Gretchen Morgenson: Banks Are Still Too Big To Fail

The New York Times columnist tells Bill that, five years after the country’s economic near-collapse, banks are still too big to fail, too big to manage, and too big to trust.

Pulitzer Prize-winning New York Times columnist Gretchen Morgenson tells Bill Moyers that, five years after the country’s economic near-collapse, banks are still too big to fail, too big to manage, and too big to trust. Stockholders’ reaffirmation of Jamie Dimon as JP Morgan Chase’s chairman and CEO this week — despite a year of accusations and investigations at the bank — is further evidence, she says, of an unchecked system that continues to covet profits and eschew accountability, putting our economy and democracy at risk. Morgenson also discusses how behemoth companies like Apple manipulate the system and avail themselves of the biggest tax loopholes money and influence can buy.

“These banks are not getting smaller; they’re getting larger. There are now more too-big-to-fail institutions than there were prior to the 2008 crisis,” Morgenson tells Bill.

And while the Dodd-Frank Act was supposed to prevent that from happening, Morgenson says the law itself is less powerful than those it hopes to regulate.

“Dodd-Frank set up a system to unwind troubled institutions when they become troubled. But it requires regulators taking a really firm stand against large, politically-interconnected, and powerful companies… I just think it’s too easy to put the taxpayer on the hook and bail these people out. So of course the response from these people is going to be, I’ll just do it bigger next time, the taxpayer will be there to bail me out, and we’ll go on our merry way.”

Full transcript below the fold...

BILL MOYERS: Welcome. Where to begin? There’s been so much news this week of giant corporations gaming the system, it makes your head swim. And perhaps that’s the problem, we’re overwhelmed. Just look at some of the headlines: "Apple executives face Senate grilling," "Apple is shifting its tax burden," "Apple’s Web of Tax Shelters Saved It Billions..."

That New York Times story, by the way, went on to report how Apple, America’s most profitable technology company, avoided those taxes “…through a web of subsidiaries so complex it spanned continents and went beyond anything most experts had ever seen…”

Just consider this item from the Financial Times. By setting up a subsidiary in Ireland, “…Apple Sales International, paid virtually no taxes on sales of $74 billion between 2009 and 2012.” Furthermore, “In 2011, it paid $10 million in taxes on $22 billion in profits, or a rate of 0.05 per cent…”

As that great newspaper The Onion observed, tongue firmly in cheek, “That must be how they keep their prices so low.”

Now look at these headlines: "Deja Vu on the Hill: Wall Street Lobbyists Roll Back Finance Reform, Again,” “Derivatives Reform on the Ropes,” “Banks Win Big as Regulators Refuse to Rein in $700 Trillion Derivatives Market.”

And on, and on. The banking industry’s all-out campaign to gut the reforms enacted just three years ago to put an end to the financial chicanery that almost destroyed us in 2008.

Which brings us to another finalist for this week’s honor roll of questionable accountability, JPMorgan Chase, the largest bank in the United States. Despite the bank's year of embarrassing behavior, shareholders re-elected their entire board of directors and voted that Chairman and CEO Jamie Dimon could hold onto both his highfalutin job titles.

Back to this table comes someone who keeps a sharp eye on the “animal spirits” of the corporate world, Gretchen Morgenson, one of the foremost business journalists in the country. Pulitzer Prize-winner and assistant editor at The New York Times, where her column appears every Sunday. Her most recent book is Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Created the Worst Financial Crisis of Our Time. It’s a must-read.

Welcome.

GRETCHEN MORGENSON: Thanks, Bill.

BILL MOYERS: So why should anyone watching this right now care whether Jamie Dimon wears two hats at the head of JPMorgan?

GRETCHEN MORGENSON: Well, of course, JPMorgan, as you know, going back, stepping back, was the bank that did not go to the precipice, did not require a bail out, it made it through the financial crisis of 2008 in fairly good stead. And so that presented for Mr. Dimon a sort of bragging right, as it were. I led my bank through this terrible crisis with very little in the way of trouble. So why would you want me to change anything about how I operate this bank? Well, as you know, the problems that came up over the past year involving the trading losses, the $6 billion trading losses that their—

BILL MOYERS: The London Whale.

GRETCHEN MORGENSON: --their Chief Investment Office is what got people a little bit alarmed. Is this bank as well managed as Mr. Dimon says it is? And so the idea among some shareholders was, you really ought to have a check and balance here on this chief executive. We don't want the imperial CEO who also is the Chairman of the Board. Because there was some risk management issues that we really need addressed.

There obviously was not adequate oversight of the Chief Investment Office if you're going to have $6 billion in losses. And yet the shareholders that turned down that proposal to separate the chief executive office from the chairman title, and so Mr. Dimon continues on as both.

BILL MOYERS: Since he wears both hats, does this mean that Jamie Dimon, Chairman of the Board, gets to decide whether Jamie Dimon, CEO is doing a good job?

GRETCHEN MORGENSON: Pretty much. I mean, he is essentially overseeing his own performance. Which, you know, is a conflict of interest. So it's, generally speaking, ideal to have someone overseeing the C.E.O. or a strong board that can oversee and rein in a CEO. Well, this is a board that had people on the risk committee who were obviously not monitoring the risks that were being taken on in the company. And the fact that they were reelected by a majority of shareholders, I think is quite indicative of a very big problem that we have in America today.

And that is that many, many large institutional shareholders who represent you and me, mutual funds, pension funds, the like, vote with management on many of these important issues. And so they're not necessarily voting your opinion or mine.

BILL MOYERS: He's also ultimately responsible for over $2.3 trillion in assets and 256,000 employees. I mean, is it possible for one man to prevent all that happened at JPMorgan Chase last year?

GRETCHEN MORGENSON: This is where we get into the problem of institutions that are too big to manage. And ultimately then, too big to be allowed to fail. Which is the single most, the single largest peril that we have not addressed after the 2008 financial Armageddon. Dodd-Frank was supposed to address that issue, was supposed to eliminate too big to fail, but it hasn't.

And because there's the implicit guarantee by the taxpayer, we are always going to be at peril for some sort of a problem like this. Now the $6 billion loss didn't turn out to be a death knell for the company, it absorbed it.

It was able to do so without any kind of a hiccup financially. But, you know, that was one example. The company has enormous derivatives exposure. Enormous exposures around the world with counterparties. So you really do feel that it's too big to manage. And so therefore, we really must cut these banks down to a smaller size.

BILL MOYERS: You wrote recently about the bill introduced in the Senate by a bipartisan team of Sherrod Brown, Democrat from Ohio and David Vitter, a Republican from Louisiana. And you call that a "smart” bill. What appeals to you about it?

GRETCHEN MORGENSON: Well, what that bill basically does is it requires a far greater capital cushion for these banks, a far greater sort of rainy-day fund for these banks to have on hand in case they get into trouble. In 2008, the capital requirements were far too thin. So the cushion was this big when it should've been this big. And it wasn't liquid. It didn't consist of, you know, cash or treasury securities that you could sell immediately. It was, you know, one of these complex situations set up by this committee in Basel, Switzerland. And, you know, very, you know, Byzantine.

And it wasn't readily available capital. There wasn't enough of it and it wasn't liquid. And so the Sherrod Brown and David Vitter bill is an idea of how to have that pile of cash available, ready if there's a problem. Well, banks don't like this because they want to deploy that cash. They want to earn money on that cash. They want to, you know, take risks with that cash. And so of course they object to that idea.

BILL MOYERS: Do you think there's any chance that an intelligent-sounding, seeming bill, like the Sherrod Brown and David Vitter proposal has a chance of competing against the army of lobbyists that Jamie Dimon and others can send down to Washington?

GRETCHEN MORGENSON: It is a formidable, formidable army. I grant you that. I just hope that people on Main Street will rise up and support this idea, support this bill. Otherwise, we are simply going to have another crisis far sooner than we would otherwise. I mean--

BILL MOYERS: Why?

GRETCHEN MORGENSON: --these banks are not getting smaller. They're getting larger. There are now more too-big-to-fail institutions than there were prior to the 2008 crisis--

BILL MOYERS: Dodd-Frank was supposed to prevent that from happening.

GRETCHEN MORGENSON: Dodd-Frank set up a system that is supposed to be in place to unwind troubled institutions when they become troubled. But again, it requires regulators taking a really firm stand against large, politically-interconnected, and powerful companies. And it is extremely, I don't see why if they wouldn't do that in 2008 why they're going to do it the next time around.

I just think it's too easy to put the taxpayer on the hook and bail these people out. And there's just been no penalty for failure in the 2008 crisis. So of course the response from these people is going to be, I'll just do it bigger next time, taxpayer will be there to bail me out, and we'll go on our merry way.

BILL MOYERS: Bloomberg Businessweek had a cover story recently, “Dimon Is Forever: Why Jamie Dimon is Wall Street's Indispensable Man.” Couldn't they have said that about Henry VIII or Louis XVI?

GRETCHEN MORGENSON: Well, you could've said it about John Gutfreund, who was the head of Salomon Brothers before he was made to take leave after the scandal in 1991 where they were found to have rigged the treasury market. I mean, if I were Jamie Dimon, I'd be worried about being called the king of the heap, because when that happens there is often a comeuppance. It hasn't happened to him yet. But, so here is a man that has succeeded because he hasn't failed.

I think that's really what we're talking about here. So the bar is quite low, wouldn't you say? I mean, by comparison to the banks that did require huge bailouts, Bank of America, CitiBank, you know, Wells Fargo, to a lesser degree, perhaps. This was the bank that was better than the rest. And so he gets all of these accolades because of it. Well, maybe that's, some of it is perhaps justified. But I think it's really a little bit much in putting him on a little bit of a pedestal.

BILL MOYERS: Has Wall Street as an institution, has Wall Street as a system of being in the world, learned anything in the last four years?

GRETCHEN MORGENSON: Absolutely not. Learned nothing.

BILL MOYERS: Why?

GRETCHEN MORGENSON: You know, I was shocked, Bill, when after the crisis, Wall Street and the large banks continued their lobbying efforts unstopped, right? They didn't even hide in their trenches for one minute after pushing the nation's economy to the brink. And that to me was, it seemed like evidence of, there was just no shame. No shame at all in, among these people that had really created this problem and this crisis.

And they were given slack. They were, you know, allowed to stay in their jobs. They weren't removed. They weren't jailed. They weren't penalized. And so that's the disconnect that I think we really, I was shocked by.

BILL MOYERS: Speaking of putting the taxpayer on the hook. Now, you know, I like my Apple products and I'm sure everybody listening has something kind to say about how technology and Apple in particular has helped their own situation.

However, when I watched those hearings this week, I thought, when Apple is avoiding all the taxes they're paying on all those profits overseas, doesn't it put a burden on the rest of us? And doesn't it, as in fact the Senate Committee says, create a more unjust tax system?

GRETCHEN MORGENSON: Well, I think it does, Bill. Because these are obviously extremely successful companies building a product, as you say, that many, many people enjoy. This is not like Wall Street creating, you know, products that no one needs and that only wind up hurting people, as we saw in the crisis. But it is a cost to the system if you don't have adequate tax rolls coming in from these immensely successful companies. And this is not illegal. Apple has not been accused of doing anything illegal.

It's, you know, being shrewd. It's being smart about the tax code, which is a giant mess, because it has been manipulated to gain these kinds of loopholes.

BILL MOYERS: Let's take a look at an excerpt from the Senate hearings earlier this week. Senator Levin is questioning Apple's CEO, Tim Cook.

SENATOR CARL LEVIN (FROM SENATE HEARING): You point out, and accurately so, Mr. Cook, that 95 percent of the creativity that goes into those products is in California. But two-thirds of the profits are in Ireland. And you've made a decision, which you have a right to do, not to bring that money home.

TIM COOK (FROM SENATE HEARING): Senator, we're proud that all of our R&D, or the vast majority of it is in the United States.

SENATOR CARL LEVIN (FROM SENATE HEARING): I know. But the profits that result from it are sitting in Ireland in corporations that you control that don't pay taxes.

TIM COOK (FROM SENATE HEARING): All of--

SENATOR CARL LEVIN (FROM SENATE HEARING): You ought to be proud--

TIM COOK (FROM SENATE HEARING): All of the profits from all of the products we sell in the United States--

SENATOR CARL LEVIN (FROM SENATE HEARING): I know that.

TIM COOK (FROM SENATE HEARING): --pay taxes in the United States.

SENATOR CARL LEVIN (FROM SENATE HEARING): Oh I know that.

BILL MOYERS: So what is wrong with all of that money sitting in Ireland?

GRETCHEN MORGENSON: If we're not receiving the tax revenues that this company, you know, hypothetically should be paying, then that's an opportunity loss for the government.

BILL MOYERS: It could be the roads and bridges that the--

GRETCHEN MORGENSON: Could be.

BILL MOYERS: --employees of Apple out in Cupertino--

GRETCHEN MORGENSON: Absolutely.

BILL MOYERS: --use every day to get to and from home and work.

GRETCHEN MORGENSON: Yes, it could be, you know, the municipal police departments, firefighters. It could be any one of those things. So it really is a matter of fairness, I think. And that's what, it doesn't pass that test. Is it fair that individuals pay, you know, whatever 39 percent, 40 percent of their taxes, have very few, you know, tricks and games to be able to play to get, you know, away from that.

Is that fair when you have massively, you know, rich American corporations paying far, far less? I think also what's interesting about this particular situation is that it's, Apple says it's based in California. But it's stateless. You know, it's one of these kind of, it doesn't really exist in any of these other places. And that, there's something really, really strange about that.

BILL MOYERS: Why do you think the corporate income tax is so easy to evade?

GRETCHEN MORGENSON: Because lobbyists have spent many, many years making sure that these loopholes are put into the tax code. I mean, this is the job of many, many people in Washington on K Street to manipulate the tax code for a particular client or industry. And so we see that just constantly. It's constantly being fiddled with.

BILL MOYERS: So does Cook's argument that Apple is simply playing by the rules of a broken tax system, hold water?

GRETCHEN MORGENSON: Well, it does. It is a broken tax system. And they are, apparently, playing by the rules. But I would like to know if Apple's lobbyists had anything to do with creating the loopholes and rules that they're now benefiting from. It really is a situation where we have large corporations with so much power in Washington able to change legislation, roll it back, as you point out with Dodd-Frank, able to change the tax code to their benefit. I mean, this is really about, this is really about the power and the money in Washington that comes from these behemoth corporations.

BILL MOYERS: You make me realize anew that there is this collusion, I didn't say conspiracy, collusion between the financial elites and the political elites that has widened the gap between everyday citizens, taxpayers, out there.

GRETCHEN MORGENSON: Uh-huh.

BILL MOYERS: Isn't that a crisis for democracy?

GRETCHEN MORGENSON: Yes. It's a crisis for democracy. It's also widened the gap, Bill, between small community banks that didn't create the problem. Okay, so they're now operating at an extreme disadvantage to the large behemoths because the large behemoths have the implied taxpayer guarantee, which gives them a lower funding cost, they, you know, when they go out to raise capital, they don't have to pay as much because the investors understand they're going to get bailed out if they get into a problem.

So, community banks don't have those benefits. So not only has this, you know, widened the gulf between Main Street and these, you know, powerful institutions, it's also widened the gap between, you know, smaller institutions that provide a service to, you know, small-town America or medium-sized-town America. And I think that's also troubling, because they're not going to be able to compete and they can't compete.

BILL MOYERS: You ever get frustrated?

GRETCHEN MORGENSON: I get frustrated. I get upset. I think that we're going in the wrong direction. Many times I feel that I'm stuck in this groove of scandal after scandal after scandal. They're coming more and more frequently, they're larger in size, they devastate more people. And I don't see an adequate response from our government. So it's a, it is a very frustrating time, I think. The disconnect I think between Main Street and Washington and the connections that Wall Street and corporate America, I think that disconnect is growing bigger, larger, and more pernicious.

BILL MOYERS: Gretchen Morgenson, thank you very much.

GRETCHEN MORGENSON: Thanks, Bill.

About Diane Sweet

Diane Sweet's picture
Senior Editor, Lives in a gerrymandered district in Michigan.

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