Banks and the 10% Deposit Cap

On page 180, we say this:

“Bank of America, JPMorgan Chase, and Wells Fargo all had to be exempted from a federal rule prohibiting any single bank from holding more than 10 percent of all deposits in the country.”

This is not quite right.

We were relying on this passage from a Washington Post article: “Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation’s deposits despite a rule barring such a practice.”

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In-Person Events

We’ve added a new Events page to the site (which you should see at the top of the page if you’re viewing this on the site). Right now this lists scheduled events that are open to the public, should you want to see what we look like in person. We’ll be adding more as they get scheduled, and we hope to see you at one of them.

The Book Exists!

Simon and I saw it for the first time at the Fordham Law School conference on Friday. A bunch of reviewers got their copies before we did. A few notes:

  • It looks and feels beautiful. The cover is made of something they call “foil” in the industry.
  • It was printed in Virginia.
  • There are already two people selling it on eBay (it won’t be in bookstores until March 30).

I’ll have a calendar of appearances up at some point, probably later this week.

Review by Arnold Kling

Arnold Kling of EconLog, a generally libertarian economics blog, has a flattering review of 13 Bankers. I especially appreciate it because even though we differ from Kling on many of our ideological presuppositions and political preferences, he recognizes the potential bipartisan appeal of at least some parts of the book. For example:

“Johnson and Kwak start by putting the issue of large banks in historical and international context. Although they lean left, they may shock progressives with their sympathetic treatment of Thomas Jefferson and Andrew Jackson in their suspicion of financial concentration.”

This should not be too surprising, really. Progressives and libertarians both tend to be suspicious of concentrated economic power and its ability to sway government policy, though we might differ on solutions. To simplify vastly, progressives want the government to take a harder line on big business, while libertarians want smaller government and hence less ability for big business to twist public policy in its favor. But Simon and I do not share the faith in government regulators that some progressives have, and this is why we support breaking up big banks.

Kling does raise a few quibbles. Without restating them here, I would say that #1 is a fair point (it’s a question of emphasis between ideology and exogenous historical factors. #2 is also a fair point. We weren’t trying to argue that regulation of OTC derivatives would have solved everything; it comes up disproportionately in the book in part because of its symbolic value. As for #3, we weren’t trying to say that BISTRO was the first credit default swap. It was the first synthetic CDO, at least according to Gillian Tett’s book.

Review by Publishers Weekly

It’s all of one paragraph, but it does capture the main point: “Given the swelling size of the six megabanks, the authors make a persuasive case that the financial system cannot be secure until those banks that are ‘too big to fail’ are somehow broken up.”

Review by Kirkus Reviews

The first official book review is in, from Kirkus Reviews. It’s behind a subscription firewall, but they call it “A detailed, dismaying and damning summation of recent Wall Street-Washington collusion — and the recurrent risk of financial folly.”

(In related good news, Kirkus Reviews was recently purchased by Herbert Simon, which means it will be surviving.)

13 Other Bankers

The Huffington Post has a story on the thirteen biggest paychecks in finance. This is certainly not the actual thirteen biggest in finance, because those would all be hedge fund managers. And it probably isn’t the thirteen biggest in the banking sector, since I don’t think banks have to disclose that (they do have to disclose top executives’ pay; I’m not sure if any recent changes in the law demand disclosure of the top earners’ pay). But it’s still thirteen big paychecks.

If there’s one name shareholders should be mad about, it’s probably Gregory Curl at Bank of America, who comes in at #12 — despite getting completely rolled by Greg Fleming in the negotiations to buy Merrill Lynch, at least according to Andrew Ross Sorkin in Too Big to Fail. On Sunday, September 14, 2008 — the day before Lehman declared bankruptcy and the real panic began — B of A agreed to pay not just a premium for Merrill Lynch, but, according to Sorkin, “the biggest premium in the history of bank mergers” (p. 358). (Most likely, Bank of America could have bought Merrill for a small fraction of the purchase price only a week later.) Not only that, but Bank of America agreed to fund Merrill’s bonus pool up to 2007 levels, which would contribute (via the scandal over the Merrill bonuses) to Ken Lewis losing his job as B of A’s CEO.

Final Corrections

Page 199: Change “forty senators” to “forty-one senators.”

Page 208: Change “The Obama administration agrees” (with the large banks) to “The Obama administration agreed.”

By James Kwak

Did Barack Obama Read Our Book?

Well, probably not. But today, according to the Wall Street Journal, Obama is set to propose new restrictions on the size of the largest banks and on the activities they can engage in. (See our Baseline Scenario posts for more details.) Imposing hard limits on bank size is something that we have been arguing for and that is a central recommendation of 13 Bankers, which describes how the banks got so big and why that presents both economic and political problems.

One announcement by President Obama is, of course, only the first step in a long journey. The resistance from the banking industry and its allies in Congress will be bitter and, in the short term (the current session of Congress), probably successful. But the fact that the president is willing to take a stand–depending on how strong a position he actually takes–will help move both public opinion and the Washington establishment in the right direction.

By James Kwak

Welcome

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