Leo Jacobowitz's Reviews > 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

13 Bankers by Simon Johnson
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Nov 04, 2011

really liked it
Read in July, 2010

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.
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