Chris Whalen: The Fallacy of “Too Big To Fail”–Why the Big Banks Will Eventually Break Up

Jim Puplava is Author & Host of Financial Sense & Financial Sense Newshour providing weekly broadcasts and writing thought-provoking commentary for Financial Sense Online in addition to interviews with top financial thinkers.
In a riveting interview on the banking industry, Christopher Whalen of Tangent Capital Partners in New York joins Jim on Financial Sense Newshour to discuss the fallacy of “too big to fail,” conflicts of interest in the derivatives markets, problems with the 2005 bankruptcy laws, and political failures, policies and programs.

Chris Whalen elaborates on the present economic situation and why we are not seeing the changes Americans expect.  

Nearly every foreclosure defense attorney has been has been asked and challenged with the question, “why did this happen to our economy?”  Most homeowners, whether in foreclosure or not, are clueless as to why the economy is still failing and why foreclosures have not been stopped by some form of government intervention.

Chris Whalen doesn’t mince words about the big banks. “We don’t need to have these behemoths. It’s just a total fallacy,” said Mr. Whalen, a financial analyst who has spent the last eight years evaluating the industry giants, like Citigroup, Bank of America and JPMorgan Chase. “The big guys are going to break up.” The audio interview runs for 24:22…and there’s also a transcript if you wish to read it, instead of listen.

Click here for interview:
Financial Sense Interview with Christopher Whalen

 Interview highlights:

Jim Puplava asks Chris, “you’ve been a critic of the too-big-to-fail fallacy. In your opinion, you think the big guys are going to break up. Why do you believe that to be the case?”

Chris replies, “…the big banks are under an enormous amount of pressure. First off, Fed interest rates; it’s destroying the economics of the business.”

Chris continues: “Think about JP Morgan. Here you have a bank that’s a dominant lender, so they actually know when your company is going to go bankrupt. They may even be arranging DIP financing. They’re also trading credit default swaps on the other side. I mean isn’t this is an anti-trust problem? Isn’t this a conflict of interest? Of course it is. And yet nobody ever thinks of it this way because the large banks are seen as sacrosanct, all the payment flows go through them every day — mortgage payments, tax payments, everything else — and the Fed says, Oh, mio my, we can’t break them up. Yes we can.

If I was appointed trustee at Bank of America to restructure the litigation liabilities that are killing that bank, I would have no problem selling five, six institutions in IPOs and raising a lot of money and then we would have five more banks about the size of US Bancorp. I think that would be very good for the economy. So you can break these things up, but in an economic way that’s not going to scare the public; you have to communicate effectively obviously. But I think the economics of these big banks, it no longer works….”

The interview continues and Chris pulls no punches about what is the cause of this lingering economic disaster… “Barack Obama dropped the ball. It’s very simple.”

JIM: “What was amazing to me, Chris, is in the ’91 S&L crisis, there were a lot of white-collar crimes; a lot of individuals went to jail over that scandal. We recently talked to William Black and he said as a result of the 2007-2008 crisis, nobody has gone to jail. In the case of MF Global, there have been no allegations — or at least nobody is being held under criminal charges. Has that surprised you that $1.6 billion disappears and everybody pleads ignorance in terms of where it went?” [16:17]

CHRIS: “Well, no. This is Barack Obama. Look, Barack Obama is bought and sold by the big banks. He could have brought a variety of claims against people who use deception in a securities transaction. It’s illegal; it’s a violation of most state laws and it’s a violation of the uniform securities act. But nobody has brought the claim. He’s waited long enough now that the statute of limitations has run on most of these claims. So this is really Barack Obama. I mean if Mitt Romney has his act together, he should crucify Obama over letting the bankers get away.

See, what judges don’t understand, especially at the federal and appellate level is that the fraud in the US today is just as bad as it was in the 20s. And when Louis Brandeis came down with his great decision in 1925 in Benedict v. Ratner, he basically slammed the door shut for Wall Street. We couldn’t do structured securities deals for 25 years until they had the revision to the Uniform Commercial Code in the late 50s after World War II.

Unfortunately, the fraud today is at least as bad if not worse and because the politicians are, as I say, bought and sold by the big banks; that’s where they raise all their money. You know, Obama was just up here in New York raising money from the banks. He’s let them go. And I think it’s only when the public gets angry enough to start voting these people out of office and you start maybe seeing some attorneys general at the state level — like Eric Schneiderman, who may want to run for higher office — do the right thing and bring fraud claims maybe under New York state law (well, It would be better under New York law, in fact, it would be easier to prove), then you may start to see some justice. But you know, Barack Obama dropped the ball. It’s very simple.” [18:00]

The interview is another eyeopener. The clock is ticking on the statute of limitations and lawmakers have yet to apply enough regulation to the financial industry to adequately protect investors. Without regulation investors will not come back and the economy cannot mend. Politicians that are doing nothing to right the wrongs need to be held accountable and need not be returned to office.  Your vote counts – vote them out.

Mr. Whalen, 53, who recently wrote “Inflated: How Money and Debt Built the American Dream,” a book on the history of borrowing in America, has argued that the strongest banks are the ones without exposure to Wall Street. As he sees it, the biggest banks, facing potentially billions in losses as investors sue over mortgage bets gone bad, will need to be broken up.

Bank of America has been a frequent target. In his popular weekly newsletter, Mr. Whalen contends the bank has been permanently crippled by its exposure to troubled mortgage investments — and would be worth more in pieces. Investors, he has said, should agitate for a restructuring.

His affinity for smaller banks traces back to childhood. Growing up in Virginia, he regularly went with his father to First National Bank of Strasburg, a community lender, that Mr. Whalen likens to the bank in the film “It’s a Wonderful Life.” The head of the bank, with his desk on the main floor, was known to fix customers’ fishing reels as a hobby.

As early as February 2005, Mr. Whalen wrote that the growing trend of banks’ shifting risky loans off their books and into investments like collateralized debt obligations raised troubling questions about hidden vulnerabilities in the financial system. In March 2007, a year before mortgage bets felled Bear Stearns, Mr. Whalen said at a conference in Washington that subprime home loans posed a threat whose scope was “almost unknowable.”

A lot has changed in the last 50 years… all but the greedy Mr. Potters.

2 thoughts on “Chris Whalen: The Fallacy of “Too Big To Fail”–Why the Big Banks Will Eventually Break Up

  1. sorry to say but Chris is wrong…the TBTF care not about law as it applies to them, only how it applies to you or the competition, or profitability in the normal sense of the word…they only care about control…and what they have to do to maintain it…fraud is ok…obama didn’t drop the ball…he carried it into the end zone for them…just like they wanted…it seems like someone showed him the Zapruder film in Jan. 2009…about the time he STFU…

    they are very good at what they are doing…i actually believe it is their intention to take title to every piece of property on this planet and beyond…and they have made a giant step forward in doing so…

    they intend to use whatever means necessary to enforce the debt..the judicial system, and even the military if necessary…it was like “well went to all the trouble put out all this sub-prime debt, let’s not waste this opportunity!”…

    i don’t believe at this point any amount of peaceful discussion or illumination of the fraud is going to stop them…it will not end pretty…

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