13 bankers: too big to fail simon johnson and james kwak

13 Bankers: Too Big to fail

Simon Johnson and James Kwak

2008 The Financial Meltdown

October 13, 2008: Meeting at the US Treasury DepartmentRepresentatives from nine banks – Bank of America, Bank of New York,

Citigroup, Goldman Sachs, J.P. Morgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo - were told by Henry Paulson to sell shares to the US government.

The terms of the Deal: The “deal was structured as a purchaser preferred stocks, which effectively

meant that Treasury loaned the banks money, at an initial 5% annual interest rate (lower than anything available in the market) … that never had to be repaid.


Was this a government takeover of the financial industry? No, it was a bailout.

What is the difference?


Takeover versus Bailout

Bailout/Blank Check:“The government keeps the bank afloat in its current for: managers keep their jobs, shareholders keep some value and creditors are kept whole, so taxpayers bear most of the losses.” (166)

Takeover: “Managers lose their jobs shareholders are wiped out, and any remaining losses are shared between taxpayers and creditors.” (166)


The Power of Wall Street“The terms of [the] intervention would reveal the lasting influence and

power of the Wall Street ideology --- that big, private, lightly regulated financial institutions are good for America.” (162)

Government intervention, not the free marketRather than “let the free market take its course in Indian financial eco-

disaster,” Paulson (Treasury), Ben Bernanke (Fed) and Tim Geithner (New York Fed) “engineered a massive government intervention in the financial system.” (162)


The Power of Wall Street“Never before has so much money been dedicated to save an industry from

the consequences of its own mistakes.” (164)

Ultimate Irony: Free Market Wall Street Bailed Out by Government “In the ultimate irony, it went to an industry that had insisted for decades

that it had no use for the government and would be better off regulating itself …” (164)


The Power of Wall Street: Political consequences“A casual observer could be forgiven for thinking Washington had behaved

like an emerging market government in the 1990s -- using public resources to protect a handful of large banks with strong political connections …” (156)

Wall Street: Stronger Because of the Crisis“Whether this was due to political capture or to unbiased economic

policymaking result was the same: Wall Street only grew stronger as a result of the financial crisis.” (156)


US as an Emerging MarketMany of the same officials who bailed out, rather sought to takeover sick

banks in the US in 2008 had previously in their careers overseen or recommended takeovers in emerging economies were there was a financial crisis.

What is the difference?

13 bankers: too big to fail simon johnson and james kwak

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