Everything this Book Predicted on Wall Street Megabanks Ruling their Regulators Is Now Unfolding

 

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Everything this Book Predicted on Wall Street Megabanks Ruling their Regulators Is Now Unfolding

By Pam Martens and Russ Martens: September 16, 2024 ~

It is rare for a book to be so comprehensive and insightful that it provides a roadmap for the future – especially when its cast of characters are the lawyered-up megabanks on Wall Street and their legions of lobbyists and public relations flacks. We’re referring to Taming the Megabanks: Why We Need a New Glass-Steagall Act by Arthur E. Wilmarth, Professor Emeritus of Law at George Washington University.

Last Tuesday, the Federal Reserve completely capitulated to the demands of the Wall Street megabanks on its plan to dramatically raise capital levels at the megabanks — the so-called Basel III Endgame. The Fed, via its Vice Chair for Supervision, Michael Barr, announced it was cutting the required capital it had formally proposed in July of 2023 by more than half and will continue to allow the megabanks to use their own dodgy internal models to assess market risk.

How did the megabanks achieve such a quick victory on such a critical matter? They threatened to tie the Fed up in court for years and hired a Big Law operative to drive home the point.

Wilmarth’s book presciently saw that occurring – because the megabanks have been gaming and bucking and beating meaningful financial reform since President Obama signed into law the easily manipulated Dodd-Frank financial reform legislation in 2010.

Chapter 12 in Taming the Megabanks is titled “Unfinished Business.” It walks readers through each of the much-touted financial reforms that Obama’s minions told the American people they could count on following the worst megabank-induced financial crisis since the Great Depression. But many of Dodd-Frank’s promised key reforms never happened, as Wilmarth details by naming names and pulling back layers of dark curtains.

Instead of Dodd-Frank’s Volcker Rule ending the megabanks’ ability to bet the house via hedge funds, the rule was stonewalled for years, then ignored, then it essentially disappeared. As we reported earlier this month, the U.S. Treasury’s Office of Financial Research (OFR) revealed that as of March 31, 2024, Global Systemically Important Banks in the U.S. (G-SIBs/megabanks) had loaned out $2.348 trillion to hedge funds. Foreign Global Systemically Important Banks had loaned out another $1.628 trillion to hedge funds; and “Other Lenders” had loaned out an additional $566 billion to hedge funds. That brought the total of margin loans to just hedge funds on March 31, 2024 to a total of $4.542 trillion. (Put your cursor on the graph lines here.)

And remember all that talk about the push-out rule for derivatives? That illusion bit the dust in 2014, thanks to Citigroup and two former cronies in Congress. As of December 31, 2023, Goldman Sachs Bank USA, JPMorgan Chase Bank N.A., Citigroup’s Citibank and Bank of America held a staggering total of $168.26 trillion in derivatives out of a total of $192.46 trillion at all federally-insured U.S. banks, savings associations and trust companies. That’s just four banks holding 87 percent of all derivatives at all 4,587 federally-insured financial institutions in the U.S. that existed as of December 31, 2023. This data comes from the quarterly report at the Office of the Comptroller of the Currency (OCC), another of the federal regulators that says it’s going along with the Fed’s plan to scale back capital requirements at the megabanks.

In response to our query last week as to whether the OCC was on board with the Fed’s scaled back capital requirements, the OCC gave us this statement from Acting Comptroller Michael Hsu:

“The changes outlined by Vice Chair Barr reflect the work the three agencies undertook together. To ensure that the capital requirements for the nation’s largest banks are modernized and strengthened, I am committed to working with my peers on next steps to drive the Basel 3 endgame to closure.”

The FDIC is the third federal agency involved in setting the capital levels for the megabanks. It gave us this statement last week from FDIC Chair Martin Gruenberg:

“The Federal Reserve, OCC, and the FDIC have worked cooperatively on the Basel III proposal, including the changes outlined in Vice Chairman Barr’s remarks. I look forward to the agencies working together to bring Basel III to a conclusion that will strengthen bank capital and bolster financial system resilience and stability.”

In July, Wilmarth revealed the illusory nature of yet another promised reform from Dodd-Frank in an opinion piece at the American Banker (paywall) titled: “The FDIC’s resolution plan for failed megabanks is an empty promise.”

Wilmarth explains in the American Banker piece that one of Dodd-Frank’s primary goals was to prevent taxpayers from having to rescue megabanks, as occurred in 2008. A key component of that goal is Title II of Dodd-Frank, which provides an Orderly Resolution Plan to unwind failing megabanks without the need for taxpayer or Federal Reserve bailouts. That Plan, in turn, requires a giant pool of instantly available cash, which Dodd-Frank calls the Orderly Liquidation Fund or OLF. Shockingly, Wilmarth reveals that there hasn’t been a dime in the OLF since its creation in 2010. Wilmarth explains:

“…the FDIC’s sole source of funding for a Title II receivership is the Orderly Liquidation Fund, or OLF, which the Treasury administers. When Congress passed the Dodd-Frank Act, the big-bank lobby defeated proposals that would have required megabanks to pay risk-based premiums to prefund the OLF. As a result, the OLF has a zero balance. The FDIC must therefore borrow from the Treasury to pay the costs of a Title II receivership that cannot be covered by wiping out the holding company’s shareholders and debt-holders.”

Wilmarth correctly concludes in Taming the Megabanks that there is only one way to protect the U.S. economy and the financial stability of the nation’s banking system and that is to break up the megabanks by restoring the Glass-Steagall Act, which would separate Wall Street’s global trading houses from federally-insured banks. Otherwise, the megabanks will continue to dictate government policy, regulate their own regulators, and set the stage for the next destabilizing Wall Street and banking collapse.

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After JPMorgan Threatens to Sue, the Fed Cuts Its Capital Requirement on the 5-Count Felon from a Planned 25 Percent Hike to Less than 8 Percent

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After JPMorgan Threatens to Sue, the Fed Cuts Its Capital Requirement on the 5-Count Felon from a Planned 25 Percent Hike to Less than 8 Percent

By Pam Martens and Russ Martens: September 4, 2024 ~

It appears that Senator Elizabeth Warren was spot on in her assessment of the lack of a backbone for Federal Reserve Chairman Jerome Powell when it comes to raising capital requirements on the powerful megabanks on Wall Street. At a March 7 Senate Banking Committee hearing in which Powell was appearing as a witness, Warren said this:

“Despite all you said last year when the banks failed [in the spring banking crisis of 2023] about supporting Vice Chair Barr’s recommendations to strengthen rules for big banks, public reporting now says that you are driving efforts inside the Fed to weaken the capital rule. You even told the House Financial Services Committee representatives yesterday that you think it’s ‘very plausible’ that you withdraw the rule.”

The capital rule that Senator Warren is referring to was proposed more than a year ago by federal banking agencies but has yet to be enacted. It is formally known as the Basel III (or Basel Endgame) rule. Jamie Dimon, the Chairman and CEO of JPMorgan Chase, has been leading the charge to stop federal bank regulators from implementing the rule. (See Jamie Dimon Hires Dodd-Frank Hatchet Man to Weigh Suing the Fed Over Proposed Capital Rules.)

Warren concluded her comments to Powell at the March hearing with this:

“You are the leader of the Fed and when the heat was on last year, you talked a lot about getting tougher on the banks. But now the giant banks are unhappy about that and you’ve gone weak-kneed on this. The American people need a leader at the Fed who has the courage to stand up to these banks and protect our financial system.”

Dimon is aggressively fighting the rule change most likely because higher capital requirements could restrict the bank’s ability to prop up its share price with multi-billion-dollar stock buybacks each year, increase its dividend to appease its shareholders that this multi-felon bank is on the right course and lavish multi-million dollar bonuses on Dimon.

Powell has now demonstrated Senator Warren’s ability to correctly read the tea leaves. Quietly, at 5 p.m. last Wednesday, before the long Labor Day weekend, the Fed released its new capital requirements for the megabanks that will become effective on October 1, 2024.

We know that federal banking regulators had originally planned to increase JPMorgan Chase’s capital by 25 percent because Dimon stated that fact in his April letter to shareholders, writing that if the capital rules proposed by the FDIC, Office of the Comptroller of the Currency and the Federal Reserve are implemented, they “would increase our firm’s required capital by 25%.”

But instead of 25 percent, the Fed raised JPMorgan Chase’s capital requirement by just 7.89 percent from the 2023 level, taking it from a total capital requirement of 11.4 in 2023 to just 12.3 in 2024. Had the 25 percent increase been imposed, JPMorgan Chase’s capital requirement would have totaled 14.25.

JPMorgan Chase is the largest U.S. bank and has for years been ranked by its regulators as – by far – the riskiest bank in the United States. The U.S. Treasury’s Office of Financial Research, which was created under the Dodd-Frank financial reform legislation of 2010 to provide federal regulators with up-to-date research on threats to financial stability, has created a “Bank Systemic Risk Monitor” that provides an overall score to show the systemic risk a particular bank represents to U.S. financial stability. The current chart is shown in the graph at the top of this article. JPMorgan Chase’s score of 857 is 23 percent higher than the next riskiest bank on the list, Citigroup, which has a systemic risk score of 697. (Citigroup is the bank that blew itself up in the financial crash of 2008 and received over $2.5 trillion in secret revolving loans from the Fed from December 2007 through July of 2010 according to the eventual audit released by the Government Accountability Office.)

But of particular note, JPMorgan Chase’s score is twice that of Deutsche Bank USA (DB USA), which has a systemic risk score of 422. And yet, here is what the Fed did last Wednesday. It raised Deutsche Bank USA’s capital requirement from 13.8 in 2023 to 18.4 currently – an increase of a whopping 33 percent versus an increase of 7.89 percent for JPMorgan Chase.

Jamie Dimon has been personally making the rounds in Washington in an effort to stop the implementation of the proposed capital rules. Internal government documents show that Dimon and his Chief of Staff, Judith Miller, met separately with the following Fed Governors on December 15 of last year: Fed Governor Adriana Kugler; Fed Vice Chair Philip Jefferson; and Fed Governor Christopher Waller.

Financial Times reporters Joshua Franklin and James Politi reported that in mid March, Dimon met in a one-on-one meeting with Vice President Kamala Harris and separately with President Biden’s Chief of Staff, Jeff Zients.

In a July 2 letter to Powell, Senator Warren described a “culture of corruption” that has taken root at the Fed since Powell became Chair. Among numerous issues, Warren cited the following:

“I am particularly concerned about reports that you have met or had private conversations with Jamie Dimon, the CEO of JPMorgan Chase, at least 19 times since becoming Chair of the Federal Reserve in February 2018. You have also reportedly met ten times with BlackRock CEO Larry Fink, seven times with Goldman Sachs CEO David Solomon, and at least nine times with the heads of other major banks. This is an astonishing amount of your time to give to the CEOs of the nation’s largest banks and financial firms.”

In addition to Warren, the watchdog group, Better Markets, has pushed back hard on the lies and fictions that the Wall Street megabanks are spreading in hopes of killing the more stringent capital rules. The YouTube video below features Better Markets’ Director of Banking Policy, Shayna Olesiuk, addressing those misleading claims.

WALL STREET ON PARADE