What do you think?
Rate this book
13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
Even after the ruinous financial crisis of 2008, America is still beset by the depredations of an oligarchy that is now bigger, more profitable, and more resistant to regulation than ever. Anchored by six megabanks—Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley—which together control assets amounting, astonishingly, to more than 60 percent of the country’s gross domestic product, these financial institutions (now more emphatically “too big to fail”) continue to hold the global economy hostage, threatening yet another financial meltdown with their excessive risk-taking and toxic “business as usual” practices. How did this come to be—and what is to be done? These are the central concerns of 13 Bankers, a brilliant, historically informed account of our troubled political economy.
In 13 Bankers, Simon Johnson—one of the most prominent and frequently cited economists in America (former chief economist of the International Monetary Fund, Professor of Entrepreneurship at MIT, and author of the controversial “The Quiet Coup” in The Atlantic )—and James Kwak give a wide-ranging, meticulous, and bracing account of recent U.S. financial history within the context of previous showdowns between American democracy and Big from Thomas Jefferson to Andrew Jackson, from Theodore Roosevelt to Franklin Delano Roosevelt. They convincingly show why our future is imperiled by the ideology of finance (finance is good, unregulated finance is better, unfettered finance run amok is best) and by Wall Street’s political control of government policy pertaining to it.
As the authors insist, the choice that America faces is whether Washington will accede to the vested interests of an unbridled financial sector that runs up profits in good years and dumps its losses on taxpayers in lean years, or reform through stringent regulation the banking system as first and foremost an engine of economic growth. To restore health and balance to our economy, Johnson and Kwak make a radical yet feasible and focused reconfigure the megabanks to be “small enough to fail.”
Lucid, authoritative, crucial for its timeliness, 13 Bankers is certain to be one of the most discussed and debated books of 2010.
In 13 Bankers, Simon Johnson—one of the most prominent and frequently cited economists in America (former chief economist of the International Monetary Fund, Professor of Entrepreneurship at MIT, and author of the controversial “The Quiet Coup” in The Atlantic )—and James Kwak give a wide-ranging, meticulous, and bracing account of recent U.S. financial history within the context of previous showdowns between American democracy and Big from Thomas Jefferson to Andrew Jackson, from Theodore Roosevelt to Franklin Delano Roosevelt. They convincingly show why our future is imperiled by the ideology of finance (finance is good, unregulated finance is better, unfettered finance run amok is best) and by Wall Street’s political control of government policy pertaining to it.
As the authors insist, the choice that America faces is whether Washington will accede to the vested interests of an unbridled financial sector that runs up profits in good years and dumps its losses on taxpayers in lean years, or reform through stringent regulation the banking system as first and foremost an engine of economic growth. To restore health and balance to our economy, Johnson and Kwak make a radical yet feasible and focused reconfigure the megabanks to be “small enough to fail.”
Lucid, authoritative, crucial for its timeliness, 13 Bankers is certain to be one of the most discussed and debated books of 2010.
305 pages, Hardcover
First published March 30, 2010
About the author
Simon Johnson
80 books60 followersSimon Johnson is a British American economist. He currently is the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management. He has held a wide variety of academic and policy-related positions, including Professor of Economics at Duke University's Fuqua School of Business. From March 2007 through the end of August 2008, he was Chief Economist of the International Monetary Fund.
Ratings & Reviews
Friends & Following
Create a free account to discover what your friends think of this book!
Community Reviews
Displaying 1 - 30 of 213 reviews
December 11, 2017
A saucy/misleading title, as the book is more balanced than renegade... and thank goodness. For students of the markets, the authors give a brief history of U.S. banking, explain macro-level derivatives, and why Uncle Sam always bails the banks out. Less data utilized than I'd have liked.
Excerpts :
---------
“Banking institutions are more dangerous than standing armies.” - Thomas Jefferson
“Like all businesses, banks needed to invent new products that were not yet commoditized and could command high margins. Structured products were the perfect answer… sold largely to sophisticated investors, such as hedge funds and university endowments, and therefore subjected to limited oversight by the SEC. ”
“According to the head of QuickLoan Funding, a subprime lender, Citigroup provided the funds to borrowers with credit scores below 450. At the time, the national median was about 720.”
“The discount rate is the rate at which banks may borrow directly from the federal reserve. The federal funds rate is the rate at which banks may borrow money from each other overnight.”
“In July of 2008, Merrill Lynch sold a portfolio of CDOs with a face value of $36 billion to Lone Star Funds for only $6.7 billion ... and even loaned Lone Star $5 billion to close the deal.”
“A bank’s balance sheet is supposed to record what its assets are worth. A write-down is a reduction in the recorded value of an asset. Only some assets need to be marked to market, meaning their values should be adjusted to current market prices.”
“In March 2009, under pressure from lawmakers, AIG finally released some details… Goldman Sachs received $12.9 billion from AIG, Merrill Lynch $6.8 billion, Bank of America $5.2 billion, and Citigroup $2.3 billion. This is cash these banks would not have received had AIG gone bankrupt…”
"If they’re too big to fail, they’re too big.” - Alan Greenspan
“A bank default can cause losses which actually exceed its actual debt… The fact remains that certain financial institutions cast a sufficiently large shadow over the financial system. They cannot be allowed to fail.”
.
Excerpts :
---------
“Banking institutions are more dangerous than standing armies.” - Thomas Jefferson
“Like all businesses, banks needed to invent new products that were not yet commoditized and could command high margins. Structured products were the perfect answer… sold largely to sophisticated investors, such as hedge funds and university endowments, and therefore subjected to limited oversight by the SEC. ”
“According to the head of QuickLoan Funding, a subprime lender, Citigroup provided the funds to borrowers with credit scores below 450. At the time, the national median was about 720.”
“The discount rate is the rate at which banks may borrow directly from the federal reserve. The federal funds rate is the rate at which banks may borrow money from each other overnight.”
“In July of 2008, Merrill Lynch sold a portfolio of CDOs with a face value of $36 billion to Lone Star Funds for only $6.7 billion ... and even loaned Lone Star $5 billion to close the deal.”
“A bank’s balance sheet is supposed to record what its assets are worth. A write-down is a reduction in the recorded value of an asset. Only some assets need to be marked to market, meaning their values should be adjusted to current market prices.”
“In March 2009, under pressure from lawmakers, AIG finally released some details… Goldman Sachs received $12.9 billion from AIG, Merrill Lynch $6.8 billion, Bank of America $5.2 billion, and Citigroup $2.3 billion. This is cash these banks would not have received had AIG gone bankrupt…”
"If they’re too big to fail, they’re too big.” - Alan Greenspan
“A bank default can cause losses which actually exceed its actual debt… The fact remains that certain financial institutions cast a sufficiently large shadow over the financial system. They cannot be allowed to fail.”
.
October 24, 2021
13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Simon Johnson and James Kwak, 2010, 304 pp., ISBN 9780307379054, Library-of-Congress HG2491.J646.2010 College Library. Dewey 332.10973
Every plan we've heard from Treasury amounts to the same thing--an attempt to socialize the losses while privatizing the gains. --Paul Krugman, pp. 175, 181, 183.
CEOs of 13 financial institutions met with President Obama 2009.03.27 to ask for bailouts: American Express, Bank of America, Bank of New York Mellon, Citigroup, Freddie Mac, Lloyd Blankfein, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Northern Trust, PNC, State Street, US Bank, and Wells Fargo. Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia had already failed. pp. 3-4. These bankers' irresponsible bets had caused the financial crisis and the first global recession since WWII. Obama bailed them out, then wanted moderate banking-regulation reforms. The bailed-out bankers fought him. pp. 5, 191.
Wall Street rules. pp. 6, 179.
(See /Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street/, Charles Gasparino, 2010: Obama kissed Wall Street's ring to get the campaign money he needed to win in 2008. Wall Street gave Obama $millions in campaign contributions. Obama gave Wall Street $trillions in bailouts. The return-on-investment is almost infinite. pp. 185-188.
Moreover, Obama acted like a hostage throughout his presidency: as if it had been explained to him that going against the moneyed interests was not an option. See /JFK and the Unspeakable: Why He Died and Why it matters/, for what happens to a disobedient president.)
1998.05: Commodity Futures Trading Commission head Brooksley Born questioned whether derivatives trading regulation should be strengthened. Derivatives are just bets on whether other numbers will rise or fall. There was a total of $2.5 trillion of custom derivative bets in play. Fed chair Alan Greenspan, Treasury Secretary (former Goldman Sachs chair) Robert Rubin, and Deputy Treasury Secretary Larry Summers shouted her down. Congress and President Clinton passed a law prohibiting regulation of custom derivatives--AFTER the Fed bailed out failed derivatives trader Long Term Capital Management in September 1998. pp. 9, 135-137, 148.
Fraudulent companies Enron and WorldCom failed in 2001-2002, having been abetted by many of the biggest banks, and by auditors and credit-raters. pp. 148-149.
Over-the-Counter derivatives bets were $20 trillion by 2008, inflating the housing bubble. p. 10.
The government bailed out the insolvent banks with no-strings blank checks on the order of $1 trillion. [This book was published in 2010. That number went much higher, up to $16 trillion, see Money, Power, and the People: The American Struggle to Make Banking Democratic, Christopher W. Shaw, 2019, pp. 296-300.] Without regulation to prevent a repeat. pp. 11, 174. The biggest banks, that had to be hauled up the cliff, got even bigger and more powerful. As of 2009.03.27, Bank of America's assets were 16.4% of U.S. GDP; JPMorgan Chase's 14.7% of U.S. GDP; Citigroup's 12.9% of U.S. GDP. pp. 12, 217. These banks and just 3 others--Wells Fargo, Goldman Sachs, Morgan Stanley--are too big to fail, in that they each control assets worth over 4% of U.S. GDP. The authors say this should be the limit for all banks, and 2% for investment banks. Such limits won't happen while bankers have more political power than the public. Conventional wisdom has changed away from support of moneyed interests before--notably after the Panic of 1907 and in the Great Depression. pp. 220-221. Commercial bank assets totalled $11.8 trillion, 84% of U.S. GDP; debt held by all financial institutions totalled $36 trillion, 259% of U.S. GDP, as of 2007.12.31. pp. 59, 180.
Historically, there have been times when the U.S. Government fought the power of financial oligarchy. Decreasingly effectively since FDR.
Thomas Jefferson correctly discerned that banks' control of financial transactions and credit, give them economic and political power. p. 17.
By the late 19th century, the Senate was known as the "millionaires' club," businesses buying political favors. p. 23. In 1913, bankers got the Federal Reserve system, which would bail them out during panics. p. 28. It gave light regulation and cheap money, encouraging speculative risk, leading to the crash 16 years later, in 1929. pp. 29-30.
"No methods of regulation ever have been or can be devised to remove the menace of private monopoly and overweening commercial power." --Louis Brandeis. p. 29.
Reform requires weakening the economic and political power of the oligarchs. South Korea's People's Solidarity for Participatory Democracy achieved some of this after the 1997-1998 meltdown. p. 52, 184.
In 1998, financial-markets gambling firm Long Term Capital Management had $4 billion of its investors' money, and another $130 billion it had borrowed from other financial institutions, which it used to play the derivatives market. It lost most of its bets. The New York Fed, to avoid a market meltdown, talked big banks into buying out LTCM with $3.6 billion. This kept the New York market afloat. p. 54. It also sent the message that the Fed would not let private market actors suffer the consequences of their own bad decisions. p. 148. The banks that lent money to LTCM lost nothing.
Savings-and-Loan crisis: 2,000 banks failed, 1985-1992. pp. 88, 189. This did nothing to change the greed-is-good narrative. Banks contribute $millions to House and Senate banking-committee chairs' campaigns. p. 91. Banks own the U.S. Government. p. 92. Bankers revolve into government and back. Banks get to choose which agency to be regulated by--which compete to regulate most lightly, and charge banks the lowest fees. p. 96. Under Clinton, the Democratic Party abandoned unions and consumers in favor of Wall Street. p. 100. Ayn Rand disciple Alan Grenspan became Federal Reserve chair 1987-2006 "to advance free-market capitalism as an insider." p. 102
The authors don't mention progressive taxation for corporations. If each doubling of profit meant an extra 1% to the tax rate on it, suddenly mergers wouldn't be so attractive. Similarly for a progressive tax on assets.
The American people need to hire a lobbyist. https://www.theonion.com/american-peo...
The book answers questions like these:
https://www.goodreads.com/trivia/work...
Every plan we've heard from Treasury amounts to the same thing--an attempt to socialize the losses while privatizing the gains. --Paul Krugman, pp. 175, 181, 183.
CEOs of 13 financial institutions met with President Obama 2009.03.27 to ask for bailouts: American Express, Bank of America, Bank of New York Mellon, Citigroup, Freddie Mac, Lloyd Blankfein, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Northern Trust, PNC, State Street, US Bank, and Wells Fargo. Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual, and Wachovia had already failed. pp. 3-4. These bankers' irresponsible bets had caused the financial crisis and the first global recession since WWII. Obama bailed them out, then wanted moderate banking-regulation reforms. The bailed-out bankers fought him. pp. 5, 191.
Wall Street rules. pp. 6, 179.
(See /Bought and Paid For: The Unholy Alliance Between Barack Obama and Wall Street/, Charles Gasparino, 2010: Obama kissed Wall Street's ring to get the campaign money he needed to win in 2008. Wall Street gave Obama $millions in campaign contributions. Obama gave Wall Street $trillions in bailouts. The return-on-investment is almost infinite. pp. 185-188.
Moreover, Obama acted like a hostage throughout his presidency: as if it had been explained to him that going against the moneyed interests was not an option. See /JFK and the Unspeakable: Why He Died and Why it matters/, for what happens to a disobedient president.)
1998.05: Commodity Futures Trading Commission head Brooksley Born questioned whether derivatives trading regulation should be strengthened. Derivatives are just bets on whether other numbers will rise or fall. There was a total of $2.5 trillion of custom derivative bets in play. Fed chair Alan Greenspan, Treasury Secretary (former Goldman Sachs chair) Robert Rubin, and Deputy Treasury Secretary Larry Summers shouted her down. Congress and President Clinton passed a law prohibiting regulation of custom derivatives--AFTER the Fed bailed out failed derivatives trader Long Term Capital Management in September 1998. pp. 9, 135-137, 148.
Fraudulent companies Enron and WorldCom failed in 2001-2002, having been abetted by many of the biggest banks, and by auditors and credit-raters. pp. 148-149.
Over-the-Counter derivatives bets were $20 trillion by 2008, inflating the housing bubble. p. 10.
The government bailed out the insolvent banks with no-strings blank checks on the order of $1 trillion. [This book was published in 2010. That number went much higher, up to $16 trillion, see Money, Power, and the People: The American Struggle to Make Banking Democratic, Christopher W. Shaw, 2019, pp. 296-300.] Without regulation to prevent a repeat. pp. 11, 174. The biggest banks, that had to be hauled up the cliff, got even bigger and more powerful. As of 2009.03.27, Bank of America's assets were 16.4% of U.S. GDP; JPMorgan Chase's 14.7% of U.S. GDP; Citigroup's 12.9% of U.S. GDP. pp. 12, 217. These banks and just 3 others--Wells Fargo, Goldman Sachs, Morgan Stanley--are too big to fail, in that they each control assets worth over 4% of U.S. GDP. The authors say this should be the limit for all banks, and 2% for investment banks. Such limits won't happen while bankers have more political power than the public. Conventional wisdom has changed away from support of moneyed interests before--notably after the Panic of 1907 and in the Great Depression. pp. 220-221. Commercial bank assets totalled $11.8 trillion, 84% of U.S. GDP; debt held by all financial institutions totalled $36 trillion, 259% of U.S. GDP, as of 2007.12.31. pp. 59, 180.
Historically, there have been times when the U.S. Government fought the power of financial oligarchy. Decreasingly effectively since FDR.
Thomas Jefferson correctly discerned that banks' control of financial transactions and credit, give them economic and political power. p. 17.
By the late 19th century, the Senate was known as the "millionaires' club," businesses buying political favors. p. 23. In 1913, bankers got the Federal Reserve system, which would bail them out during panics. p. 28. It gave light regulation and cheap money, encouraging speculative risk, leading to the crash 16 years later, in 1929. pp. 29-30.
"No methods of regulation ever have been or can be devised to remove the menace of private monopoly and overweening commercial power." --Louis Brandeis. p. 29.
Reform requires weakening the economic and political power of the oligarchs. South Korea's People's Solidarity for Participatory Democracy achieved some of this after the 1997-1998 meltdown. p. 52, 184.
In 1998, financial-markets gambling firm Long Term Capital Management had $4 billion of its investors' money, and another $130 billion it had borrowed from other financial institutions, which it used to play the derivatives market. It lost most of its bets. The New York Fed, to avoid a market meltdown, talked big banks into buying out LTCM with $3.6 billion. This kept the New York market afloat. p. 54. It also sent the message that the Fed would not let private market actors suffer the consequences of their own bad decisions. p. 148. The banks that lent money to LTCM lost nothing.
Savings-and-Loan crisis: 2,000 banks failed, 1985-1992. pp. 88, 189. This did nothing to change the greed-is-good narrative. Banks contribute $millions to House and Senate banking-committee chairs' campaigns. p. 91. Banks own the U.S. Government. p. 92. Bankers revolve into government and back. Banks get to choose which agency to be regulated by--which compete to regulate most lightly, and charge banks the lowest fees. p. 96. Under Clinton, the Democratic Party abandoned unions and consumers in favor of Wall Street. p. 100. Ayn Rand disciple Alan Grenspan became Federal Reserve chair 1987-2006 "to advance free-market capitalism as an insider." p. 102
The authors don't mention progressive taxation for corporations. If each doubling of profit meant an extra 1% to the tax rate on it, suddenly mergers wouldn't be so attractive. Similarly for a progressive tax on assets.
The American people need to hire a lobbyist. https://www.theonion.com/american-peo...
The book answers questions like these:
https://www.goodreads.com/trivia/work...
June 24, 2012
Rather than a review of 13 Bankers, I am wrestling with understanding the response to the book. It makes me feel like I’m missing something and did not get the secret decoder ring.
Unlike most books that explore the 2008 financial collapse, this book looks back to the political viewpoints of Jefferson and Hamilton. In a nutshell, Jefferson didn’t trust big government. In addition to that, he didn’t trust any highly centralized power and this included the banks. In contrast, Hamilton did trust a centralized government with powers to encourage the finance system. For Jefferson this is not tenable because you have two powers interconnected which leads to unchecked powers.
So if I’m even close – then that’s step one of the decoder ring. That’s the basic argument. The problem is now fitting those arguments into today’s inauthentic political discourse. How does one take this fundamental argument and transform it into good guys and bad guys?
Many reviews acknowledge Johnson’s solid historical analysis of financial regulations and then dismiss him as a crazy conspiracy theorist. See an example here: http://www.economist.com/node/15716841
So rather than taking on Johnson’s arguments, he’s labeled as a conspiracist.
I haven’t finished the book – but since he’s invoked Jefferson, I presume his solution is more democracy. However, his first solution seems to be that America needs another Andrew Jackson or Franklin D. Roosevelt. And here is where I think my disappointment might develop. More democracy means more process. And process is slow, difficult and demands people to work together. This is the discussion America needs to have – rather than “finding” and labeling the good guys and the bad guys. Instead, by discussing the leaders of these complicated political movements, the argument simplifies the solution to a single person – a super hero.
I will update upon completion of the book.
Final thoughts: The book does provide a thorough examination of financial regulation. Rather than pointing to a single politician, the book calls for greater regulation. It argues that markets are not all knowing and are not self-correcting.
Unlike most books that explore the 2008 financial collapse, this book looks back to the political viewpoints of Jefferson and Hamilton. In a nutshell, Jefferson didn’t trust big government. In addition to that, he didn’t trust any highly centralized power and this included the banks. In contrast, Hamilton did trust a centralized government with powers to encourage the finance system. For Jefferson this is not tenable because you have two powers interconnected which leads to unchecked powers.
So if I’m even close – then that’s step one of the decoder ring. That’s the basic argument. The problem is now fitting those arguments into today’s inauthentic political discourse. How does one take this fundamental argument and transform it into good guys and bad guys?
Many reviews acknowledge Johnson’s solid historical analysis of financial regulations and then dismiss him as a crazy conspiracy theorist. See an example here: http://www.economist.com/node/15716841
So rather than taking on Johnson’s arguments, he’s labeled as a conspiracist.
I haven’t finished the book – but since he’s invoked Jefferson, I presume his solution is more democracy. However, his first solution seems to be that America needs another Andrew Jackson or Franklin D. Roosevelt. And here is where I think my disappointment might develop. More democracy means more process. And process is slow, difficult and demands people to work together. This is the discussion America needs to have – rather than “finding” and labeling the good guys and the bad guys. Instead, by discussing the leaders of these complicated political movements, the argument simplifies the solution to a single person – a super hero.
I will update upon completion of the book.
Final thoughts: The book does provide a thorough examination of financial regulation. Rather than pointing to a single politician, the book calls for greater regulation. It argues that markets are not all knowing and are not self-correcting.
January 31, 2011
Some things that I bookmarked while reading:
"the core function of finance is financial intermediation -- moving money from a place where it is currently not needed to a place where it is needed. The key questions for for any financial innovation are whether it increases financial intermediation and whether that is a good thing." (continues to talk about "innovations" in credit cards mostly being ways of making pricing more complex)
"much of the positive effect of homeownership is due not to ownership itself, but to other factors that differentiate owners and renters" (mostly looks like income and length of time in the home/apt)
"the founder of Daewood [...] also placed a big bet on cars" (in talking about the chaebol of Korea overextending. we briefly owned a Daewoo.)
Oh, so depressing, and yet, so useful in understanding how we got to this damn place over the last 30 years. In particular, what seems like a long digression about oligarchs & financial crises in Russia, Indonesia, South Korea, etc. turns out to be provide plenty of a-ha moments later, seeing some of those very things -- somewhat disguised -- in our own economics & politics over the last couple of years.
There's a LOTR quote (not sure if it's in the original books or just the movie) in which Galadriel says something to the effect of the quest being on the edge of a knife; stray but a little, and you shall fail (or fall, I can't remember which) and the end of this book feels that way to me. There's this moment that we're in -- and honestly, may have already passed through -- where the status quo of the 1990s & 2000s could have been overturned. It won't last forever, and maybe it's already gone.
"the core function of finance is financial intermediation -- moving money from a place where it is currently not needed to a place where it is needed. The key questions for for any financial innovation are whether it increases financial intermediation and whether that is a good thing." (continues to talk about "innovations" in credit cards mostly being ways of making pricing more complex)
"much of the positive effect of homeownership is due not to ownership itself, but to other factors that differentiate owners and renters" (mostly looks like income and length of time in the home/apt)
"the founder of Daewood [...] also placed a big bet on cars" (in talking about the chaebol of Korea overextending. we briefly owned a Daewoo.)
Oh, so depressing, and yet, so useful in understanding how we got to this damn place over the last 30 years. In particular, what seems like a long digression about oligarchs & financial crises in Russia, Indonesia, South Korea, etc. turns out to be provide plenty of a-ha moments later, seeing some of those very things -- somewhat disguised -- in our own economics & politics over the last couple of years.
There's a LOTR quote (not sure if it's in the original books or just the movie) in which Galadriel says something to the effect of the quest being on the edge of a knife; stray but a little, and you shall fail (or fall, I can't remember which) and the end of this book feels that way to me. There's this moment that we're in -- and honestly, may have already passed through -- where the status quo of the 1990s & 2000s could have been overturned. It won't last forever, and maybe it's already gone.
November 5, 2011
Is the American form of government a democracy and secondarily, is the economic system a market capitalist one?
According to the authors of 13 bankers the answer to both questions is a resounding, "No!" Kwak and Johnson are well known in financial circles for their highly influential blog, the Baseline Scenario. The authors clearly detail the causes behind the global financial credit crisis which has persisted since 2008. To the authors, the primary reason for the crisis can be traced to the policies of the most influential financial institutions in the US, broadly dubbed "the oligarchy," or the 13 Bankers. The regulatory policies which allowed these banks to grow seemingly exponentially during the 1990s were driven by the lobbying muscle placed forcefully on the federal government, notably the Federal Reserve and the Clinton and later Bush Administrations. The inexorable drive towards greater scale, greater consolidation and financial innovation euphemistically described as "risk management" eventually transformed banks from balance sheet lenders to fee generating trading factories bent on the packaging and repackaging of opaque financial instruments. This process was known as securitization, which was the engine of massive job and income growth on Wall Street in the 1990s and the period leading up to the crisis. This high stakes game of selling and trading collateralized bond pools was played by all the banks, commercial and investment alike. Over time, the institutions became one and the same and the losses from the high stakes poker of securitization threatened the investment grade risk rating of the largest banks of the world. Excessive competition resulted in an abandonment of credit standards by many institutions. The securitization machine thus led to an asset price bubble which ultimately popped, nearly bringing all the major financial institutions to insolvency. The catastrophe was prevented by the Federal largesse - essentially taxpayer money. The Federal deficit that has ballooned as a result of the infamous TARP, TALF, Freddie and Fannie bailouts (as well as the conduct of multiple wars) is to some, the great impediment to any so called sustainable growth in the future.
One could quibble with the authors on some details in their critique of derivatives and their understanding of subordination as it relates to ABS and CDOs but their dissection of the inequities entrenched in the American economic system is a credible and staggering attack on the Republic itself. This book should be required reading for today's citizen and accompanied with Joseph Stiglitz's Downfall, which complements it nicely and clearly addresses the long-term trend of income inequality.
The growing dispersion of income between the highest and lowest in America, a trend predating the crisis, would ultimately have choked off consumption and thus, corporate earnings and the roaring stock market of the 1990s. The "lower classes" found a way to consume more with available credit. The ability of the American homeowner to dip into their home's equity was the only source of capital for continued consumption in the face of household income decreases for many families. The issue of steadily declining income and increased lack of global competitiveness should now be Kwak, Johnson and every American's main concern. The declining income of the American worker, the emasculation of the manufacturing sector, the eroding public educational system is the "fault" of many and the result of a host of variables and changing demographics.
The most dire consequence of today's massive deficit may be the loss of the country's great core competency: its ability to educate, nurture and finance entrepeneurs. This is particularly unsettling because the capital markets are only distributors, or redistributors of wealth rather than wealth generators. Wealth generators produce enhanced productivity and more importantly, jobs. Assigning blame solely to the "13 Bankers" distracts slightly from very serious cultural flaws that America must address which clearly Kwak and Johnson are sensitive to but are not fully captured in the book. Greed is not only embedded in the psyche of financial professionals but in the DNA of America. For every bad debt product there was a borrower, for every instrument there was a counter party, a consumer - who was usually informed of the risk (the exceptions of course are many and notable.)
History will likely judge the Clinton Administration quite differently now that many realize how the decisions made to push home loans to unqualified borrowers were overwhelmingly made during his Administration. Regulatory changes encouraging home ownership to the unqualified were exacerbated by the end of the end of Glass-Steagall which opened the door for the era of mega banks: as Clinton era banking reform and the Greenspan agenda brought down the walls between high risk investment banks and previously sleepy, conservative depository institutions. High stakes poker started soon thereafter. Wall Street is a very complicated place surrounded by very complicated walls with a labyrinth of piping that likely needs to be reconfigured or dismantled. In order to Occupy or even end Wall Street as we know it today in 2011 - one must understand the details.
I highly recommend this book.
According to the authors of 13 bankers the answer to both questions is a resounding, "No!" Kwak and Johnson are well known in financial circles for their highly influential blog, the Baseline Scenario. The authors clearly detail the causes behind the global financial credit crisis which has persisted since 2008. To the authors, the primary reason for the crisis can be traced to the policies of the most influential financial institutions in the US, broadly dubbed "the oligarchy," or the 13 Bankers. The regulatory policies which allowed these banks to grow seemingly exponentially during the 1990s were driven by the lobbying muscle placed forcefully on the federal government, notably the Federal Reserve and the Clinton and later Bush Administrations. The inexorable drive towards greater scale, greater consolidation and financial innovation euphemistically described as "risk management" eventually transformed banks from balance sheet lenders to fee generating trading factories bent on the packaging and repackaging of opaque financial instruments. This process was known as securitization, which was the engine of massive job and income growth on Wall Street in the 1990s and the period leading up to the crisis. This high stakes game of selling and trading collateralized bond pools was played by all the banks, commercial and investment alike. Over time, the institutions became one and the same and the losses from the high stakes poker of securitization threatened the investment grade risk rating of the largest banks of the world. Excessive competition resulted in an abandonment of credit standards by many institutions. The securitization machine thus led to an asset price bubble which ultimately popped, nearly bringing all the major financial institutions to insolvency. The catastrophe was prevented by the Federal largesse - essentially taxpayer money. The Federal deficit that has ballooned as a result of the infamous TARP, TALF, Freddie and Fannie bailouts (as well as the conduct of multiple wars) is to some, the great impediment to any so called sustainable growth in the future.
One could quibble with the authors on some details in their critique of derivatives and their understanding of subordination as it relates to ABS and CDOs but their dissection of the inequities entrenched in the American economic system is a credible and staggering attack on the Republic itself. This book should be required reading for today's citizen and accompanied with Joseph Stiglitz's Downfall, which complements it nicely and clearly addresses the long-term trend of income inequality.
The growing dispersion of income between the highest and lowest in America, a trend predating the crisis, would ultimately have choked off consumption and thus, corporate earnings and the roaring stock market of the 1990s. The "lower classes" found a way to consume more with available credit. The ability of the American homeowner to dip into their home's equity was the only source of capital for continued consumption in the face of household income decreases for many families. The issue of steadily declining income and increased lack of global competitiveness should now be Kwak, Johnson and every American's main concern. The declining income of the American worker, the emasculation of the manufacturing sector, the eroding public educational system is the "fault" of many and the result of a host of variables and changing demographics.
The most dire consequence of today's massive deficit may be the loss of the country's great core competency: its ability to educate, nurture and finance entrepeneurs. This is particularly unsettling because the capital markets are only distributors, or redistributors of wealth rather than wealth generators. Wealth generators produce enhanced productivity and more importantly, jobs. Assigning blame solely to the "13 Bankers" distracts slightly from very serious cultural flaws that America must address which clearly Kwak and Johnson are sensitive to but are not fully captured in the book. Greed is not only embedded in the psyche of financial professionals but in the DNA of America. For every bad debt product there was a borrower, for every instrument there was a counter party, a consumer - who was usually informed of the risk (the exceptions of course are many and notable.)
History will likely judge the Clinton Administration quite differently now that many realize how the decisions made to push home loans to unqualified borrowers were overwhelmingly made during his Administration. Regulatory changes encouraging home ownership to the unqualified were exacerbated by the end of the end of Glass-Steagall which opened the door for the era of mega banks: as Clinton era banking reform and the Greenspan agenda brought down the walls between high risk investment banks and previously sleepy, conservative depository institutions. High stakes poker started soon thereafter. Wall Street is a very complicated place surrounded by very complicated walls with a labyrinth of piping that likely needs to be reconfigured or dismantled. In order to Occupy or even end Wall Street as we know it today in 2011 - one must understand the details.
I highly recommend this book.
December 28, 2016
This is the second book I've tackled regarding the 2008 financial crisis. I liked this one. The research and info came across nicely and it was presented in a way that anyone could understand. The author focused on the banks and their risky behaviors, all to make the next dollar. I found it interesting how the author talked about the government bailouts, but still, the bigger fish swallowed up the weaker ones.
October 29, 2011
This is a superb explanation of how the supremacy of Wall Street, and its cosiness to Washington, helped cause the financial crisis, and made true reform afterward much more difficult. Johnson and Kwak go back as far as Thomas Jefferson and Andrew Jackson to examine the nexus of politics and banking. They explain why bankers and politicians are so close, and why politicians always seem to bend to the will of the banksters: it's not just about campaign contributions (traditional capital), or the revolving door between Wall Street and Washington (human capital). It's also about the ideology of finance, what they term cultural capital - the idea that a large, sophisticated, mostly unfettered financial sector is unambiguously good for America. Politicians and legislators have bought into this ideology, which makes reforming the system incredibly difficult.
Johnson and Kwak don't argue that a bailout was unnecessary. Instead, they argue it should have been done differently. Taxpayers got the shaft. It didn't have to be that way; temporarily nationalizing the banks would have been a much better deal for "Main Street." The FDIC engages in "nationalizing" a bank every time a retail bank fails, and no one has conniptions about that sort of nationalizing. But the behemoth investment banks/brokerages, when they became too big to fail, had gained so much political clout that nationalization was seen as undesirable by the decisionmakers.
Not only did the major banks become too big to fail, but after the crisis they are even bigger - and more profitable. When the next crisis occurs, these banks will again be too big to fail, and taxpayers will have to foot the bill for bailouts again. The solution is to limit the size of the banks. It can be done, the authors argue, but only if there is political will to do so.
Read this in conjunction with Bethany McLean and Joe Nocera's All the Devils are Here: The Hidden History of the Financial Crisis, which covers the period beginning about 30 years before the crisis, up to the implosion, and doesn't address the bailouts. These two books will tell you almost everything you need to know about it.
Johnson and Kwak don't argue that a bailout was unnecessary. Instead, they argue it should have been done differently. Taxpayers got the shaft. It didn't have to be that way; temporarily nationalizing the banks would have been a much better deal for "Main Street." The FDIC engages in "nationalizing" a bank every time a retail bank fails, and no one has conniptions about that sort of nationalizing. But the behemoth investment banks/brokerages, when they became too big to fail, had gained so much political clout that nationalization was seen as undesirable by the decisionmakers.
Not only did the major banks become too big to fail, but after the crisis they are even bigger - and more profitable. When the next crisis occurs, these banks will again be too big to fail, and taxpayers will have to foot the bill for bailouts again. The solution is to limit the size of the banks. It can be done, the authors argue, but only if there is political will to do so.
Read this in conjunction with Bethany McLean and Joe Nocera's All the Devils are Here: The Hidden History of the Financial Crisis, which covers the period beginning about 30 years before the crisis, up to the implosion, and doesn't address the bailouts. These two books will tell you almost everything you need to know about it.
May 1, 2016
This book penned by two of the most vocal commentators on the 2008 financial crisis, takes a systematic approach to uncover the causative factors which helped trigger the crisis and brought the entire American economy to a standstill.
The book starts with the origin of modern banking in the United States, dating back to the late 18th century and the First Bank of the United States, and henceforth goes on to narrate the influential role that finance would come to play in the future; the contrasting ideologies of two of America's founding fathers, Thomas Jefferson, who was highly suspicious of wealthy financiers and Alexander Hamilton who wholeheartedly believed in free market capitalism, are very well presented.
There is also ample coverage given to the causal factors leading to the Great Depression of the 1930s and the slew of regulatory measures that followed which kept the financial systems relatively healthy for the next few decades. A brief section is dedicated to the emerging market crisis of the late 1990s and how the U.S. through the IMF preached the austerity measures that it itself would fail to take a decade later.
There is also an interesting chapter on the emergence of academic finance, and how it transformed Banking from a rather boring and unexciting field to a happening and increasingly competitive field, thereby becoming highly quantitative and complex in the process. The collapse of risk-loving financial institutions like Salomon Brothers,Drexel Burnham Lambert and Long Term Capital Management are also assessed and analyzed in details, and the major deregulatory environment that flourished post the 1990s, which gave unrestricted access to cheap capital for large financial institutions and encouraged risk taking, is dissected and scrutinized in details, finally the failure of regulatory agencies to monitor excessive risk-taking and how Wall Street through it's far reaching influence in Washington always managed to win every situation in its favour. The authors also provide a succinct analysis of the 'Too Big to Fail' institutions and how they managed to secure government bailout packages without any conservatorship or cut in executive compensation.
The role of financial innovation and the toxic assets it created like CDS(Credit Default Swaps),inverse floaters and exotic variants of MBS (Mortgage Backed Securities), which triggered a domino like effect spiraling and creating repercussions through the entire financial system leading to the collapse of two major investment banks(Lehman Brother & Bear Sterns), are also quite well explained. This book proved to be a highly educative and informative experience for me, as I got to know many of principal causes of the crisis and how a similar event can be averted in the future through more stringent regulatory measures.
The book starts with the origin of modern banking in the United States, dating back to the late 18th century and the First Bank of the United States, and henceforth goes on to narrate the influential role that finance would come to play in the future; the contrasting ideologies of two of America's founding fathers, Thomas Jefferson, who was highly suspicious of wealthy financiers and Alexander Hamilton who wholeheartedly believed in free market capitalism, are very well presented.
There is also ample coverage given to the causal factors leading to the Great Depression of the 1930s and the slew of regulatory measures that followed which kept the financial systems relatively healthy for the next few decades. A brief section is dedicated to the emerging market crisis of the late 1990s and how the U.S. through the IMF preached the austerity measures that it itself would fail to take a decade later.
There is also an interesting chapter on the emergence of academic finance, and how it transformed Banking from a rather boring and unexciting field to a happening and increasingly competitive field, thereby becoming highly quantitative and complex in the process. The collapse of risk-loving financial institutions like Salomon Brothers,Drexel Burnham Lambert and Long Term Capital Management are also assessed and analyzed in details, and the major deregulatory environment that flourished post the 1990s, which gave unrestricted access to cheap capital for large financial institutions and encouraged risk taking, is dissected and scrutinized in details, finally the failure of regulatory agencies to monitor excessive risk-taking and how Wall Street through it's far reaching influence in Washington always managed to win every situation in its favour. The authors also provide a succinct analysis of the 'Too Big to Fail' institutions and how they managed to secure government bailout packages without any conservatorship or cut in executive compensation.
The role of financial innovation and the toxic assets it created like CDS(Credit Default Swaps),inverse floaters and exotic variants of MBS (Mortgage Backed Securities), which triggered a domino like effect spiraling and creating repercussions through the entire financial system leading to the collapse of two major investment banks(Lehman Brother & Bear Sterns), are also quite well explained. This book proved to be a highly educative and informative experience for me, as I got to know many of principal causes of the crisis and how a similar event can be averted in the future through more stringent regulatory measures.
May 5, 2010
The authors' basic premise in this book is that the only way to prevent future financial crisis is to downsize banks that are too big to fail. They describe the history of banking in the US concentrating on the presidencies of Jefferson, Jackson, Teddy Roosevelt, Franklin Roosevelt, Reagan, George H. W. Bush, Clinton, George W. Bush and Obama. The authors see the big banks as oligarchies with enormous political power. (Surprise, I laugh.) The book was tedious reading at times and I'm glad there was no final exam. As explained in the book, the banks do have enormous talent on their staffs. They recruit the best and the brightest from the best colleges in our country. While salaries have not increased overall in the United States in the past 10 years, salaries in the banks have increased dramatically. Most large banks have their own economists on staff. Banks are always on the lookout to recruit the best mathematicians and physicists to help find the latest loophole, to produce the best financial products, to make the most money for the firm. It makes me wonder how the government regulators can identify fraud when they are up against such talent. This book showed me that the financial crisis was not due to the banks rather a combination of the failures of our government policies and the banks. With so many different ideas on how to fix financial problems in the future expressed by so many different policy makers, I hope we can get it right this time. In a nutshell, this book was interesting but tedious reading.
August 25, 2014
This is an easy to read account of how wall street and Washington got so cozy and some historical perspective as well. Thorough and well-written. I will be assigning it in my banking class this semester.
June 21, 2010
This is the best book I have read on the recent financial crisis of 2008. The authors present a historical study of how and why it happened and show why it will happen again if the US govt does not go through with breaking up financial institutions which are 'too big to fail'. Both the Bush and Obama administrations have allowed the big banks to remain BIG thereby allowing them to bring the world economy into crisis again by taking the extraordinary risks that they took to get us there in the first place in 2008. This is really a worry for all of us.
The authors make some very salient points which must be disturbing for all Americans and for the image of their country as a functioning peoples' democracy. They show that six megabanks in the US control assets amounting to a staggering 60% of the nation's GDP. The ex-Wall street honchos have gradually cornered important positions within the administration as bureaucrats, outside as lobbyists, in the rating agencies and in congress and the senate. This is no different from the small set of oligarchs who control most arms of the government in developing countries. This is a very sobering and disturbing image of the country because it makes regulating the reckless financial industry very difficult. The ex-Wall street guys in Congress and the senate constantly work against the peoples' interests for regulating the industry.
The authors show historically how Thomas Jefferson, Andrew Jackson, Theodore Roosevelt and Franklin Roosevelt fought to keep the individual corporations from getting too big to manipulate the political system against the peoples' interests. The Glass-Steagall Act of 1933 kept the financial industry well regulated for 50 years from taking the reckless risks of today. By the time of the Reagan era, Wall street had gradually colonized Washington and successfully pushed through relaxation of many key regulations setting the stage for complex, risky financial products like CDS, various derivatives etc. People like Larry Summers, Tim Geithner, Robert Rubin, Hank paulson are all ex-Wall street honchos and they certainly did not see the risks the same way - naturally!
The authors make the following interesting assertions while discussing how to restore the health and balance of the US (and global economy as a result) :
1. There is no evidence that large banks gain economies of scale above a very low threshold of $10 b in assets.
2. The Glass-Steagall act was in force between 1933 and 1983 and there is no evidence to show that it stifled innovation in the US economy in various fields, contrary to Wall street crowing about regulation stifling innovation.
3. No financial institution should be allowed to control or have ownership interests of more than 4% of the US GDP. It should be 4% for all banks and 2% for investment banks.
Though the discussions on many complex financial products are difficult to understand for the layman, the book is very accessible with regard to its core tenets. In the era of globalization, whatever happens in the US affects the whole world. It is certainly a worrisome future with the giant Wall street oligarchy controlling Washington putting all of us ordinary folks under immense risk of another meltdown like that of 2008.
This book is a must read for the American and European people and take their countries back from the oligarchs.
The authors make some very salient points which must be disturbing for all Americans and for the image of their country as a functioning peoples' democracy. They show that six megabanks in the US control assets amounting to a staggering 60% of the nation's GDP. The ex-Wall street honchos have gradually cornered important positions within the administration as bureaucrats, outside as lobbyists, in the rating agencies and in congress and the senate. This is no different from the small set of oligarchs who control most arms of the government in developing countries. This is a very sobering and disturbing image of the country because it makes regulating the reckless financial industry very difficult. The ex-Wall street guys in Congress and the senate constantly work against the peoples' interests for regulating the industry.
The authors show historically how Thomas Jefferson, Andrew Jackson, Theodore Roosevelt and Franklin Roosevelt fought to keep the individual corporations from getting too big to manipulate the political system against the peoples' interests. The Glass-Steagall Act of 1933 kept the financial industry well regulated for 50 years from taking the reckless risks of today. By the time of the Reagan era, Wall street had gradually colonized Washington and successfully pushed through relaxation of many key regulations setting the stage for complex, risky financial products like CDS, various derivatives etc. People like Larry Summers, Tim Geithner, Robert Rubin, Hank paulson are all ex-Wall street honchos and they certainly did not see the risks the same way - naturally!
The authors make the following interesting assertions while discussing how to restore the health and balance of the US (and global economy as a result) :
1. There is no evidence that large banks gain economies of scale above a very low threshold of $10 b in assets.
2. The Glass-Steagall act was in force between 1933 and 1983 and there is no evidence to show that it stifled innovation in the US economy in various fields, contrary to Wall street crowing about regulation stifling innovation.
3. No financial institution should be allowed to control or have ownership interests of more than 4% of the US GDP. It should be 4% for all banks and 2% for investment banks.
Though the discussions on many complex financial products are difficult to understand for the layman, the book is very accessible with regard to its core tenets. In the era of globalization, whatever happens in the US affects the whole world. It is certainly a worrisome future with the giant Wall street oligarchy controlling Washington putting all of us ordinary folks under immense risk of another meltdown like that of 2008.
This book is a must read for the American and European people and take their countries back from the oligarchs.
April 30, 2010
This book was terrific overview of the history of the US financial system going back to Hamilton and Jefferson and goes in depth to describe how we got where we are. Simon and James do an amazing job of diagnosing the problems.
They contend that too big to fail banks simultaneously pose too much systemic to the economy AND have too much political sway to make effective regulation and oversight possible. This is very much in line with the views of Nobel Prize winners Joseph Stiglitz and Paul Krugman (along with Nouriel Roubini and Dean Baker).
While their solution may be incredibly politically difficult I think you could rally the public (and their pitchforks) around it and invoke the legacy of Jefferson and Roosevelt (Teddy mostly, but a little Franklin too). I think it would take a lot of political capital at first and it may be the last thing Obama could do in his political career but I think it would leave a more positive legacy for himself and on the economy than any other course of action he could take.
This book was great and I suggest that everyone reads it.
They contend that too big to fail banks simultaneously pose too much systemic to the economy AND have too much political sway to make effective regulation and oversight possible. This is very much in line with the views of Nobel Prize winners Joseph Stiglitz and Paul Krugman (along with Nouriel Roubini and Dean Baker).
While their solution may be incredibly politically difficult I think you could rally the public (and their pitchforks) around it and invoke the legacy of Jefferson and Roosevelt (Teddy mostly, but a little Franklin too). I think it would take a lot of political capital at first and it may be the last thing Obama could do in his political career but I think it would leave a more positive legacy for himself and on the economy than any other course of action he could take.
This book was great and I suggest that everyone reads it.
September 22, 2011
While I think this book is a good history of the regulation changes that occurred in banking from the mid to late 90s, I do not think this book does that great a job explaining the recent banking crisis. The authors clearly believe that the changes in regulation and lax regulators caused the crisis and that better/stronger regulation would fix it. They however fail to explain how if the regulators are so co-opted by the big banks that regulation on its own will work. I also feel that the authors let Fred and Fannie Mae's role in the collapse and their cozy relationship with both parties in Washington off too lightly. I wish they had spent more time developing how we measure too big to fail and how we limit or break up banks that reach that threshold.
This book will appeal manly to people who have an interest in financial and economic history, otherwise it will seem a slow read. It is a good summery of the way banking has changed over the last three decades and does give good insight into how the regulators as well as the regulations failed us over the last five years.
This book will appeal manly to people who have an interest in financial and economic history, otherwise it will seem a slow read. It is a good summery of the way banking has changed over the last three decades and does give good insight into how the regulators as well as the regulations failed us over the last five years.
June 4, 2010
What happens when free market true believers meet predatory bankers? Financial oligarchy, says Former IMF economist Simon Johnson and that describes the USA today. For example, how many high-level government officials are former Goldman Sachs people? Lots. And if the government officals aren’t Wall Street insiders, they are free market ideologues. Take Alan Greenspan for example. He was apparently so convinced that markets could regulate themselves that he believed rules against fraud were unnecessary. Got that Bernie Madoff. Then, of course, there’s the money.
Between the money, the ideology, and the interchangeable personnel Wall Street has convinced Washington that Wall Street is indispensable. Simon Johnson says that’s a recipe for disaster after disaster followed by bailout after bailout. His solution to the problem: we need a latter day Andrew Jackson or Teddy Roosevelt to take on the banks and break them up. I hope Obama has read this book
Between the money, the ideology, and the interchangeable personnel Wall Street has convinced Washington that Wall Street is indispensable. Simon Johnson says that’s a recipe for disaster after disaster followed by bailout after bailout. His solution to the problem: we need a latter day Andrew Jackson or Teddy Roosevelt to take on the banks and break them up. I hope Obama has read this book
November 30, 2017
Read in 2012 - pre-Goodreads.
Review 11.30.17 - I was very interested in the financial meltdown as I work in the finance industry. It was a rough time.
Review 11.30.17 - I was very interested in the financial meltdown as I work in the finance industry. It was a rough time.
July 14, 2017
This book was well written, informative, and for the most part, easy to understand. I did learn a lot about terms I had heard before, but weren't too familiar with, as well as the impact of various factors on the financial downturn a few years ago. I'm not sure the book was accurately titled, as the focus was not really on 13 specific bankers, as I thought it would be.
I was shocked to learn that the financial institutions are allowed to choose their owns regulators and select which agency to regulate them based on perceptions of which agencies would be more friendly to their type of business. I didn't know that agencies "compete" for companies to regulate, which results in lax oversight. That is absolutely outrageous in my opinion.
I also understand why other countries see us as hypocritical. We were tough on the foreign "emerging markets" who had financial issues, insisting that their banks be shut down and the incompetent leaders whose actions resulted in the failures be replaced. It seems logical to do that. However, when it was our own banks that failed, our government did not do what it forced the foreign markets to do. Our banks whose management resulted in these business failures were allowed to remain intact, their leaders remained in place, and they emerged even stronger than before since they can now operate knowing the government (READ: TAXPAYERS) will bail out their poor decisions. There is no incentive for the big banks to change.
The line on page 179 of the book sums it up nicely. "On issue after issue, the big banks got what they wanted, and the taxpayer got the bill."
The authors argue for change, and provide some solutions to achieve real change to prevent future disasters. In doing so, the authors also provide a historical context for their arguments. Will their ideas work? I have no idea, but at least it is a starting place. At this point, it seems that not much has changed or been learned as a result of the last crisis, and there is the specter of another taxpayer funded bailout looming at some point in the future.
I was shocked to learn that the financial institutions are allowed to choose their owns regulators and select which agency to regulate them based on perceptions of which agencies would be more friendly to their type of business. I didn't know that agencies "compete" for companies to regulate, which results in lax oversight. That is absolutely outrageous in my opinion.
I also understand why other countries see us as hypocritical. We were tough on the foreign "emerging markets" who had financial issues, insisting that their banks be shut down and the incompetent leaders whose actions resulted in the failures be replaced. It seems logical to do that. However, when it was our own banks that failed, our government did not do what it forced the foreign markets to do. Our banks whose management resulted in these business failures were allowed to remain intact, their leaders remained in place, and they emerged even stronger than before since they can now operate knowing the government (READ: TAXPAYERS) will bail out their poor decisions. There is no incentive for the big banks to change.
The line on page 179 of the book sums it up nicely. "On issue after issue, the big banks got what they wanted, and the taxpayer got the bill."
The authors argue for change, and provide some solutions to achieve real change to prevent future disasters. In doing so, the authors also provide a historical context for their arguments. Will their ideas work? I have no idea, but at least it is a starting place. At this point, it seems that not much has changed or been learned as a result of the last crisis, and there is the specter of another taxpayer funded bailout looming at some point in the future.
April 16, 2017
Johnson and Kwak's blog was essential reading during the financial crisis, and is still quite educational. This book is also required for Money & Banking in the fall. (I'm a bit sad because I went way over the Amazon clipping limit, so 314 of my highlights are invisible via the website.)
Johnson approaches the U.S. financial crisis from the point of view of a former Chief Economist of the IMF. That perspective allows him to see the irony of how the U.S. and the IMF advised East Asian countries through their financial crises in 1997-1998 compared to how the U.S. handled its own.
Related to my previous post, Johnson gives a history of banking and regulation in the U.S., from the first central bank charter of 1791 to Jacksonian populism, to the Panic of 1907 to the Great Recession. All of this is great, concise history.
Johnson comes down on the side of Thomas Jefferson--a distrust of centralized power of bankers as a threat to the Republic. He sees what the U.S. has now-- an oligarchy of a few large politically-influential financial institutions-- as little different from the cronyism of developing nations that the U.S. has been quite critical of. The U.S. advice to Asia in the 1990s was that no bank should be "too big to fail," and the big state-backed monopolies should be broken up. Johnson offers that same advice to the U.S. today-- find a way to break up the banks, just as Republican Teddy Roosevelt did with the Trusts of the early 1900s.
About 1/3 of this book is bibliography-- a treasure trove of sources and references. You always hear of the growth of finance, but it's nice to have specific data. The undeniable fact is that the deregulation of the financial sector in the 1970s and 80s did nothing to boost U.S. productivity and therefore did not result in an obvious better allocation of capital. The financial sector replaced manufacturing 1-for-1, and commercial & investment banking and insurance profits grew to be a much larger portion--almost 50%-- of all U.S. corporate profits by 2007. The amount of leverage taken on by financial sector firms became enormous over this time period:
"in 1978, all commercial banks together held $1.2 trillion of assets, equivalent to 53 percent of U.S. GDP. By the end of 2007, the commercial banking sector had grown to $11.8 trillion in assets, or 84 percent of U.S. GDP. But that was only a small part of the story. Securities broker-dealers (investment banks), including Salomon, grew from $33 billion in assets, or 1.4 percent of GDP, to $3.1 trillion in assets, or 22 percent of GDP. Asset-backed securities such as collateralized debt obligations (CDOs), which hardly existed in 1978, accounted for another $4.5 trillion in assets in 2007, or 32 percent of GDP.* All told, the debt held by the financial sector grew from $2.9 trillion, or 125 percent of GDP, in 1978 to over $36 trillion, or 259 percent of GDP, in 2007...In 1978, the financial sector borrowed $13 in the credit markets for every $100 borrowed by the real economy; by 2007, that had grown to $51.14 In other words, for the same amount of borrowing by households and nonfinancial companies, the amount of borrowing by financial institutions quadrupled....by the third quarter of 2009, financial sector profits were over six times their 1980 level, while nonfinancial sector profits were little more than double those of 1980."
The private sector began to wade where only the GSE's had tread before-- securitizing mortgages. Deregulation allowed the lines to blur between banks and non-banks, until the lines were at last removed in 1999. Greenspan and other regulators intentionally decided not to regulate various activities. For example, Greenspan declined to look at the books of mortgage brokers owned by bank holding companies-- even though it was in the Fed's realm to do so. If there were bad practices or "liar loans" piling up, he clearly said the problem would take care of itself (and later regretted his belief in market self-regulation).
The story is that of "bigger and better," following the textbook argument that this was well because insurance conglomerates merging with banking conglomerates merging with investment banks benefited from economies of scope and scale. Johnson, like Hayek, takes issue with this type of argument and offers some good rebuttal using various studies:
"The 2007 Geneva Report, 'International Financial Stability,'... found that the unprecedented consolidation in the financial sector...led to no significant efficiency gains, no economies of scale beyond a low threshold, and no evident economies of scope."
Basically, as banks got bigger they took on even more risk. As commercial banks and investment banks were increasing competition in the securitization game, firms began to engineer products in unique ways to differentiate their products. This caused problems of information asymmetries as very few people--including ratings agencies and the Federal Reserve-- understood the products being created. The banks could manipulate their creations to be rated well by certain risk models when actually they were quite risky. Ultimately, the taxpayer was put on the hook:
"(T)he special inspector general for TARP estimated a total potential support package of $23.7 trillion, or over 150 percent of U.S. GDP (as) theoretical potential liabilities of the government."
Johnson understands the difficulties of regulation, and while he advocated a Consumer Financial Protection Bureau, he understands regulations will do little good if banks know that they are too big to fail. He recommends that a commercial banks' assets be allowed to be no bigger than 2% of GDP, 4% for investment banks.
"Saying that we cannot break up our largest banks is saying that our economic futures depend on these six companies (some of which are in various states of ill health). That thought should frighten us into action."
I give this book 4 stars out of 5. Other reviewers have rightly noted that Wall Street isn't the only place where TBTF rules-- the government has been bailing out the auto industry for years, and various other industries ranging from steel to cotton are heavily subsidized and protected. But the sheer size of the banks, the growing percentage of U.S. GDP generated by finance, and the growing political influence of banks in our "revolving door" government is alarming.
While the book is pretty mistitled, Johnson does make it clear that we've not done much to ensure that a crisis like 2007 doesn't occur again.
Johnson approaches the U.S. financial crisis from the point of view of a former Chief Economist of the IMF. That perspective allows him to see the irony of how the U.S. and the IMF advised East Asian countries through their financial crises in 1997-1998 compared to how the U.S. handled its own.
Related to my previous post, Johnson gives a history of banking and regulation in the U.S., from the first central bank charter of 1791 to Jacksonian populism, to the Panic of 1907 to the Great Recession. All of this is great, concise history.
Johnson comes down on the side of Thomas Jefferson--a distrust of centralized power of bankers as a threat to the Republic. He sees what the U.S. has now-- an oligarchy of a few large politically-influential financial institutions-- as little different from the cronyism of developing nations that the U.S. has been quite critical of. The U.S. advice to Asia in the 1990s was that no bank should be "too big to fail," and the big state-backed monopolies should be broken up. Johnson offers that same advice to the U.S. today-- find a way to break up the banks, just as Republican Teddy Roosevelt did with the Trusts of the early 1900s.
About 1/3 of this book is bibliography-- a treasure trove of sources and references. You always hear of the growth of finance, but it's nice to have specific data. The undeniable fact is that the deregulation of the financial sector in the 1970s and 80s did nothing to boost U.S. productivity and therefore did not result in an obvious better allocation of capital. The financial sector replaced manufacturing 1-for-1, and commercial & investment banking and insurance profits grew to be a much larger portion--almost 50%-- of all U.S. corporate profits by 2007. The amount of leverage taken on by financial sector firms became enormous over this time period:
"in 1978, all commercial banks together held $1.2 trillion of assets, equivalent to 53 percent of U.S. GDP. By the end of 2007, the commercial banking sector had grown to $11.8 trillion in assets, or 84 percent of U.S. GDP. But that was only a small part of the story. Securities broker-dealers (investment banks), including Salomon, grew from $33 billion in assets, or 1.4 percent of GDP, to $3.1 trillion in assets, or 22 percent of GDP. Asset-backed securities such as collateralized debt obligations (CDOs), which hardly existed in 1978, accounted for another $4.5 trillion in assets in 2007, or 32 percent of GDP.* All told, the debt held by the financial sector grew from $2.9 trillion, or 125 percent of GDP, in 1978 to over $36 trillion, or 259 percent of GDP, in 2007...In 1978, the financial sector borrowed $13 in the credit markets for every $100 borrowed by the real economy; by 2007, that had grown to $51.14 In other words, for the same amount of borrowing by households and nonfinancial companies, the amount of borrowing by financial institutions quadrupled....by the third quarter of 2009, financial sector profits were over six times their 1980 level, while nonfinancial sector profits were little more than double those of 1980."
The private sector began to wade where only the GSE's had tread before-- securitizing mortgages. Deregulation allowed the lines to blur between banks and non-banks, until the lines were at last removed in 1999. Greenspan and other regulators intentionally decided not to regulate various activities. For example, Greenspan declined to look at the books of mortgage brokers owned by bank holding companies-- even though it was in the Fed's realm to do so. If there were bad practices or "liar loans" piling up, he clearly said the problem would take care of itself (and later regretted his belief in market self-regulation).
The story is that of "bigger and better," following the textbook argument that this was well because insurance conglomerates merging with banking conglomerates merging with investment banks benefited from economies of scope and scale. Johnson, like Hayek, takes issue with this type of argument and offers some good rebuttal using various studies:
"The 2007 Geneva Report, 'International Financial Stability,'... found that the unprecedented consolidation in the financial sector...led to no significant efficiency gains, no economies of scale beyond a low threshold, and no evident economies of scope."
Basically, as banks got bigger they took on even more risk. As commercial banks and investment banks were increasing competition in the securitization game, firms began to engineer products in unique ways to differentiate their products. This caused problems of information asymmetries as very few people--including ratings agencies and the Federal Reserve-- understood the products being created. The banks could manipulate their creations to be rated well by certain risk models when actually they were quite risky. Ultimately, the taxpayer was put on the hook:
"(T)he special inspector general for TARP estimated a total potential support package of $23.7 trillion, or over 150 percent of U.S. GDP (as) theoretical potential liabilities of the government."
Johnson understands the difficulties of regulation, and while he advocated a Consumer Financial Protection Bureau, he understands regulations will do little good if banks know that they are too big to fail. He recommends that a commercial banks' assets be allowed to be no bigger than 2% of GDP, 4% for investment banks.
"Saying that we cannot break up our largest banks is saying that our economic futures depend on these six companies (some of which are in various states of ill health). That thought should frighten us into action."
I give this book 4 stars out of 5. Other reviewers have rightly noted that Wall Street isn't the only place where TBTF rules-- the government has been bailing out the auto industry for years, and various other industries ranging from steel to cotton are heavily subsidized and protected. But the sheer size of the banks, the growing percentage of U.S. GDP generated by finance, and the growing political influence of banks in our "revolving door" government is alarming.
While the book is pretty mistitled, Johnson does make it clear that we've not done much to ensure that a crisis like 2007 doesn't occur again.
October 15, 2023
No doubt, two stars is a little harsh of me. But I have very little patience for books on this topic. I'm afraid I just wasn't born with the kind of brain that could absorb this kind of content. It's not just that I fail to follow much of it - from the deeper concepts to the mere terminology (I mean, what the fuck is a hedge fund, really? Or a credit default swap? - but that I simply don't even want to know, on more of a subconscious level.
I picked this book up hoping to look smart to my Goodreads friends. I ended up feeling a whole lot dumber. And I dislike Wall Street, finance, big banks, and my own worthless self, even more than I did prior to reading.
I picked this book up hoping to look smart to my Goodreads friends. I ended up feeling a whole lot dumber. And I dislike Wall Street, finance, big banks, and my own worthless self, even more than I did prior to reading.
December 28, 2011
Excellent overview of how we got to where we are. I don't think the proposed solution will go anywhere (i.e., "too big to fail" is too big), due to the political capture issues also discussed, but I like the emphasis on "we need to start talking about this sensibly and figure out a solution," rather than some sort of ideological rant on why solution X is the only possible solution and everyone else is stupid for not agreeing.
On that note, I also think that any reviewer who says that this book is ideologically biased is an ideologue. A full 30% of this book is end notes. Those in the investment banking sector and free market purists will hate it, but the *evidence* seems pretty compelling that allowing the market to self-regulate is a really, really stupid idea. Coming back with "well, you just didn't go free-market enough!" is not going to fly. I'm all for letting banks fry for their mistakes, but not if it means bringing down Main Street along with them.
On that note, I also think that any reviewer who says that this book is ideologically biased is an ideologue. A full 30% of this book is end notes. Those in the investment banking sector and free market purists will hate it, but the *evidence* seems pretty compelling that allowing the market to self-regulate is a really, really stupid idea. Coming back with "well, you just didn't go free-market enough!" is not going to fly. I'm all for letting banks fry for their mistakes, but not if it means bringing down Main Street along with them.
March 28, 2012
Oligarchy, n., a government in which a small group exercises control especially for corrupt and selfish purposes.
The United States is ruled by an oligarchy that, despite almost wrecking the world economy, has only grown more powerful and more resistant to change. Perched atop this structure are 13 bankers who are involved with the six mega-banks (Bank of America, JPMorgan, Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) that have been rendered “too big too fail”. How did this happen? How did the American financial system develop in this way? The answer to these questions is largely the subject of Simon Johnson’s and James Kwak’s book 13 Bankers.
Read the rest of my review of 13 Bankers here.
The United States is ruled by an oligarchy that, despite almost wrecking the world economy, has only grown more powerful and more resistant to change. Perched atop this structure are 13 bankers who are involved with the six mega-banks (Bank of America, JPMorgan, Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) that have been rendered “too big too fail”. How did this happen? How did the American financial system develop in this way? The answer to these questions is largely the subject of Simon Johnson’s and James Kwak’s book 13 Bankers.
Read the rest of my review of 13 Bankers here.
May 28, 2011
The banks really do run the place. Simon Johnson dissects the financial oligarchy that controls our economy and the government, and makes plain why it is that, despite the massive financial fraud scheme that collapsed the world economy, nobody went to jail or was ever in real danger of prosecution. And he shows how nothing has changed. If anything, the main result of the financial collapse is that banks that were already 'too big to fail' are now bigger and more powerful than ever.
April 16, 2017
Rating - 8.4
A smart indictment of the financial services industry that is more factual than emotional; The authors really could have went to town on the greed/corruption but instead focussed on the structural issues
The recommendations to limit the size & power of banks is contentious & likely not to result in change, however the conversation needs to be had; Interesting points on what the fundamental of banking is
A smart indictment of the financial services industry that is more factual than emotional; The authors really could have went to town on the greed/corruption but instead focussed on the structural issues
The recommendations to limit the size & power of banks is contentious & likely not to result in change, however the conversation needs to be had; Interesting points on what the fundamental of banking is
June 27, 2010
I think this is the best book on the economic meltdown as it provides historical, political and societal context. It reminds me that the proposed financial fixes are unlikely to fix the broken system.
December 4, 2011
Simon Johnson should run Treasury.
October 23, 2010
This is a very smart book describing why the financial crisis happened and why it will likely happen again because of how little has been done with the so-called financial reform.
December 19, 2020
This is one of a number of books that I have read about the financial meltdown of 2008-2009. This book focuses on the large U.S. banks and financial institutions like Citicorp, Wells Fargo. Goldman Sachs, Bank of America, J.P. Morgan etc. The main argument of this book is that there should be no banks that are “too big to fail.” Since Reagan, efforts at bank regulation were significantly loosened or eliminated. Oversight was problematic. Too many bankers became part of both Republican and Democratic administrations and pushed big bank agendas. The Fed and the government bailed out the banks in 2009 and let taxpayers foot the bill for the greed and bad judgment of bank CEOs and the failure of regulators and credit agencies to perform their jobs.
This book was written in 2010. Sadly little has changed..
LIsted below are some notes from the book...
In the 1790s, Jefferson was particularly worried that the Bank of the United States could gain leverage over the federal government as its major creditor and payment agent, and could pick economic winners and losers through its decisions to grant or withhold credit.
Hamilton believed that the government should ensure that sufficient credit was available to fund economic development and transform America into a prosperous, entrepreneurial country.
The Panic of 1907, which nearly brought the financial system crashing down, clearly demonstrated the risks the American economy was running with a highly concentrated industrial sector, a lightly regulated financial sector, and no central bank to backstop the financial system in a crisis.
But from 1980 until 2005, financial sector profits grew by 800 percent, adjusted for inflation, while nonfinancial sector profits grew by only 250 percent.
The government bailout of the S&L industry cost more than $100 billion, and hundreds of people were convicted of fraud.
This was the first example of what came to be known as the “Greenspan put”—the idea that if trouble occurred in the markets, the Fed would come to their rescue. Greenspan cut interest rates sharply in 1998 following the Russian crisis and in 2001 following the collapse of the Internet bubble, each time helping to cushion the impact of the downturn and arguably pumping up the next bubble.
The fourth money machine of modern finance—after high-yield debt, securitization, and arbitrage trading—was the modern derivatives market.
As a result, in 2004–2006, as subprime lending reached its peak in both volume and innovation, Fannie and Freddie were pushed out of large parts of the market, because the loans being made violated their underwriting standards and because the Wall Street banks were so eager to get their hands on those loans.
With low interest rates, banks could raise money from depositors virtually for free; they could borrow cheaply from each other; they could borrow cheaply at the Fed’s discount window; they could sell bonds at low interest rates because of FDIC debt guarantees; they could swap their asset-backed securities for cash with the Fed; they could sell their mortgages to Fannie and Freddie, which could in turn sell debt to the Fed; and on and on.
They did not take harsh measures to shut down or clean up sick banks. They did not cut major financial institutions off from the public dole. They did not touch the channels of political influence that the banks had used so adeptly to secure decades of deregulatory policies. They did not force out a single CEO of a major commercial or investment bank, despite the fact that most of them were deeply implicated in the misjudgments that nearly brought them to catastrophe.
This is how capitalism is supposed to work. Failure should be punished, not rewarded. The government should be the backstop protecting society against a financial collapse, but it should exact a price for that protection.
The end of “too big to fail” will reduce large banks’ funding advantage, forcing them to compete on the basis of products, price, and service rather than implicit government subsidies.
This book was written in 2010. Sadly little has changed..
LIsted below are some notes from the book...
In the 1790s, Jefferson was particularly worried that the Bank of the United States could gain leverage over the federal government as its major creditor and payment agent, and could pick economic winners and losers through its decisions to grant or withhold credit.
Hamilton believed that the government should ensure that sufficient credit was available to fund economic development and transform America into a prosperous, entrepreneurial country.
The Panic of 1907, which nearly brought the financial system crashing down, clearly demonstrated the risks the American economy was running with a highly concentrated industrial sector, a lightly regulated financial sector, and no central bank to backstop the financial system in a crisis.
But from 1980 until 2005, financial sector profits grew by 800 percent, adjusted for inflation, while nonfinancial sector profits grew by only 250 percent.
The government bailout of the S&L industry cost more than $100 billion, and hundreds of people were convicted of fraud.
This was the first example of what came to be known as the “Greenspan put”—the idea that if trouble occurred in the markets, the Fed would come to their rescue. Greenspan cut interest rates sharply in 1998 following the Russian crisis and in 2001 following the collapse of the Internet bubble, each time helping to cushion the impact of the downturn and arguably pumping up the next bubble.
The fourth money machine of modern finance—after high-yield debt, securitization, and arbitrage trading—was the modern derivatives market.
As a result, in 2004–2006, as subprime lending reached its peak in both volume and innovation, Fannie and Freddie were pushed out of large parts of the market, because the loans being made violated their underwriting standards and because the Wall Street banks were so eager to get their hands on those loans.
With low interest rates, banks could raise money from depositors virtually for free; they could borrow cheaply from each other; they could borrow cheaply at the Fed’s discount window; they could sell bonds at low interest rates because of FDIC debt guarantees; they could swap their asset-backed securities for cash with the Fed; they could sell their mortgages to Fannie and Freddie, which could in turn sell debt to the Fed; and on and on.
They did not take harsh measures to shut down or clean up sick banks. They did not cut major financial institutions off from the public dole. They did not touch the channels of political influence that the banks had used so adeptly to secure decades of deregulatory policies. They did not force out a single CEO of a major commercial or investment bank, despite the fact that most of them were deeply implicated in the misjudgments that nearly brought them to catastrophe.
This is how capitalism is supposed to work. Failure should be punished, not rewarded. The government should be the backstop protecting society against a financial collapse, but it should exact a price for that protection.
The end of “too big to fail” will reduce large banks’ funding advantage, forcing them to compete on the basis of products, price, and service rather than implicit government subsidies.
May 5, 2010
Before opening the book I knew what I was getting into. The two authors were guests on Bill Moyers and I chalked up their more blatant biases as deference to Moyers. It was unlikely that I would find a fair account of the financial crisis, but I hoped to obtain a clear understanding for the reasons why most of the blame should be placed on Wall Street. I did obtain a clear understanding of the thought processes of the authors, but they were not clear or honest when supporting their beliefs about the cause of the crisis.
This book was a real disappointment. The praises for this book are entirely unfounded. The authors’ biases are apparent in the words they use to describe Wall Street and any controversial or contentious issue they disagree with. It’s an emotional, ideological book, not a thorough analysis of what happened to cause the blow up. Even when I agree with what they are saying, I understand there is another point of view they are purposely avoiding. It was ideological throughout and often partisan. I don’t mind that, but the blinders they put on in order to make their case stronger made it appear they were writing a book to propagandize, not to educate.
At the very beginning of the book, the recession of the early 20’s was entirely ignored because it didn’t fit into their historical narrative of the early 20th century. They could have explained quickly why it was irrelevant, but it would have complicated the points they were arguing. It quickly became apparent that the authors were looking to simplify things in order to validate their beliefs.
The recession in the 20’s was just one of many instances of bias. Their attitude about the need for the bailouts was a more significantly biased position. In one sentence early in the book they claimed the bailouts were necessary. But this is debatable, even if reasons against the bailout are not as strong as reasons for the bailout. Like I said earlier, this is how they handle all contentious issues, treating them as if they are not contentious.
Not surprisingly, Fannie Mae and Freddie Mac were mentioned in passing. To get a full understanding of their views on Fannie and Freddie, just read page 144-146. That will cover almost 100% of their writing about how Fannie and Freddie are irrelevant. It wasn’t at all convincing, especially considering how costly these two bailouts have become.
The bailout of AIG benefited Goldman Sachs more than any other company; at least that is what you will be led to believe. I only happened to be listening to a podcast about AGI the same day I read this passage in the book. On the podcast I learned that it was a foreign French bank that was the greatest beneficiary. Again, it doesn’t seem like a big deal, but I have to wonder why they feel a need to misinform the reader throughout the book.
Although I could see the general tone was biased, and I could catch about a dozen brazen attempts to mislead, I still have to wonder what I didn’t catch. They lost more credibility by what was in their book than what they said on Bill Moyers. When I was about halfway through the book I saw Johnson on CSPAN. His feigned non-partisan, non-ideological attitude was beyond the pale since he didn’t even try to hide it during the talk.
The authors are Keynesians, which any reader will surmise after reading their book or listening to either author for 10 or 15 minutes. This isn’t bad, and shouldn’t be used to undermine their opinions on the financial crisis, but their unqualified praise of the 870 billion dollar stimulus is even a little extreme for a modern day Keynesian. Readers should also know they evaluate the problem from a Keynesian perspective; something that was out of fashion with most economists just a short time ago.
If you have read this far you probably think I disagree with almost all of what they said. That isn’t true. I have tentatively come to the conclusion that a takeover would have been better than an unqualified bailout, but I can’t be sure because I can’t be sure they fairly presented the evidence and the data. I am only sure they presented the evidence and the data that supported their position. More important, they did not convince me that the failure of these firms would have been disastrous. I still think failure may have been a feasible alternative. Their matter of fact, facile statement that bankruptcy of these firms would have caused a depression was unconvincing. I also don’t buy the trite phrase that the left and in this book continue to espouse, that this is the worst economic crisis since the Great Depression. This too is debatable. Double digit unemployment and inflation in the 70’s was a big deal comparably worse than our current situation. How easy we forget. I think the authors’ amnesia is understandable considering their professed love of Keynesians who remain mystified over the 70’s.
This brings me to the last chapter, probably the best in the book, in which they prescribe solutions going forward. Essentially they agree with Alan Greenspan, “Too big to fail is too big”. They propose breaking up the largest six banks and investment firms. They provide reasons this needs to be done and why their solution is the only viable solution. Reinstating Glass-Steagall, as expected, is their first step. I’ve covered the controversy of Glass-Steagall in an earlier post, describing counter arguments the authors failed to bring up. They should forgive anyone that has made it to this point in the book feeling a little skeptical of their plans, considering how unwilling they have been to see all sides in the arguments they made in previous chapters. At least they address some objections, including the fear that there would be unintended consequences to their plans.
I finished the last chapter thinking of Adam Smith’s man of system. The authors are paradigm examples of the conceit mentioned by Smith. I guess doing nothing is also indirectly being a man of system, but that is the dilemma facing anyone who thinks private firms should not be allowed to fail. By conceding there was no choice but to bail these companies out, the authors are left with only bad choices. It is hard to judge whether their solutions are any better than the alternatives they mentioned; you would have to be a man of system to make these judgments.
One aspect of their grand scheme can be judged; the omission of any reforms of Freddie and Fannie. After over 100 billion in bailout money and putting the taxpayers on the hook for 8.1 trillion in debt, it is laughable that they were not even mentioned in the solutions chapter. Of course, since they are essentially government agencies now (conveniently off budget), the authors’ ideological position seems to be that we shouldn’t have to worry about them. However, they made a special effort to spend a lot of the chapter on the side issue regarding a consumer protection agency. What they decide to address in the solutions chapter should tell you a lot about the whole book.
I would suggest that anyone trying to understand the financial crisis listen to Johnson and Kwak, but only when they are being challenged by experts with another point of view. They may then provide good arguments and valid evidence to support their case. Don’t expect to get a fair analysis from this pair outside of a debate format. Their book is about as fair and balanced as Fox News.
This book was a real disappointment. The praises for this book are entirely unfounded. The authors’ biases are apparent in the words they use to describe Wall Street and any controversial or contentious issue they disagree with. It’s an emotional, ideological book, not a thorough analysis of what happened to cause the blow up. Even when I agree with what they are saying, I understand there is another point of view they are purposely avoiding. It was ideological throughout and often partisan. I don’t mind that, but the blinders they put on in order to make their case stronger made it appear they were writing a book to propagandize, not to educate.
At the very beginning of the book, the recession of the early 20’s was entirely ignored because it didn’t fit into their historical narrative of the early 20th century. They could have explained quickly why it was irrelevant, but it would have complicated the points they were arguing. It quickly became apparent that the authors were looking to simplify things in order to validate their beliefs.
The recession in the 20’s was just one of many instances of bias. Their attitude about the need for the bailouts was a more significantly biased position. In one sentence early in the book they claimed the bailouts were necessary. But this is debatable, even if reasons against the bailout are not as strong as reasons for the bailout. Like I said earlier, this is how they handle all contentious issues, treating them as if they are not contentious.
Not surprisingly, Fannie Mae and Freddie Mac were mentioned in passing. To get a full understanding of their views on Fannie and Freddie, just read page 144-146. That will cover almost 100% of their writing about how Fannie and Freddie are irrelevant. It wasn’t at all convincing, especially considering how costly these two bailouts have become.
The bailout of AIG benefited Goldman Sachs more than any other company; at least that is what you will be led to believe. I only happened to be listening to a podcast about AGI the same day I read this passage in the book. On the podcast I learned that it was a foreign French bank that was the greatest beneficiary. Again, it doesn’t seem like a big deal, but I have to wonder why they feel a need to misinform the reader throughout the book.
Although I could see the general tone was biased, and I could catch about a dozen brazen attempts to mislead, I still have to wonder what I didn’t catch. They lost more credibility by what was in their book than what they said on Bill Moyers. When I was about halfway through the book I saw Johnson on CSPAN. His feigned non-partisan, non-ideological attitude was beyond the pale since he didn’t even try to hide it during the talk.
The authors are Keynesians, which any reader will surmise after reading their book or listening to either author for 10 or 15 minutes. This isn’t bad, and shouldn’t be used to undermine their opinions on the financial crisis, but their unqualified praise of the 870 billion dollar stimulus is even a little extreme for a modern day Keynesian. Readers should also know they evaluate the problem from a Keynesian perspective; something that was out of fashion with most economists just a short time ago.
If you have read this far you probably think I disagree with almost all of what they said. That isn’t true. I have tentatively come to the conclusion that a takeover would have been better than an unqualified bailout, but I can’t be sure because I can’t be sure they fairly presented the evidence and the data. I am only sure they presented the evidence and the data that supported their position. More important, they did not convince me that the failure of these firms would have been disastrous. I still think failure may have been a feasible alternative. Their matter of fact, facile statement that bankruptcy of these firms would have caused a depression was unconvincing. I also don’t buy the trite phrase that the left and in this book continue to espouse, that this is the worst economic crisis since the Great Depression. This too is debatable. Double digit unemployment and inflation in the 70’s was a big deal comparably worse than our current situation. How easy we forget. I think the authors’ amnesia is understandable considering their professed love of Keynesians who remain mystified over the 70’s.
This brings me to the last chapter, probably the best in the book, in which they prescribe solutions going forward. Essentially they agree with Alan Greenspan, “Too big to fail is too big”. They propose breaking up the largest six banks and investment firms. They provide reasons this needs to be done and why their solution is the only viable solution. Reinstating Glass-Steagall, as expected, is their first step. I’ve covered the controversy of Glass-Steagall in an earlier post, describing counter arguments the authors failed to bring up. They should forgive anyone that has made it to this point in the book feeling a little skeptical of their plans, considering how unwilling they have been to see all sides in the arguments they made in previous chapters. At least they address some objections, including the fear that there would be unintended consequences to their plans.
I finished the last chapter thinking of Adam Smith’s man of system. The authors are paradigm examples of the conceit mentioned by Smith. I guess doing nothing is also indirectly being a man of system, but that is the dilemma facing anyone who thinks private firms should not be allowed to fail. By conceding there was no choice but to bail these companies out, the authors are left with only bad choices. It is hard to judge whether their solutions are any better than the alternatives they mentioned; you would have to be a man of system to make these judgments.
One aspect of their grand scheme can be judged; the omission of any reforms of Freddie and Fannie. After over 100 billion in bailout money and putting the taxpayers on the hook for 8.1 trillion in debt, it is laughable that they were not even mentioned in the solutions chapter. Of course, since they are essentially government agencies now (conveniently off budget), the authors’ ideological position seems to be that we shouldn’t have to worry about them. However, they made a special effort to spend a lot of the chapter on the side issue regarding a consumer protection agency. What they decide to address in the solutions chapter should tell you a lot about the whole book.
I would suggest that anyone trying to understand the financial crisis listen to Johnson and Kwak, but only when they are being challenged by experts with another point of view. They may then provide good arguments and valid evidence to support their case. Don’t expect to get a fair analysis from this pair outside of a debate format. Their book is about as fair and balanced as Fox News.
September 7, 2022
Before you decide to start reading this title, remember the following.
1) The title is quite misleading. The book is about the formation of major six megabanks after the financial crisis of year 2008. I think by giving the title as 13 BANKERS, the author is enjoying triskaidekaphobia of possible readers.
2) Instead of "clearly and emphatically" going through the officials of these six megabanks, the author is relying on the facts which is generally available to the public. (May be the author is fearing of possible lawsuits.)
3) This book is a treatise on the philosophy of economics of the finance crisis of 2008. As such book is not meant for absolute laymen. It is only meant for banking professionals as well as academics concentrating on banking industry.
4) Instead of reading this book, the finance market students should better watch motion pictures "Too Big to Fail" and "The Big Short".
(End)
1) The title is quite misleading. The book is about the formation of major six megabanks after the financial crisis of year 2008. I think by giving the title as 13 BANKERS, the author is enjoying triskaidekaphobia of possible readers.
2) Instead of "clearly and emphatically" going through the officials of these six megabanks, the author is relying on the facts which is generally available to the public. (May be the author is fearing of possible lawsuits.)
3) This book is a treatise on the philosophy of economics of the finance crisis of 2008. As such book is not meant for absolute laymen. It is only meant for banking professionals as well as academics concentrating on banking industry.
4) Instead of reading this book, the finance market students should better watch motion pictures "Too Big to Fail" and "The Big Short".
(End)
March 26, 2015
Published in 2010 by Simon Johnson and James Kwak, this book describes the alleged takeover of the U.S. financial industry, the regulatory institutions tasked with supervising it and the political system supposed to elect independent legislators by a small group of megabanks. It is to this financial oligarchy, which has become even more concentrated (Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, Wells Fargo, and J.P. Morgan Chase, I'm looking at you) since the 2007-08 financial crisis, that the book's title refers to.
However, the status quo did not develop over night. Instead, the authors spend a large part of the book narrating the rise of present-day American megabanks, starting from the inception of American banking, its opposition by Thomas Jefferson (as well as support by Alexander Hamilton), the emergence of the States' first financial aristocracy in the early 19th century and its circumcision by both Roosevelts roughly one century later. Indeed, one would not stray too far from the truth if reading the book as a history of the United States' quest for balance between the necessity of a large financial system for its economy and the risk of regulatory capture if banks grow too influential.
They then follow up with an analysis of financial crises in developing countries, where oligarchies with close ties to the political caste are a major source of moral hazard, and the remedies typically prescribed in the case of such crises by Western international economic bodies such as the IMF. Later on, contrasting the response of American policy-makers face to the United States' own financial crisis and their prior recommendations to foreign countries becomes the authors' favorite pastime.
Turning back to the history of the States' financial system itself, the authors document the rise of Wall Street from the late 1970s on, propulsed by the 'greed is good' mantra and ever-increasing profits (and risks). Therein they illustrate the shift from a political climate wary of banks' power to one enamored with deregulation, notably ending the Glass-Steagall Act, a legacy of the Great Depression era's quest for a stable financial system. In particular, this shift is exemplified by the promotion of the authors' favorite target, the libertarian Alan Greenspan, to the leadership of the Fed, one of the most important regulatory institutions of finance.
The book next moves to the 2000s and explains how a combination of reckless financial innovation, unfethered deregulation by institutions well-entrenched in the financial oligarchy's machinery and an economic environment feverish for housing resulted in nearly a decade of sky-high profits, primarily centered on the common assumption that housing prices were bound to rise indefinitely (or at least long enough to make a killing as investor). Knowing that the government would not let them fail due to their importance for the overall financial system - the "too big to fail" creed - banks were incentivized to take up gigantic risks masked by complex financial products or overlooked by benevolent regulators and expanding through the acquisition of already large competitors. The aggregate of these factors then resulted in the largest banking crisis and deepest recession since 1929.
Finally, the authors' concluding policy recommendations are straightforward: (1) Amelioration of consumer protection in the financial services industry and (2) breaking up any bank that is too big to fail as well as limiting their size depending on the risk associated with their economic activities. The latter policy is based on the authors' skepticism regarding the feasibility and effectiveness of the 'better regulation' approach, especially in light of the complexity of finance and the subversion of many regulatory agencies by people with an overly favorable view of finance, often coming from the industry themselves.
Now to some generalities:
- The authors deserve much praise for explaining many of the finance world's complex technicalities in a comprehensible manner without undue oversimplification. You don't need a business or economics degree to understand this book (although a healthy dose of common knowledge about finance and politics won't hurt).
- The book is short (222 pages of narrative), yet detailed. It contains numerous quotes and descriptions of the general setting in which the book's narrative takes place, making it very readable.
- The book finishes with 50 pages of comprehensive endnotes, providing sources and elaborating on the books' more specific points. Honestly, this is a blessing to anybody who cares about the quality of research and wishes to use the book's sources to trace back its conclusions - I wish more non-fiction books would do so. Ample suggestions for further lecture on topics concerning the financial crisis are available for hungry bookworms at the book's end.
- The book takes a very U.S.-centric view, with foreign banks' role being confined to the sidelines. This book provides an interesting account of how the financial crisis came to be in the States and how it has been dealt with (up to 2010) in the States. It does not look too much at the financial crisis spillover onto financial systems outside North America, though one can hardly fault it for that.
- Last, the book devotes preciously little space to one part of its title, namely the 'Next Financial Meltdown'. The authors speculate in that direction and advance plausible arguments why - if financial reform is neglected - it might come about, but remain generally wobbly with respect to its timing, scope, scale and consequences.
Overall, I really liked this book and consider it a very useful read for anybody interested in the origins of the 2007-08 financial crisis and how it could be dealt with from a U.S. perspective. Cheers!
However, the status quo did not develop over night. Instead, the authors spend a large part of the book narrating the rise of present-day American megabanks, starting from the inception of American banking, its opposition by Thomas Jefferson (as well as support by Alexander Hamilton), the emergence of the States' first financial aristocracy in the early 19th century and its circumcision by both Roosevelts roughly one century later. Indeed, one would not stray too far from the truth if reading the book as a history of the United States' quest for balance between the necessity of a large financial system for its economy and the risk of regulatory capture if banks grow too influential.
They then follow up with an analysis of financial crises in developing countries, where oligarchies with close ties to the political caste are a major source of moral hazard, and the remedies typically prescribed in the case of such crises by Western international economic bodies such as the IMF. Later on, contrasting the response of American policy-makers face to the United States' own financial crisis and their prior recommendations to foreign countries becomes the authors' favorite pastime.
Turning back to the history of the States' financial system itself, the authors document the rise of Wall Street from the late 1970s on, propulsed by the 'greed is good' mantra and ever-increasing profits (and risks). Therein they illustrate the shift from a political climate wary of banks' power to one enamored with deregulation, notably ending the Glass-Steagall Act, a legacy of the Great Depression era's quest for a stable financial system. In particular, this shift is exemplified by the promotion of the authors' favorite target, the libertarian Alan Greenspan, to the leadership of the Fed, one of the most important regulatory institutions of finance.
The book next moves to the 2000s and explains how a combination of reckless financial innovation, unfethered deregulation by institutions well-entrenched in the financial oligarchy's machinery and an economic environment feverish for housing resulted in nearly a decade of sky-high profits, primarily centered on the common assumption that housing prices were bound to rise indefinitely (or at least long enough to make a killing as investor). Knowing that the government would not let them fail due to their importance for the overall financial system - the "too big to fail" creed - banks were incentivized to take up gigantic risks masked by complex financial products or overlooked by benevolent regulators and expanding through the acquisition of already large competitors. The aggregate of these factors then resulted in the largest banking crisis and deepest recession since 1929.
Finally, the authors' concluding policy recommendations are straightforward: (1) Amelioration of consumer protection in the financial services industry and (2) breaking up any bank that is too big to fail as well as limiting their size depending on the risk associated with their economic activities. The latter policy is based on the authors' skepticism regarding the feasibility and effectiveness of the 'better regulation' approach, especially in light of the complexity of finance and the subversion of many regulatory agencies by people with an overly favorable view of finance, often coming from the industry themselves.
Now to some generalities:
- The authors deserve much praise for explaining many of the finance world's complex technicalities in a comprehensible manner without undue oversimplification. You don't need a business or economics degree to understand this book (although a healthy dose of common knowledge about finance and politics won't hurt).
- The book is short (222 pages of narrative), yet detailed. It contains numerous quotes and descriptions of the general setting in which the book's narrative takes place, making it very readable.
- The book finishes with 50 pages of comprehensive endnotes, providing sources and elaborating on the books' more specific points. Honestly, this is a blessing to anybody who cares about the quality of research and wishes to use the book's sources to trace back its conclusions - I wish more non-fiction books would do so. Ample suggestions for further lecture on topics concerning the financial crisis are available for hungry bookworms at the book's end.
- The book takes a very U.S.-centric view, with foreign banks' role being confined to the sidelines. This book provides an interesting account of how the financial crisis came to be in the States and how it has been dealt with (up to 2010) in the States. It does not look too much at the financial crisis spillover onto financial systems outside North America, though one can hardly fault it for that.
- Last, the book devotes preciously little space to one part of its title, namely the 'Next Financial Meltdown'. The authors speculate in that direction and advance plausible arguments why - if financial reform is neglected - it might come about, but remain generally wobbly with respect to its timing, scope, scale and consequences.
Overall, I really liked this book and consider it a very useful read for anybody interested in the origins of the 2007-08 financial crisis and how it could be dealt with from a U.S. perspective. Cheers!
October 29, 2017
If you want to know about the crash of 2007 then this book is fantastic it helped that i read paper promises before this as this book is more in depth. Not only is its explanation facinating and eye opening as to some very questionable if not profit making schemes, but its also provides some ideas of avoiding the next crash but as this deals with the usa they will not do the things and the revolving doors between government and wall street will continue.
I will read a book that concentrates on the uk written by mervyn king ex head of the bank of england soon to get a differing view, but economics is awesome.
The next crash will be worse without strong regulations and a cap on the size of banks plus re enacting the separation of commercial and investment banking that they put in place after the last crash 1929 but removed in 71. Read this book.
I will read a book that concentrates on the uk written by mervyn king ex head of the bank of england soon to get a differing view, but economics is awesome.
The next crash will be worse without strong regulations and a cap on the size of banks plus re enacting the separation of commercial and investment banking that they put in place after the last crash 1929 but removed in 71. Read this book.
Displaying 1 - 30 of 213 reviews