Review of 13 Bankers

13 Bankers: Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson & James Kwak; New York: Pantheon Books, 2010.

Reviewed by Dave Rawlins, who writes,

At Coffee Party Austin Board Meeting of 2 March 2011, Tanya Tussing mentioned she had read this book that Lawrence Lessig referenced in his talk two days earlier.  Hence the following personal take on this interesting book.

Simon Johnson is a former economist with the International Monetary Fund and Professor of Entrepreneurship at MIT; he is also author of “The Quiet Coup” in The Atlantic.  He is coauthor, with James Kwak, of The Baseline Scenario, a leading economic blog, described by Paul Krugman as a “must read”.  Following are some of the points I still think about:

Chapter 1 – Thomas Jefferson and the Financial Aristocracy

Pg. 34 The new legislation of the 1930s – primarily the Banking Act of 1933, better known as the Glass-Steagall Act – reduced the riskiness of the financial system, with a particular emphasis on protecting ordinary citizens.

Pg. 35 Limits on opening branches and on expanding across state lines inhibited competition, as did the prohibition against investment banks taking deposits.  As a result, banks offered a narrow range of financial products and made their money from the spread between the low (and capped) interest rate they paid depositors and the higher rate they charged borrowers.  This business model was emblematized by the “3-6-3 rule”: pay 3 percent, lend at 6 percent, and make it to the golf course by 3 PM.  According to one leading bank textbook, “some banks frowned on employees working in their offices after hours lest outsiders perceive lighted windows as a sign of trouble.”

Chapter 2 – Other People’s Oligarchs

Pg. 40  Crises were for countries with immature economies, insufficiently developed financial systems, and weak political systems, which had not yet achieved long-term prosperity and stability – countries like Thailand, Indonesia, and South Korea.  These countries had three main characteristics that created the potential for serious instability in the 1990s: high level of debt, cozy relationships between the government and powerful individuals in the private sector, and dependence on volatile inflows of capital from the rest of the world.  Together, these ingredients led to economic disaster.  Debt-fueled booms, collapsing bubbles, and panic-stricken financial systems were all reminiscent of the Crash of 1929, but the conventional wisdom was that the United States had put these growing pains behind it, thanks to strong corporate governance, deposit insurance, and robust financial regulation.  Emerging market crises were an opportunity for the United States to teach the world how to deal with financial crises.  Few people suspected that, despite the many obvious differences between emerging Asian economies and the world’s largest economy, some of those lessons would become relevant to the United States only a decade later.

Pg. 51  Growth can come back without any real fundamental reforms.  Foreign lenders learn exactly the wrong lessons from a crisis: they learn that when push comes to shove, the IMF will protect them against the consequences of their bad investments; and they learn that it’s always best to invest in the firms with the most political power (and hence the most assurance of being bailed out in a crisis), perpetuating the pattern of crony capitalism.  As a result, foreign capital flows back, and emerging markets can repeat the boom-bust-bailout cycle for a long time, perhaps indefinitely.

But long-term economic growth is unlikely to result.  Although oligarchies may be consistent with episodes of growth, they are not good at supporting the development of new entrepreneurs and the commercialization of new technologies.  In fact, entrenched economic elites may have an interest in limiting competition from new ideas and new people.

Pg. 56  In similar situations in the 1990s, the United States had urged emerging market countries to deal with the basic economic and political factors that had created devastating crises.  This advice was often perceived as arrogant (especially when the United States also insisted that crisis-stricken countries open themselves up further to American banks), but the basic logic was sound: when an existing economic elite has led a country into a deep crisis, it is time for a change.  And the crisis itself presents a unique, but short-lived opportunity for change.

Chapter 3 – Wall Street Rising: 1980-

Pg. 59  …in 1978, all commercial banks together held $1.2 trillion in assets, equivalent to 53 percent of U.S. 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.

Pg. 60  Worldwide, over-the-counter derivatives, which essentially did not exist in 1978, grew to over $33 trillion in market value – over twice U.S. GDP – by the end of 2008.

Pg. 74  The basic principle behind any oligarchy is that economic power yields political power.

Pg. 86  The main divide in the industry was no longer between commercial and investment banks; it was between the megabanks, with their portfolios of businesses that hardly existed three decades before, and the thousands of traditional banks that still made their money taking deposits and extending loans (although now they were more likely to sell those loans off to be securitized).

…  These megabanks, whether based downtown, in midtown, or in North Carolina, were the new Wall Street.

Chapter 4 – “Greed Is Good”: The Takeover

Pg. 89  Despite the scandals and crises of the 1990s, this was the decade when Wall Street translated its growing economic power into political power and when the ideology of financial innovation and deregulation became conventional wisdom in Washington on both sides of the political aisle.

Pg. 92  A second source of Wall Street’s political power was its ability to place its people in key positions in Washington.  As the big banks became richer, more of their executives became top-tier fund-raisers who could be tapped for administration jobs.  More important, as the world of finance became more complicated and more central to the economy, the federal government became more dependent on people with modern financial expertise – which meant more people from the big banks’ cutting-edge businesses.  This constant flow of people from Wall Street to Washington and back ensured that important decisions were made by officials who had absorbed the financial sector’s view of the world and its perspective on government policy, and who often saw their future careers on Wall Street, not in Washington.

Pg. 103  For Greenspan, the rapid growth of the derivatives market was proof that they were socially beneficial.  He believed, like many free market purists, that markets are self-regulating, and that as long as market participants have sufficient information, they will be aware of any potential dangers and protect themselves from them, and therefore outcomes in unregulated markets are necessarily good.  This attitude even extended to fraud; as Brooksley Born recounted, “He explained there wasn’t a need for a law against fraud because if a floor broker was committing fraud, the customers would figure it out and stop doing business with him.”

Pg. 105  The positive image of Wall Street had at least three main components.  The first was the idea that financial innovation, like technological innovation, was necessarily good.  The second was the idea that complex financial transactions served the noble purpose of helping ordinary Americans buy houses.  The third was that Wall Street was the most exciting place to be at the turn of the millennium.

Pg. 118  This combination of money, people, and prestige created what Jagdish Bhagwati identified in 1998 as the “Wall Street–Treasury complex.”  Bhagwati described how the ideology of free markets “lulled many economists and policy-makers into complacency about the pitfalls that certain markets inherently pose,” while the revolving door placed representatives of Wall Street into influential positions in Washington.  “This powerful network,” he wrote, “is unable to look much beyond the interest of Wall Street, which it equates with the good of the world.”

Chapter 5 – The Best Deal Ever

Wikipedia: Cassano accepted the 1998 proposal by J.P. Morgan to package credit-default swaps as Broad Index Secured Trust Offerings (nicknamed BISTROs).

Wikipedia: Collateralized debt obligations (CDOs) are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets.

Pg. 125  In effect, J.P. Morgan had created a new CDO out of thin air, without any of the raw material – loans or asset-backed securities – usually required.  BISTRO was the first of what came to be known as “synthetic CDOs.”

Pg. 141  Historically, regulators have set limits on leverage, because it increases the likelihood of failures that may require government intervention.  In the past twenty years, Wall Street banks invented new ways of getting around those limits.  More important, the regulators no longer felt the need to protect the financial system by defending those limits, instead acquiescing in the general belief that markets were best left to police themselves.

Pg. 147  The problem was that the cheap money was misallocated to the housing sector, resulting in anemic growth.  That misallocation was due to the new mortgage products that made it so easy to borrow large amounts of money, the voracious appetite of Wall Street banks and investors for securities back by those mortgages, and a decade of government policies that encouraged the flow of money into housing.  And the more money that flowed into new subdivisions in the desert, the less flowed into new factories where American could go to work.  Ultimately, the price of the housing bubble and the financial crisis is not just trillions of dollars of losses on mortgages and mortgage-backed securities, but a decade of poor economic growth and declining real household incomes.*

*Average real annual growth has been lower in the 2000s (through 2008) than in any decade since the 1930s; real median household income (in 2008 dollars) has fallen from $52,587 in 1999 to $50,303 in 2008.

Pg. 150  James Coffman, a former assistant director of the SEC enforcement division, wrote,

Elected deregulators appointed their own kind to head regulatory agencies and they, in turn, removed career regulators from management positions and replaced them with appointees who had worked in or represented the regulated industries.  These new managers and, in many cases, the people they recruited and promoted, advanced or adhered to a regulatory scheme that, at least with respect to the most important issues, advanced the interests of the regulated.

Chapter 6 – Too Big To Fail

Pg. 153  To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many.  And, one might add, so far with little reform.  – Mervyn King, governor of the Bank of England

Pg. 164  Never before had so much taxpayer money been dedicated to save an industry from the consequences of its own mistakes.  It is the ultimate irony, it went to an industry that insisted for decades that it had no use for the government and would be better off regulating itself – and it was overseen by a group of policymakers who agreed the government should play little role in the financial sector.

Pg. 173  In short, Paulson, Bernanke, Geithner, and Summers chose the blank check option, over and over again.  They did the opposite of what the United States had pressed upon emerging market governments in the 1990s.  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 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.  Summers was aware of the irony… But, to his credit, he acknowledged,

There have been moments, certainly, when I understood better some of the reactions of officials in crisis countries now than one was able to from the outside at the time.  It is easier to be for more radical solutions when one lives thousands of miles away than when it is in one’s own country.

Pg. 175  The opposing views, put forward by many people including Nobel Prize laureates Paul Krugman and Joseph Stiglitz (and non-Nobel laureates like us), was that some major banks were deeply sick and successive bailouts amounted to vast giveaways of taxpayer money that would do little to solve either the short-term or the long-term problems in the financial sector.  As Krugman said, “Every plan we’ve heard from Treasury amounts to the same thing – an attempt to socialize the losses while privatizing the gains.”

Pg. 180  Consolidation among the big banks and the collapse of the nonbank mortgage lenders meant much larger market share for the fewer but bigger megabanks.  Bank of America, JPMorgan Chase, and Wells Fargo all had to be exempted from a federal rule prohibiting any single bank from holding more than 10 percent of all deposits in the country, and from Department of Justice antitrust guidelines intended to limit monopoly power in specific metropolitan regions.  By mid-2009, those three banks and Citigroup together controlled half the market for new mortgages and two-thirds of the market for new credit cards.  …At the end of June 2009, five banks together had over 95 percent of the market for derivatives contracts traded by U.S. Banks, led by JPMorgan Chase with 26 percent…

Pg. 184  J. Paul Getty is reputed to have said, “If you owe a bank $100, that’s your problem.  If you owe the bank $100 million, that’s the bank’s problem.”  The bank cannot afford a loss of $100 million, and therefore will do anything to help you avoid default – and that gives you power.

Chapter 7 – The American Oligarchy: Six Banks

Pg. 210  But the most surprising break with conventional wisdom came from Alan Greenspan, who perhaps more than any other person had made the age of the megabanks possible.  In an October speech, he said, “The critical problem that we have, which we’ve got to resolve, is the too-big-to-fail issue.”  Asked how to solve this problem, he responded,

If they’re too big to fail, they’re too big.  I—this one has got me.  And the reason it’s got me is that we no longer have the capability of having credible government response which says, henceforth no institution will be supported because it is too big to fail.

At a minimum, you’ve got to take care of the competitive advantage they have, because of the implicit subsidy, which makes them competitively capable of beating out their smaller competitors, who don’t get the subsidy.  And if you don’t neutralize that, you’re going to get a moribund group of obsole-scent institutions, which will be a big drain on the savings of this society…

I don’t think merely raising the fees or capital on large institutions or taxing them is enough.  I think that’ll – they’ll absorb that; they’ll work with it; and they will still be inefficient; and they’ll still be using the savings.

So I mean, radical changes, as you – you know, break them up, you know.  In 1911, we broke up Standard Oil.  So what happened?  The individual parts became more valuable than the whole.  Maybe that’s what we need.

Pg. 220  Finance will never be just another industry.  It is too big and too central to the economy, and there is something seductive about a business that deals in nothing but money.  But reducing the size, profits, and power of the big banks will begin to restore balance both to our economy and to our political system.

Pg. 222  Even when it goes out of fashion, Thomas Jefferson’s suspicion of concentrated power remains an essential thread in the fabric of of American democracy.  The financial crisis of 2007–2009 has made Jefferson a little less out of fashion.  It is that tradition of skepticism that, if anything, can shift the weight of public opinion against our new financial oligarchy – the most law-abiding, hardworking, eloquent, well-dressed oligarchy in the history of politics.  It is to help invigorate that spirit of Jefferson that we have written this book.




About Hamilton Richards

I retired in 1966 as a Senior Lecturer in Computer Sciences at The University of Texas at Austin. These days I volunteer technical support for Citizens' Climate Lobby (Austin chapter), Common Ground for Texans, (, Integrity Texas (, and several friends.
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