13 Bankers: The Wall Street Takeover and the Next Financial Meltdown [Hardcover]

The main message is "The thirteen megabanks used political power to obtain their license to gamble with other people's money; taking that license away requires confronting that power head on." This book is very interesting in two ways, it presents a historical perspective and makes specific convincing recommendations for actions the government should take, that differ from what the government is doing
Three important issues are (1) Changes in political thinking since America's independence (2) The "blind" faith in deregulation since Ronald Reagan (3) The missed opportunity of the Obama administration.
Right from the founding of America two competing political views were present. One view that the potential power of banks was dangerous and a threat to democracy with Jefferson as its founder and the other view of Alexander Hamilton that banking in general and central banking were essential for the development of America. The great depression in 1930 was caused mainly by failures in the banking system, with several causes similar to the 2007-8 crisis. FDR was convinced that some banks had become to powerful and acted irresponsibly (like many other smaller banks) and proposed and got approval during the first six months for acts to break up banks by separating investment banking from commercial baking and new regulatory organisations and new rules to protect the clients of the banks.
Ronald Reagan started to move political thinking in the other direction: deregulation is good. There is no doubt that he was right in many areas, but banking is different from other industrial segments. Various limits to banking freedom and oversight were continuously removed during the Clinton and Bush administrations with Alan Greenspan promoting the superiority of self regulation and unregulated financial innovation. Greenspan claimed and most believed that the self interest of bankers would lead automatically to the best solutions.
The banks were exerting constant pressure on the government to reduce regulation and not regulate any of the innovations the banks were developing.
The crisis of 2007- 8 did not create economic problems of the same magnitude as FDR faced, but unemployment doubled, 1 million jobs lost in 2007 and 5.8 million in 2008. and the government had to bail out the big banks.
Different from FDR the G.W.Bush and Obama administration did not act to solve the cause of the problem: the overwhelming power of the big banks, that includes lobbying, contributions to election campaigns of the regulators, the revolving door practice (top bankers in and out of top banking and government positions. As a consequence the big banks grew substantially even in the crisis. The assets of the six largest banks grew from 18% of GDP in 1995 to 60% of GDP in 2009. The banks and the government agree the megabanks cannot be allowed to fail. The authors point to three negative consequences of accepting this concept (1) when a mega bank is on the brink of failure the government has to bail out the bank immediately because of interconnectedness with other banks ("collateral damage").(2) Taking higher risks has the possibility of higher profits. As the bankers know their bank will be bailed out they will take huge risks (3) As they cannot be allowed to fail the banks have access to money at lower rates. Large banks paid 0.78% less than the small banks in the wake of the financial crisis. That represents $34 billion for the eighteen largest banks, accounting for about half their profit in 2009
Even though this subject has been much discussed, the authors present convincing arguments that it is impossible for the government to regulate these banks. The banks will pursue the same and new innovative practices they did in the past. Different from FDR, the Obama administration will not break up the big banks. It is a missed opportunity. It could have been done during the crisis.
Alan Greenspan is one of the few that accepted he made a huge mistake in believing self regulation of banks. He said in October 2009: "The biggest problem we have to resolve is the too-big-to-fail issue". "Break them up". In 1911 we broke up Standard Oil." So what happened? The individual parts became more valuable than the whole."
The authors present a vast amount of statistical evidence to prove their points. May be they are wrong but their analysis and recommendation merit serious consideration.

I rate this book 4 stars for the information but just 2 stars for interest because it is so yawningly boring - useful but not controversial and written by academic/consultant types who may be hoping the book will become required reading in Economics courses. Although I do not disagree with its basic viewpoint, the book is highly slanted: everything is based on secondary sources, from which the authors take what they like and nothing else.

This book is a damning indictment of the banking and financial sectors in their past and present conditions and especially the political influence of financial institutions. The authors explain how a system of crony capitalism grew within the finance industry that created much of our current problems but surely all crony capitalism is damaging. The authors blame a combination of big business and big politics, but most of the criticism is on the big banks buying influence rather than big politicians selling it.

They also show that the purpose of practically all financial derivatives is purely speculative and that banker financed speculators create bubbles that turn into recessions/depressions. (Elsewhere I learned that banks lend about 7% to Industry versus 75% for Property - helps explain the property bubble, doesn't it?)

The book isn't technical but it's not really for those who don't have at least a little knowledge about how the world of finance works. Better to read "The Creature from Jekyll Island" which uncovers the whole criminal scam of today's money in the clearest and simplest manner I have come across.

And, for ways out of our enslavement, I also recommend "Freedom" by Veronica Chapman. There is also Menard's wonderful "With Lawful Excuse" available as an ebook for $16 from the WorldFreemanSociety, but you can first have a free look on youtube at Menard's "Bursting Bubbles of Government Deception" to see if the book is likely to interest you. If possible, "With Lawful Excuse" is even better than his videos but I'm glad I read Chapman's introductory book first. I also recommend that you get the "prequel", a book also called "Bursting Bubbles of Government Deception" and costing about $5.50, also from the WorldFreemanSociety, which provides the basics needed to get to grips with "With Lawful Excuse". Chapman's book is about English law whereas Menard's books refer to Canadian law but, of course, as part of the common wealth, the Canadian system is similar to that in England. Don't miss.

Also have a look at Google Videos & You Tube, search for Raymond St Clair, the strawman illusion, the antiterrorist, bursting bubbles, etc, etc. The videos of Raymond St Claire going into a local court and very politely distressing all the court officials on a fundamental point of law are priceless. The basis of Raymond St Claire's challenge and the reason for their distress is not clear in the videos but IS explained towards the end of the "Freedom" book - namely that judges swear to uphold common law but they are actually sitting in a civil/statute law court where they have no power over you unless you agree (which we are always fooled into doing, because we don't know any better). Don't miss!

I bought this book on the basis of having seen one of the author's (Simon Johnson) on Bloomberg a couple of times, where the book was mentioned. Johnson's clear analysis of the current financial crisis in these interviews and the fact that he has not bought into the current idea that everything is rosy in the world again made after 60 weeks of the US stock markets rising with few signs of rest.
Johnson is a former chief economist at the International Monetary Fund and currently Professor of Entrepreneurship at MIT. His co-author, James Kwak is a ex-McKinsey & Co. consultant.
The book is divided into 7 chapters and a full introduction, together with 50 pages of detailed notes (linked to footnotes in text) and a useful set of blog links on the subject together with recommended further reading.
The first chapter takes us back to the Founding Fathers and highlights the early differences of thinking between Thomas Jefferson and Alexander Hamilton when serving under President George Washington in the late eighteenth century. It highlights the essential tension between those who believe in the need for a strong central bank and those who would rather do without such an institution. This sets the stage for the debate and battles between those who believe that a central Federal bank is essential to the smooth workings of the US economy and those who counter that this can lead to an abuse of power. The debate is still very much alive today, even more so in the aftermath of the recent economic contraction.
The book does not focus simply upon the USA. It then ranges to consider the events in Asia during the late 1990s with the currency and econonomic crises that swept through the region and engulfed Russia and South America, together with Long Term Capital Management (LTCM) on Wall Street. Ironically, the kinds of advice given by the IMF and implicitly the USA to the Asian emerging economies regarding their crises centred upon a set of policies which the USA totally ignored when their own crisis hit in 2007-2009. This is well analysed in the book.
The third chapter is entitled "Wall Street Rising: 1908-" and shows how the philosophical and institutional economic as well as political conditions established as a result of the Great Depression (e.g. Glass-Steagall Act [Banking Act 1933]) together with numerous other legislative safeguards were challenged and unravelled from the era of Reagan onwards. In particular, it highlights the moves made by influential players for Wall Street in New York and Washington that created the extreme 'laissez-faire' environment of the late 1990s and early 2000s. One of the most significant factors being the unfettered explosion of the derivatives market, which Chairman Alan Greenspan at the Fed, along with Robert Rubin and Larry Summers at the US Treasury considered outside their area of concern. Essentially, the viewpoint from Washington seeming to be that what is good for Wall Street is good for the country. A poignant issue, given the policies followed by Greenspan's successor, Ben Bernanke; whilst Larry Summers once again has the ear of the President.
The last three chapters of the book look very closely at the increasing power of Wall Street banks during the past decade. The growing power of Wall Street not only considers the influence that they have in Washington with legislators, but at the consequences of the 'Too Big to Fail' policy pursued by Hank Paulon, Ben Bernanke and Tim Geithner at the height of the crisis in 2008 when it looked as if Merrill Lynch, Countrywide, Fannie and Freddie were just the beginning of the end, as Lehman Brothers fell and AIG sought assistance from imminent melt-down. The short selling pressure on Goldman Sachs and Morgan Stanley, together with Bank of America, Citibank and Wells Fargo made the prospect of such a major catastophe very real. However, the deal arranged by the Fed and Treasury was very different to what even Wall Street expected in terms of its generousity and terms. This section of the book helps one understand exactly why the survivors of the melt-down in 2009 bounced back so quickly and strongly in the following year. It also underlines the fact that the policy has now created an even more concentrated industry amongst the major banks effectively making a mockery of the 'Too Big to Fail' mantra.
The book was published in early 2010 and therefore acknowledges the Obama administration's intent to reform the financial system in the States. However, it points to the unlikeliness of this happening, given the even greater power of Wall Street - post the crisis. In light of this potential outcome it concludes that the ingredients and attitudes central to the financial crisis are still very much in place and that it will simply be a matter of time before another one hits. The alternative suggested by the authors returns one to the opening chapter's commentary about the ideological battle between those who would support the tenets of Jefferson and those representing the views of Hamilton. The issue is whether Obama will actively pick up the gauntlet to return to the work started by Theodore Roosevelt in the early part of the last century and continued through the post Great Depression legislation introduced on Franklin D Roosevelt's watch: this was one of healthy scepticism for concentrated economic power as reflected in the anti-trust legislation at the time.
Anyone interested to consider an analysis of 'what went wrong' in the lead up to the financial crisis, which goes beyond the more obvious consideration of an unregulated multi-trillon dollar global derivatives market should read this book. The historical analysis highlights that the crisis was of course partly down to market conditions, but more importantly, it provides the reader with an appreciation that the philosophical economic and political arguments about the nature and abuse of power in industrial concentration is central to these events. The style of writing is clear and quite journalistic in nature; however, this is a strength in that it makes the content more accessible to a wider audience. However, this is not a book for light reading. The analysis (in particular the accompanying notes) is detailed and to fully appreciate the work requires more than one careful read: but it's worth it.
My only criticism of the hardcover version of this book is the actual cover. It appears to have been printed with an external finish which feels quite uncomfortable to the touch and reminded me of those experiences when someone drags their nails over a blackboard! Of course, one can ditch the cover after purchase.