wells Fargo was doing, opening up accounts, charging people ridiculous fees, all sorts of stuff that again, if I were to do at my firms, I’d go to jail. But there’s a certain class of companies and banks, if you will. The too big to fail type that they could do whatever the hell they want and it doesn’t matter Anyway, I’m gonna share with you some of the mission statements from some of these big firms And again, if you are a longtime listener, you know How much I detest these firms and what they stand for and what they’ve done to people over the years and for the life Of me, I don’t understand how people still have accounts for them. I know you’re one of the guys that has you know 10 15 20 hundred million dollar account. You’re they’re gonna take care of you But if you’re not in that level, then I got it. You’re just a number. Anyway, this is JP Morgan Chase’s mission here. Our integrity and reputation depend on our ability to do the right thing, even when it’s not the easy thing. Goldman Sachs, no financial incentive or opportunity, regardless of the bottom line, justifies departure from our values. I mean, I want to throw up in my mouth. when I read these things, we all know that this is just not the case. Um, Goldman Sachs, creating, creating weapons of mass destruction, investment vehicles, knowing that, you know, they knew that they were going to blow up and making money when they sold them and making money after they blew up. Yeah. No financial incentive or opportunity is no, no way justifies departure from your values. Well, I guess what is your values? Don’t have any. Morgan Stanley, the talent and passion of our people are critical to our success. Together we share a common set of values rooted in integrity and excellence. Uh-huh. And then Merrill Lynch, a part of Bank of America who was doing all sorts of nefarious stuff to their clients. The interests of our clients must come first. Holy shit, no way. Shut up. You’re insulting my intelligence, as Michael Corleone once said. Okay. I wanna share with you this, this again, I’m gonna go back to, actually, William Cohen wrote about this several years ago in the Wall Street Journal, talking about when they were trying to break up the big banks back in the day. This is 1947, the top 17 investment banks. Top seven, there were 17 of them. for basically violating, government went after them for violating antitrust laws, in essence, collusion. In their suit, the Justice Department alleged that the investment firms had created an integrated overall conspiracy and combination beginning in 1915 and in continuous operation thereafter by which they developed a system to eliminate competition and monopolize the cream of the business of investment banking. Aha. The US argued that the top Wall Street investment banks, Morgan Stanley was the lead defendant, and Goldman Sachs as well, crafted a type of cartel, which was able to set prices, charge for their services, such as securities, underwriting, mergers, and acquisitions. The firms colluded to essentially box out smaller banks. It was discovered that the big investment firms would strategically place their partners on their clients’ boards of directors. By doing this, it placed their firms in very favorable positions to win, basically, and they know when, where, all this business was coming from and how to go about getting it. Now, again, think about it, 17 major investment banks. We just have a handful today. The too big to fail variety, which is 2% all banks outstanding, 0.2, excuse me, 0.2%. Goldman Sachs, Morgan Stanley, J.P. Morgan Chase, Citigroup, Bank of America, and Deutsche Bank. Now, they are many orders of magnitude, larger and more concentrated than they were back in 1947. Back then, they weren’t commercial banks. Now they’re commercial banks and investment banks. Size, concentration, revenue, and connections have placed these entities above the rule of law. Again, I always cite this, it’s fascinating to me. This was Attorney General Eric Holder under Barack Obama. He stated this during a Senate hearing, he said a Senate hearing, March 6th, 2013. When banks are considered too big to fail, it is difficult to prosecute them. If we do bring a criminal charge, it will have a negative impact on the national economy. Get your arms. around that. He’s basically saying, what the hell am I supposed to do? I’m going to go after these big banks? Oh no, it’s going to be bad for the overall economy. Well then, the entire system is crooked. It’s a mess and it needs to be busted up. President of the Federal Reserve Bank of Dallas, who used to be Richard Fisher, points out, an example, another problem, the too big to fail, is the unfair market for capital. I’ve discussed this in the past as well. The mega banks can raise capital more cheaply. than smaller banks. Studies, including those published by the International Monetary Fund, estimate that the advantage be as much as one percentage point, 100 bips. That’s a, that’s a big advantage. That makes it a very certain and uneven playing field, tilted, tilted to the big firms against Main Street and the smaller firms. Anyway. 1929, 1929 stock market crash investigation. There was all sorts of instances of widespread collusion, fraud, whatnot. And then we had the banking act 1933 known as a Glass-Steagall Act. Now I, when the Glass-Steagall Act, most part, it kept problems of conflict of interest somewhat at bay. for what, some 66 years, until it was repealed in 2000. And one of the great things about the Glass-Steagall Act was that it was, it’s simple. It’s 53 pages long. 53 pages long. And again, I appreciate laws that are black and white. Anyway, you think about, think about all the thousands and thousands of pages of legislation. going back to Sarbanes, Oxley, Dodd, Frank, that we’ve written since, thousands of pages. And yet we still have the Silicon Valley Banks of the World and the signature banks and all this stuff that happens. Anyway, it doesn’t make any difference. Anyway, what the Glass-Steagall legislation did is it split up conflicting operations within a firm, forcing the firm to decide what arena they would operate. Savings banks could take deposits from the public and make personal and home loans. Commercial banks could take deposits from businesses and make business loans. Investment banks could raise capital for businesses by taking companies public, doing secondary offlings, handling mergers and acquisitions, and brokerage firms would be providing a market for stocks and bonds, holding trades, helping people manage their money. Mutual funds, which at the time were not that big of a deal, they were known as investment trusts. could invest in portfolios of stocks and bonds and sell shares to investors. Wasn’t perfect, however, it was user friendly and it did eliminate many conflicts of interest. Again, in my opinion, that’s what we need to get back to. That’s what worked. Again, what we have right now is a system where, again, no matter what these guys do. All they’re gonna do is they’re gonna pay a fine, they’re gonna pay a fine, and they’re gonna walk away. Bank of America just did it. See, equivalent of a parking ticket for them. That’s it. They’ll pay it and they’ll walk away. And again, this is just a reminder to people as well. You gotta understand who you’re doing business with and what their motivation is. It matters. It really does. You can’t serve two masters. and the CEO of a publicly traded company has a fiduciary duty to his or her shareholders. That’s what’s most important, not to you the client. You work with the independent CFP, registered investment advisor, they have a fiduciary duty to do the right thing by you. Watchdog on wallstreet.com.