Wednesday, December 8, 2010

Citigroup's "Too Interwoven" Threat

On the same day (12/7/2010) the United States Treasury sold the last 2.4 billion shares of its former 27% ownership of Citigroup, the Chairman of Citigroup said it is not whether Citi is "too big to fail" but that its global operations are "too interwoven" in the global economy to fail.

Less than a week ago Jaime Dimon of J.P. Morgan Chase argued that "too big" is good for the economy.  I have argued that the Volcker Rule is not about "too big to fail" but about financial institutions of any size which constitute a systemic danger.  Still, the concept of "too big to fail" keeps framing the public debate rather than the more accurate "systemically dangerous" criteria.  Anat Admati, a finance professor, has taken Jaime Dimon's comments and put them in the analytical framework of "too big" and the risks of leverage.

How can you measure a bank's leverage risk, if it is legally allowed by the suspension of the FASB rule on mark-to-market of assets to fair value to carry assets at unreal values creating fraudulent financial balance sheets?

I have discussed, on the basis of disparate but similar economic research, that leverage can be used to stimulate an economy, to cool an economy, and as a possible indicator of financial bubbles.  As such, too much leverage can be a direct risk to an economy.  Banks, shadow banks, and any financial entity however large or small needs to be regulated and proper risk management supervised to ensure they are not systemically dangerous and any systemically dangerous financial institution of whatever size must be wound down and broken up until it no longer presents a systemic threat.  The Dodd-Frank Bill left the formation, definition, and extent of the Volcker Rule to regulators to construct.  In this age of political gridlock created by the financial sector lobbyists and their bought and purchased minions, there is little hope that the Volcker Rule will establish proper risk management much less a trigger to wind a systemically dangerous entity down.

While there has been some back room effort to discuss a strong and effective Volcker Rule, I am not going to hold my breath for a Treasury Secretary, who was a one of those directly responsible for the financial crisis and TARP, or a President, whose advisers are mired in a New Political Reality which favors the financial elite, to act in the best interests of a stable democratic economy which recognizes the plebeian populace as the people who government serves and protects.

At what point do the threats of either "too big to fail", "too big", or "too interwoven to fail" become an extortionate threat or even a terrorist threat?
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