"We became the party of the status quo."

August 16, 2017 4:52 PM

"Look at the continuing scandals that are pouring out of Wells Fargo, with the most recent headlines about their having sold car insurance to people without any rationale, whatsoever... Lanny Breuer’s articulation of 'too big to prosecute' goes down as, on the one hand, the most honest and also the most disturbing statement made by the head of the Criminal Division in the Justice Department." A two-part interview with former New York governor Eliot Spitzer about antitrust, economic concentration, and regulatory capture.
posted by crazy with stars (12 comments total)

Wells Fargo says this was not a case of trying to improperly profit at customers' expense, but rather just an embarrassing breakdown in processes and internal controls.

That's a good line. I think regular car thieves should use it. "I'm sorry your honor, I wasn't trying to profit off this poor fellow by taking his car. It was just an embarrassing breakdown of processes and internal control. I'm looking into the problem and I swear it won't happen again."
posted by gusottertrout at 10:56 PM on August 16, 2017 [7 favorites]

Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised.

This justification for punishing the bank with simply a fine is inequitable and infuriating, but it's also either true or false. It is possible that criminal prosecution of HSBC would cause problems for the bank's customers, and others as well, that outweigh the benefits of pursuing those charges. Or maybe that's just a specious justification for the Department of Justice's decision not to seek to put any of HSBC's senior executives in jail.

Which of those is the case seems to me a key question, and one that Greenwald doesn't seem give any attention to.

Meanwhile, the interview with Eliot Spitzer is described as being about about ethics and whether law enforcement institutions in the U.S. have the will and the ability to hold the most powerful actors in corporate America to account. His own experiences with being held to account by law enforcement institutions is described as follows: Spitzer, who was forced to resign from his position as governor in 2008 and did not succeed in his bid to become New York City’s comptroller in 2013, has mostly left public life and now focuses on running the real estate group he inherited from his father.

That seems to elide some information that's relevant to the discussion.
posted by layceepee at 5:57 AM on August 17, 2017 [2 favorites]

The Idea Of Finance as Intermediated Scarce Private Capital Is Obsolete

Abstract
The dominant view of banks and other financial institutions is that they function primarily as intermediaries, managing flows of scarce funds from those who have accumulated them to those who have need of them and can pay for their use. This understanding pervades textbooks, scholarly writings, and policy discussions – yet it is fundamentally false as a description of how a modern financial system works. Finance today is no more primarily “intermediated” than it is pre-accumulated or scarce.

This Article challenges the outdated narrative of finance as intermediated scarce private capital and maps the basic structure and dynamics of the financial system as it actually operates. We begin by developing a three-part taxonomy of ways to model financial flows – what we call the “credit-intermediation,” “credit-multiplication,” and “credit-generation” models of finance. We show that only the last model captures the core dynamic of a complex modern financial system, and that the ultimate source of credit-generation in any such system is the sovereign public, acting primarily through its central bank and treasury. We then trace the operation of this dynamic throughout the financial system, from the banking sector, through the capital and “shadow banking” markets, all the way out to the “disruptive” frontier of peer-to-peer digital finance.

What emerges from this retracing of the financial system’s operative logic is a comprehensive view of modern finance as a public-private franchise arrangement. On this view, the sovereign public acts effectively as franchisor, licensing private financial institutions to earn rents as franchisees in dispensing a vital public resource: the public’s monetized full faith and credit. We conclude the Article by drawing out some of the potentially transformative analytic and normative implications of a paradigmatic shift from the orthodox theory of financial intermediation to the franchise view of finance.

US banks are starving the economy of cash - "Last Monday [2017/7/31], Thomas Hoenig, the Vice Chairman of the Federal Deposit Insurance Corporation (FDIC), sent a stunning letter to the Chair and Ranking Member of the U.S. Senate Banking Committee... What the fearless Hoenig told the Senate Banking Committee was effectively this: the biggest Wall Street banks have been lying to the American people that overly stringent capital rules by their regulators are constraining their ability to lend to consumers and businesses. What's really behind their inability to make more loans is the documented fact that the 10 largest banks in the country 'will distribute, in aggregate, 99 percent of their net income on an annualized basis', by paying out dividends to shareholders and buying back excessive amounts of their own stock."

Monopoly power and the decline of small business: big business vs democracy, growth & equality - "While the Jeffersonian yeoman farmer, owning his own freehold, industrious for himself, was idealized to the point of mythology and Franklin's entrepreneurial commerce was probably a bit easier to achieve if one was, like Franklin himself, an energetic autodidactic polymath genius, there is something to be said for a citizenry leavened by the thinking of more rather than fewer small business owners."

In the 15 years between 1997 and 2012: 72,000 small US manufacturers shut down; as did 108,000 local retailers and 13,000 community banks (fully half of America's complement of small banks!). The number of US startups has dropped by 50% since 1970. These statistics are not the result of the changing times: they're due to massive, monopolistic corporations stacking the deck against small competitors through unfair and corrupt practices, to the detriment of American growth, equality and democracy.

In Monopoly Power and the Decline of Small Business: The Case for Restoring America’s Once Robust Antitrust Policies, Stacy Mitchell from the Institute for Local Self-Reliance details the exact way that monopolistic practices have concentrated wealth in the hands of a small investor class at the expense of entrepreneurs, innovation, and the public they serve -- providing a worse product at a higher price while locking out competitive alternatives... Mitchell's report is one chapter in The American Antitrust Institute's essential Report on Antitrust and Entrepreneurship, an ongoing series that goes rather a long way to explaining how America's politics and economy got to their current state -- and what we can do about them.

On the Formation of Capital and Wealth

Abstract
We show modern information technology (in short IT) is the cause of rising income and wealth inequality since the 1970's and has contributed to slow growth of wages and decline in the natural rate. We first study all US firms whose securities trade on public exchanges. Surplus wealth of a firm is the difference between wealth created (equity and debt) and its capital. We show (i) aggregate surplus wealth rose from -$0.59 Trillion in 1974 to $24 Trillion which is 79% of total market value in 2015 and reflects rising monopoly power. The added wealth was created mostly in sectors transformed by IT. Declining or slow growing firms with broadly distributed ownership have been replaced by IT based firms with highly concentrated ownership. Rising fraction of capital has been financed by debt, reaching 78% in 2015. We explain why IT innovations enable and accelerate the erection of barriers to entry and once erected, IT facilitates maintenance of restraints on competition. These innovations also explain rising size of firms. We next develop a model where firms have monopoly power. Monopoly surplus is unobservable and we deduce it with three methods, based on surplus wealth, share of labor or share of profits. Share of monopoly surplus rose from zero in early 1980's to 23% in 2015. This last result is, remarkably, deduced by all three methods. Share of monopoly surplus was also positive during the first, hardware, phase of the IT revolution. It was zero in 1950-1962, reaching 7.3% in 1965 before falling back to zero in 1970. Standard TFP computation is shown to be biased when firms have monopoly power.

posted by kliuless at 6:27 AM on August 17, 2017 [16 favorites]

Talk about disruptive IT businesses.
posted by radicalawyer at 8:07 AM on August 17, 2017

A guy I went to college with is running for Congress in Iowa on an explicit anti-trust platform
posted by dismas at 1:06 PM on August 17, 2017 [2 favorites]

Wells Fargo says this was not a case of trying to improperly profit at customers' expense, but rather just an embarrassing breakdown in processes and internal controls.

Well, yeah, this is obviously true.

After all, the reason it went on for so long and at such a scale was that the overwhelming majority of the fake accounts and services were free. That's why people didn't figure out that WF employees had signed them up for these things.

It's obviously not in the interest of the bank to reward its employees for "selling" free services to people who didn't want them.
posted by atrazine at 4:39 AM on August 18, 2017

You say that as if the customer's information itself wasn't considered of considerable value to the company in terms of what it could be used for or how it could be released. "Incentive" programs too tend to carry a stick alongside the carrot for employees, where company pressure to sell creates obvious incentives to cheat, something that happens in every instance of such programs I'm personally aware of, and seems entirely likely in any I'm not. Most of it is small scale information release permission that the customer probably will never notice if there's a forged agreement, and is used for marketing or selling to third parties. Employees who don't sign up their share, according to whatever metrics can find themselves or their branch penalized or not rewarded in accordance to expectations, which puts pressure on the branch to push employees for sign ups.

Whether customers really want these agreements or not matters far less than getting them to agree as the benefit isn't coming entirely from the customer providing the signature. At best, this sort of program is akin to having weak security of customer information as the effect of these kinds of incentives is well known and abuse is rampant if there aren't ample safeguards of the sort not present in Wells Fargo's case.

I admit though that I'm biased and personally don't trust Wells in any case since I used to work for them back in the days of the home mortgage crisis. They were full of shit about what they knew then and I have no reason to suspect the culture has changed since given everything else known.
posted by gusottertrout at 5:40 AM on August 18, 2017 [1 favorite]

It's obviously not in the interest of the bank to reward its employees for "selling" free services to people who didn't want them.

The bank would not have explicitly created incentives for them and applied huge pressure to them to do so if they did not think it was valuable.
posted by praemunire at 9:36 AM on August 18, 2017

So Wells Fargo shouldn't be trusted to open a savings account with?
posted by Beholder at 4:06 PM on August 19, 2017

So Wells Fargo shouldn't be trusted to get a free calendar from.

the entire banking system would have been destabilised.
And how is that a BAD thing?
posted by oneswellfoop at 7:08 PM on August 19, 2017

[B]anks work by concealing risk. The essence of banking is to issue "risk-free" claims (deposits), and use the money to fund risky activities (loans). This is impossible -- you can't really turn risky activities into risk-free investments -- and also socially necessary, in that it mobilizes savers' money into productive activities. "A banking system," writes Steve Randy Waldman, "is a superposition of fraud and genius that interposes itself between investors and entrepreneurs" to make everyone better off. But like any fraud, it suffers from exposure: If everyone thinks too hard about the fact that banks use risk-free deposits to fund risky loans, then the system collapses. (This, arguably, describes 2008, and every banking panic.)

The 'finance franchise' and fintech (Part 1) - "If banks are free to create money from thin air, what then are the limitations?"

The authors argue since credit outstanding is not fundamentally dependent upon—or, therefore, limited by— pre-accumulated investment capital, it must be limited only by investment opportunities which are viewed as potentially profitable. “In other words, credit is endogenous rather than subject to exogenously given, pre-accumulated funds.” If the opportunities are there, banks will generate the funds (on effectively maximum leverage by way of an accounting trick) to find ways to finance them.

There is a catch though! It’s only authorised institutions which officially have this power, say the authors. This is how the public balance sheet comes into play... The problem is... even if the public balance sheet is not theoretically responsible for defending shadow banking liabilities, the revolving door between the shadow-banking sector and the official sector by way of liability transfer opens the “authorised system” to contamination.

The 'finance franchise' and fintech (Part 2) - "It should be noted, the theory isn't necessarily unique as much as combinatory since it channels both Chartalist thinking and shadow banking collateralist thinking."

What’s really interesting, however, is how it applies to the budding fintech sector, which aims to increase its independence from the official sector by recreating models based on loanable funds (credit intermediation) assumptions. These models, most famously, include peer-to-peer systems and cryptocurrency.

The authors imply these institutions will learn the hard way that once a credit generation model backed by a public-private franchise is in play in the economy, it’s almost impossible to go back. The reason being: all exclusive loanable funds systems carry a major competitive disadvantage on cost of funding vs established public-private franchise systems, and are hence likely to be outcompeted... if these systems are to expand beyond their peripheral place, they will have to reintegrate into the core finance franchise system eventually...

or just have central banks become digital money as a service (MaaS) platform cooperatives, implement public utility postal banking :P (and watch the death of banks!)

Common Ownership And The New Antitrust Movement

The proliferation of brands sometimes keeps up the illusion of choice, but if we look through the brands to the parent companies, we find that, no matter which beer we buy, the money all goes to the same place.

The new antitrust movement argues that a long list of negative consequences result from this kind of economic concentration. Consumer prices go up, wages go down, startup activity wanes, innovation slows, and our industrial systems become much more fragile. Advocates of this position have won the enthusiastic endorsement of the Democratic party, which has made antitrust one of the centerpieces of the party’s new agenda.

At the same time as the new antitrust movement has gained steam, others have been raising the alarm about the way companies are owned. Like the antitrust advocates, these folks also argue that our economy features an illusion of choice. But for them, the source of the illusion is not that massive holding companies own most of the brands we choose from. Rather, the illusion results from the fact that all public companies, no matter their size, are commonly owned by the same diversified investors...

If the common ownership critics are right about the source of our economy’s rot, then antitrust remedies aimed at increasing the number of firms in a given market will be inadequate. After all, multiplying the number of firms operating in a particular sector will do nothing about the fact that those larger number of firms will still be jointly owned by the same people who owned the smaller number of firms that preceded them.

Communist Boards

[I]magine a corporate governance system in which directors have fiduciary obligations not just to shareholders, and not just to stakeholders like employees, customers and communities, but also to the principles of international communism. How would that influence compensation committee discussions? "Sure the CEO beat his total shareholder return targets, but will paying him $20 million really bring about full communism now?"

I kid, of course; these committees are about keeping state control on companies, not about following communist principles. If you want companies run on Marxist principles, there is always the United States, where people are worried that the rise of index funds has accidentally imposed Marxism on our public companies. It is true that, in the limit, if companies are looking out for their shareholders, and if their shareholders all own all other companies in proportion to their contribution to the economy, then companies really should do what is best for the economy, not for themselves. Doing what is best for the economy is not exactly Marxism, but it is a sort of 21st-century financial-capitalist flavor of Marxism anyway.

Digital platforms force a rethink in competition theory

In all digital markets, the cost structure of high upfront costs and low additional or marginal costs means there are large economies of scale. The broad impact of digital technology has been to increase the scope of the markets many businesses can hope to reach... Economists are letting down competition regulators in failing to provide the tools for evaluating in specific cases the claim that — in a world of significant returns to scale and network effects — bigger is better for everyone...

How can potential challengers develop new technologies to topple an incumbent if they have to compete with an apparently zero price? For that matter, how will investment in physical networks or content get funded if an incumbent using the network and content captures all the profit downstream? Reversing the kind of increased concentration seen in the US takes a significant commitment of political capital and bureaucratic energy. These are more likely to be forthcoming if the analysis and evidence is there to back them up.

The Rise of Market Power and the Decline of Labor's Share - "The decline of both the labor and capital shares, as well as the decline in low-skilled wages and other economic trends, have been aided by a significant increase in markups and market power."

A reading list on market power, superstar firms, and inequality - "The basic facts are these: Most industries in the U.S. have grown more concentrated, meaning the largest firms account for a larger share of revenue. At the same time, corporate profits have reached all-time highs, despite lackluster rates of business investment. And the number of new businesses being founded has declined; the number of new growth startups being founded has risen, yet these firms struggle to scale. The cause of these trends is not clear. Theories include the rise of IT and the network effects it creates, less-rigorous antitrust enforcement, and lobbying and excess regulation."
posted by kliuless at 9:30 PM on August 19, 2017 [1 favorite]

Banks have for decades had regulatory compliance departments staffed with compliance officers whose job it is to ensure the financial institution is in compliance with applicable laws and regulations, especially ones that protect consumers.

Over the years, the agencies that examine and regulate banks have increased the pressure on banks to be proactive about consumer compliance and to take a risk-based approach to managing it.

Instead of lurching from crisis to crisis dealing with outbreaks of noncompliance, a bank was supposed to assess compliance risks, identify key vulnerabilities, and develop and implement plans for controlling the risk that included training and testing. The compliance breach would never happen because it had been foreseen by the wise people who put together the bank's risk-management program.

I wonder how the Wells Fargo debacle has affected the compliance profession and the compliance function within banks.

It's likely that WF's risk-management policies and procedures, including those dealing with consumer compliance, were absolutely perfect and up to date on the regulators' most recent utterances. If so, how is it that the fraudulent practices weren't detected and stopped sooner?

Do the boards and executive management view compliance as a necessary evil that must be funded and trotted out occasionally but still kept on a leash to avoid taking a hit to revenues? Or, have banks figured out how to make the executive and senior managers who are responsible for branch operations and sales campaigns also be personally accountable for compliance breaches in a way that sends a message of deterrence to the rest of the organization?
posted by A. Davey at 2:02 PM on August 22, 2017