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The Bill Daley Problem
The Baseline Scenario ^ | By Simon Johnson

Posted on 01/10/2011 5:52:45 AM PST by DeaconBenjamin

Bill Daley, President Obama’s newly appointed chief of staff, is an experienced business executive. By all accounts, he is decisive, well-organized, and a skilled negotiator. His appointment, combined with other elements of the White House reshuffle, provides insight into how the president understands our economy – and what is likely to happen over the next couple of years. This is a serious problem.

This is not a critique from the left or from the right. The Bill Daley Problem is completely bipartisan – it shows us the White House fails to understand that, at the heart of our economy, we have a huge time bomb.

Until this week, Bill Daley was on the top operating committee at JP Morgan Chase. His bank – along with the other largest U.S. banks – have far too little equity and far too much debt relative to that thin level of equity; this makes them highly dangerous from a social point of view. These banks have captured the hearts and minds of top regulators and most of the political class (across the spectrum), most recently with completely specious arguments about why banks cannot be compelled to operate more safely. Top bankers, like Mr. Daley’s former colleagues, are intent of becoming more global – despite the fact that (or perhaps because) we cannot handle the failure of massive global banks.

The system that led to the crisis of 2008, and the recession that has so severely damaged so many Americans, encouraged excessive risk-taking by major private sector financial institutions and, yes, Fannie Mae, Freddie Mac, and other Government Sponsored Enterprises (although these were most definitely not the major drivers of the crisis – see 13 Bankers).

Today’s most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. They are undoubtedly too big to fail – if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent. The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors. This lets them stay big and – amazingly – get bigger.

In the latest available data (Q3 of 2010), the big 6 had assets worth 64 percent of GDP. This is up from before the crisis – assets in the big six at the end of 2006 were only about 55 percent of GDP. And this is up massively from 1995, when these same banks (some of which had different names back then) were only 17 percent of GDP.

No one can show significant social benefits from the increase in bank size, leverage, and overall riskiness over the past 15 years. The social costs of these banks – and their complete capture of the regulatory apparatus – are apparent in the worst recession and slowest recovery since the 1930s.

Paul Volcker gets it; no wonder he has resigned. Mervyn King, governor of the Bank of England, gets it. Tom Hoenig, president of the Kansas City Fed, gets it. Elizabeth Warren, the tireless champion of consumer rights, gets it. Gene Fama, father of the efficient financial markets view, gets it better than anyone.

I discussed the issue in public for two hours at the American Financial Association (AFA) meetings in Denver on Friday with two presidents of the AFA (Raghu Rajan and John Cochrane) and a Nobel Prize winner (Myron Scholes). This is not a left-wing or marginal group – there must have been at least 500 people in the audience (video will be available). The top minds in academic finance understand the problem vividly and are articulate about it – there is no rebuttal to the points being made by Anat Admati and her distinguished colleagues.

This is not a left-right issue – again, look at the list of people who co-signed Professor Admati’s recent letter to the Financial Times. This is a question of technical competence. Do the people running the country – including both the executive branch and the legislature – understand economics and finance or not?

If the country’s most distinguished nuclear scientists told you, clearly and very publicly, that they now realize a leading reactor design is very dangerous, would you and your politicians stop to listen? Yet our political leadership brush aside concerns about the way big banks operate. Why?

Top bankers, including Bill Daley, have pulled off a complete snow job – including since the crisis broke in fall 2008. They have put forward their special interests while claiming to represent the general interest. Business and other groups, of course, do this all the time. But the difference here is the scale of the too big to subsidy – measured in terms of its likely future impact on our citizenship and our fiscal solvency, this will be devastating.

Most smart people in the nonfinancial world understand that the big banks have become profoundly damaging to the rest of the private sector. The idea that the president needed to bring a top banker into his inner circle in order to build bridges with business is beyond ludicrous.

Bill Daley now controls how information is presented to and decisions are made by the president. Daley’s former boss, Jamie Dimon, is the most dangerous banker in America – presumably he now gets even greater access to the Oval Office. Daley is on the record as opposing strong consumer protection for financial products; Elizabeth Warren faces an even steeper uphill battle. Important regulatory appointments, such as the succession to Sheila Bair at the FDIC, are less likely to go to sensible people. And in all our interactions with other countries, for example around the G20 but also on a bilateral basis, we will pursue the resolutely pro-big finance views of the second Clinton administration.

Top executives at big U.S. banks want to be left alone during relatively good times – allowed to take whatever excessive risks they want, to juice their return on equity through massive leverage, to thus boost their pay and enhance their status around the world. But at a moment of severe financial crisis, they also want someone in the White House who will whisper at just the right moment: “Mr. President, if you let this bank fail, it will trigger a worldwide financial panic and another Great Depression. This will be worse than what happened after Lehman Brothers failed.”

Let’s be honest. With the appointment of Bill Daley, the big banks have won completely this round of boom-bust-bailout. The risk inherent to our financial system is now higher than it was in the early/mid-2000s. We are set up for another illusory financial expansion and another debilitating crisis.

Bill Daley will get it done.

TOPICS: Business/Economy; Culture/Society; Government; News/Current Events

1 posted on 01/10/2011 5:52:46 AM PST by DeaconBenjamin
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To: DeaconBenjamin

Once again great leadership by the community organizer, nobama. Those who voted for the putz, nobama, should hang their heads in shame. Watch out America!

2 posted on 01/10/2011 6:00:30 AM PST by hal ogen (1st Amendment or Reeducation Camp?)
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To: DeaconBenjamin

The other problem is that he is a Daley, from one the of the most corrupt, thuggish, criminal political machines ever. I grew up in Chicago and I am sure glad to live in Texas now, even if it is the People’s Republic of Texas right now.

3 posted on 01/10/2011 6:00:50 AM PST by austingirl
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To: DeaconBenjamin

Let’s be honest. With the appointment of Bill Daley, the big banks have won.Well it looks as the fat cats turn out to be Obama’s pals.Unexpected /s

4 posted on 01/10/2011 6:03:46 AM PST by Vaduz
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To: All
Tapping Daley is just part of Ohaha's "No-Chicago-Sleazeballs-Left Behind initiative" (to paraphrase Malkin). Bill "Let's Count the Ballots Again in this Locked Room" Daley is the new Ohaha COS ......... Daley headed the Chicago Branch of The Daley Family Vote Mfg Division. The Daley family motto is "When We Fix Elections, They Stay Fixed."

NOTE During the 2008 Democratic presidential primaries, Daley was a prominent supporter of Barack Obama. On November 5, 2008, Daley was named to the advisory board of the Obama-Biden Transition Project.


MORE DALEY TIDBITS: Bill Daley (brother of Chi/Mayor Richard Daley), is former Commerce Secy under Clinton and long-time executive at Wall Street’s JP Morgan Chase.

REFERENCE Lehman's Bankruptcy Estate Sues J.P. Morgan
FR Posted May 26, 2010 by markomalley

Lehman's Bankruptcy Estate Sues JP Morgan Chase & Co., alleging that JP Morgan illegally siphoned billions of dollars from Lehman in the days before the investment bank filed the largest bankruptcy in US history.

The lawsuit, filed Wednesday in US Bankruptcy Court, New York, alleges that JP Morgan Chief Executive James Dimon and other top executives used inside knowledge to take advantage of Lehman as its financial state worsened.

JP Morgan coerced Lehman to turn over $8.6 billion in collateral in Sept 2008, triggering a liquidity squeeze that contributed to Lehman's collapse, the suit said. The estate is hoping to recoup billions in collateral the bank demanded, and other damages. (Excerpt) Read more at ...


Daley became associated with Amalgamated Bank of Chicago, where he was first vice chairman (1989–1990) and then president and chief operating officer (1990-1993). Daley returned to the practice of law, as a partner with the firm Mayer Brown (then Mayer, Brown & Platt) from 1993 to 1997, where he served on the board of Fannie Mae.

In December 2001, he was appointed President of SBC Communications Inc. to help reform the company's image.

In May 2004, Daley was made Midwest Chairman of J.P. Morgan Chase and Bank One Corp. to oversee post-merger operations from Chicago. (See JB Morgan billion dollar looting reference above--circa 2008.)

Daley currently serves on the Boards of Directors of Boeing, Merck & Co., Boston Properties, Inc., and Loyola University Chicago. He is also a trustee of Northwestern University and sits on the Council on Foreign Relations.

In 1993, he served as special counsel to the President on issues relating to the passage of the North American Free Trade Agreement (NAFTA). In 1997, Daley became Secretary of Commerce in the second administration of President Bill Clinton, and he remained at that post until July 2000, when he resigned to campaign for the Vice President.

After he resigned as Commerce Secretary he became chairman of Vice President Al Gore's presidential campaign. He was portrayed in the HBO film Recount, about the Florida election recount of the 2000 presidential election, by actor Mitch Pileggi.


NOTO BENE Daley currently serves on the Boards of Directors of Boeing. Boeing's Corporate HQ moved to Chi-town in Sept of 2001. Boeing was "offered multi-million dollar tax breaks" b/c other cities were wooing Boeing.

So guess what Chicago Mayor facilitated the Boeing FREEBIES - which shifted a huge tax burden to Homeowners for decades to come?

Yup----it was Richard M. Daley, Bill's brother. And then Bill Daley gets picked to be on Boeing's Board of Directors. Watta coincidence.

5 posted on 01/10/2011 6:16:11 AM PST by Liz (There's a new definition of bipartisanship in Washington -- it's called "former member.")
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To: DeaconBenjamin

The idea that the president needed to bring a top banker into his inner circle in order to build bridges with business is beyond ludicrous.

They haven’t fixed anything. And those of us on the front lines know it. That’s why the hoarding of capital and increase of efficiency has become the norm.
The fundamentals are broken and this administration wants to continue to build the FIRE economy. This isn’t going to end well.

6 posted on 01/10/2011 6:16:40 AM PST by griswold3 (Employment is off-shored, away from govt. regulations, price pressure groups, and liabilities.)
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To: DeaconBenjamin
The Bill Daley Problem

Gibby? Is that YOU?

7 posted on 01/10/2011 6:27:31 AM PST by WayneS (Enlightened statesmen will not always be at the helm. -- James Madison)
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To: DeaconBenjamin

obama hasn’t tagged anyone with real business experience and who wasn’t a political fellow traveller yet.
This is just another commie goofball.

8 posted on 01/10/2011 7:01:43 AM PST by Texas resident (Hunkered Down)
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To: DeaconBenjamin

It’s OK. Remember, the Democrats are “for the little guy”.

9 posted on 01/10/2011 7:35:50 AM PST by headstamp 2 ("My Boss is a Jewish Carpenter")
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To: DeaconBenjamin

He is a chi town thug... just like his corrupt father.


10 posted on 01/10/2011 8:06:38 AM PST by LibLieSlayer (WOLVERINES!)
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To: DeaconBenjamin

Chicago corruption bump for later............

11 posted on 01/10/2011 9:21:07 AM PST by indthkr
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To: hal ogen

“Once again great leadership by the community organizer, nobama. Those who voted for the putz, nobama, should hang their heads in shame. Watch out America!”

Those who voted for BO are too stupid to realize what they have done. Almost all blacks voted for him because he is “black”. They are too stupid to know that he’s more white and arabic than black. Remember the “Obama’s stash” lackey? That is what we are dealing with. Complete idiots.

12 posted on 01/10/2011 12:25:32 PM PST by Bluebeard16
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