Customer Reviews

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown

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The desire to analyze the current economic downturn has prompted a deluge of books, most focusing on how to address present and future economic ills and some narrowly focused on individual players and institutions that played a key role in the financial collapse, while others explained the events that led us to this place. "13 Bankers" explains how we got here and more importantly comes up with ideas to prevent a recurrence in the future far more concisely than many others I've read. I could be easy to dismiss Johnson and Kwak's observations as being pessimistic, as makes a very damning indictment of the banking and financial sectors in their past and present conditions and a rather trenchant argument that if these problem are not addressed we likely face another imminent meltdown. The authors give readers a quick concise history of finance and banking in the United States, something that many Americans are woefully unaware of, that points out how banks and financial institutions came to garner so much power over the economy. While efforts have been made to regulate them to varying degrees those regulations have often proven ineffective or are too often enacted AFTER financial catastrophes, much our current situation. The authors rather persuasively argue that the "too big to fail" model and the bailouts of 2008 and 2009 were misguided, arguing that nationalization would have been the better route to go. They continue the argument that the forced mergers, such as Merrill Lynch and Bank of America, were mistakes and instead had created institutions that are now truly to big to fail. In some respects it almost sounds like a Teddy Roosevelt-era trust buster and his argument that these large institutions need to be broken up to diffuse their power certainly makes sense. They also point out the corrosive effect their political clout and donations carry with the political process, hindering further efforts at regulation.

Ultimately "13 Bankers is far more satisfying a read than some recent books on the subject such as The Road from Ruin: How to Revive Capitalism and Put America Back on Top, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Rediscovering Values: On Wall Street, Main Street, and Your Street, and America, Welcome to the Poorhouse: What You Must Do to Protect Your Financial Future and the Reform We Need. Yet the sad truth is that while the authors make a compelling argument for change the political establishment in Washington lacks the political will to break up these excessively large institutions. It wouldn't be good for THEIR business, which is getting reelected. While there are efforts afoot in Washington at reform none are as radical a surgery as proposed here, but suffice to say when the next financial catastrophe comes, and the authors argue it IS coming, there is unlikely to be any taxpayer/voter support for ANY bailout in ANY form. If anything "13 Bankers" made me mad as hell and against any future bailout, let alone continuing the current ones in place. What makes me madder still is that the politicians in both parties will likely never consider the radical proposal put forward here. It's a shame that it will take another financial crisis to get Congress and the Executive Branch to really act responsibly.

13 Bankers takes us through he painful history of the financial crisis that brought us where we are today and that now makes it so hard to move forward. Simon and Kwak argue that absent reform, another bailout - a more costly bailout with even greater global consequences, millions of jobs lost, and a ruinous impact on our government budget - is unavoidable.

Many Americans apparently do not yet understand how much influence financial institutions have in Washington, DC. Banks used to answer to Washington and were once held accountable for their actions. That is no longer is the case. We have never had such a concentrated banking system in the United States and it's dangerous that so much of our financial future is wrapped up in the big banks.

But the book is not pessimistic. Simon and Kwak offer instances from our history when elected representatives took on concentrated financial power. Each time, most Americans initially did not grasp how the system works, and this proved a major obstacle to reform. But the political leadership was able to explain what needed to be done, and to persuade average Americans that the nature of power in and around the financial sector had become so great and so distorted that something major had to be done.

The book is not anti-finance, but it is very much against the way our biggest banks operate today. The book describes exactly what needs to be done so that what happened in 2008-09 will never be allowed to happen again. Let's hope the prescription works.

I'm jumping in here more to vote among the opinions already expressed than to say anything new. I mostly agree with Bruce Lasker. The book is a good straightforward history of how we got to this point in American banking, but is neither deep in its analysis nor strong in its recommendations. If the reviews had been split on this issue I wouldn't have bothered, but since its 9 to 1 against Mr. Lasker, I think it's worth making it 9 to 2.

The opinion in this book is all expressed through word choice. When the authors don't like an increase in lending it is "an orgy of lending." When they do, "banks responded with capital to support growth." People they disagree with "rant," while people they like "point out" or even "prove." But there's never any analysis to back up these opinions, they're painted onto what is basically a factual history. I happen to agree with more than half of their views, but if I didn't, I wouldn't have been convinced by this book. It doesn't help that everything is based on secondary sources, from which the authors take what they like and nothing else.

On the other hand, if you want a factual history, and either agree with the authors or are willing to ignore loaded words, this is an excellent choice. It's well-written, witty, up-to-the-minute and accurate. The opinions are never intrusive, and never foolish. They feel concentrations of banking power are dangerous, which is pretty reasonable, but they ignore the problems caused by the local corruption that grew up in its place. You learn about Jefferson, Madison and Jackson's principled objection to national banking, you won't learn about politicians anxious to create local bank monopolies for their friends and associates, restraining competition in order to maximize profit and control local economies.

You'll learn how deposit insurance and limits on deposit interest reduced bank failures for 50 years, but not how it destroyed middle class savings when high inflation combined with low legal ceilings on interest; you also won't see the terrible customer service that existed until a "shadow" banking system made an end run around the regulations and offered ATM's, high-interest money market accounts, 24-hour-banking, automated deposits, Internet banking and other innovations (when I started working you got a paper paycheck every two weeks that you had to take to a physical bank on your lunch hour as they were open only 9 to 3 on weekdays and the tellers took the same lunch hour as the office workers so you didn't eat lunch on payday, no food allowed in the bank). Sneaky overcharging and predatory lending loom large in this book, with no hint of the advantage to customers when fixed commissions were smashed or companies were forced to improve accounting disclosure.

Wall Street is always the villain, local banks that lend only to their boards of directors and pals and support the local political machine, are whitewashed. The entire S&L crisis is blamed on Wall Street sharpies taking advantage of sleepy local bankers, you won't hear that virtually the entire loss was from commercial lending by oil-patch banks whose strong political connections ran through Texas, not New York. You'll read how Wall Street money flooded into Washington in campaign contributions and lobbying, you won't read about extortion from politicians introducing legislation to expropriate people's financial businesses unless they paid up. You also won't read about the constant movement of financial innovators to get away from the whole messy business of power politics, organizing off-shore, using private vehicles and leaving regulated businesses to come up with better solutions. It's always politicians trying to draw these into the regulatory framework, where they are forced to render unto Caesar, it's not financial innovators lining up to buy political backing for their ideas. Even the harm done by the gigantic financial institutions built entirely by Washington is blamed on Wall Street, not Washington.

I'm not defending Wall Street here, just pointing out there are two sides to the story. Wall Street, and more generally global financial innovation fighting entrenched local traditional practices, has done both good and bad. Mostly it does things that some people will consider good and others will consider bad. The one point of strong agreement I have with the authors is that a system of crony capitalism grew up, and led to a lot of our current problems. Personally, I would attack all crony capitalism, not just financial, as killing it in one place just tends to encourage it to spring up in another. We have crony defense contractors, medical companies, agribusinesses among many others. I grant that financial cronies are more dangerous than the others (except maybe defense contractors) but they are more alike than different. And the fundamental reform has to be political. If someone is handing out government money, it's pointless to outlaw taking it, because someone will always find a way to break the law, and then repay the giver. Stopping the handout is the point.

Simon Johnson is ubiquitous, appearing on a wide range of shows (at least those I watch such as NPR, PBS, and HBO). He is wonderful to listen to, a guy filled with knowledge (as well he should be since he teaches at MIT). And he has a sense of humor. And he is not one with a "conspiracy theory" which apparently one "reviewer" (one-star one) claims. So when I heard about this book, I had to read it.
I grew up in the home of a banker. But Dad was a small-town bank president in what we call "community banks." And the bank still exists and is doing well in Vermont. But my dad, when he retired in the early 70s, said, "Banking isn't banking any more." I had no idea what he was talking about, mainly because I was never much interested in banking. But I have become quite interested in it now that this country has become economically handcuffed by these so-called bankers.
This is a very well written book with a very comprehensive set of notes (footnotes) at the end. In other words, anyone writing comments about these authors being conspiracy theorists is simply ignoring the content of the book. Having said this, however, I want to acknowledge that the book isn't written for people who don't have at least a little knowledge about how the world of finance works. In other words, I found myself lost in many places. But I cannot fault the writers or the writing. I simply don't have what we English teachers would call "prior knowledge," the essential tool to reading.
The authors are not bashing anyone. The book is structured so the reader is provided with some history (and it is sourced history) before being presented with what happened and how it happened. I like how objective Johnson and Kvak are. To use a phrase that I captured from a cable channel I would never watch, this is "fair and balanced."
What most interested this reader is the case the writers make for "The American Oligarchy." Indeed that is what we have with these "financial elites" that run Wall Street. They are so tightly tied into our non-functioning Congress (and to some degree a too-tied-to-Wall-Street White House and to five very-tied-to-Wall-Street on the Supreme Court).
I intend to give this book as a gift to a few people I know who really need accurate information. But do "tea baggers" read I wonder.

Johnson and Kwak have written the best book I have read so far on the financial mess. Their historical introduction to the subject includes a description of Thomas Jefferson's concerns about banking. Their conclusion that we need to break up the mega-banks cycles back to Jefferson (and also Andrew Jackson). Some technical knowledge is needed to follow all of the arguments of the book, but the authors take great pains to make this material accessible to anyone who reads a daily paper and is vaguely familiar with mortgage backed securities, collateralized debt obligations, credit default swaps, etc. One walks away from this book upset that the new administration in Washington hasn't taken bolder steps to make finance "boring" once again. I seriously hope that Senator Dodd and Representative Frank carefully read this book, pass it to their Congressional colleagues and staff members, and push hard for serious financial reform. This country cannot afford to experience another meltdown, but as the authors (and many others) point out, this last bailout of the "too big to fails" (also known as "heads they win, tails we lose") only gives the big banks more incentive to gamble even more dangerously. We've now had the tech bubble burst (minor recession) and the housing bubble burst (serious recession). What will be the next sector to blow up?

America is not a democracy? America is not a democratic republic?

America is an oligarchy? One wonders after reading "13 Bankers: The Wall Street Takeover and the Next Financial Meltdown" by Simon Johnson and James Kwak. The authors write, "We may have the most advanced political system in the world, but we also have its most advanced oligarchy." This book is a startling revelation of the power of the large banks in America. An oligarchy is defined as a form of government in which the power is vested in a few, or in a dominant class or clique. It appears that the large American banks have been powerfully influencing Washington for several decades, and culminated in the 1990's when "Wall Street translated its growing economic power into political power" that gave Wall Street "on issue after issue what they wanted."

The authors further claim that the result of the Glass - Steagall Banking Act of 1933 that separated commercial banks from investment banks and brokerages was the "safest banking system America had known in its history and booms and busts were prevented." Repealing Glass-Steagall was at the top of the commercial banks' wish list, and it was repealed in 1999. Since the 1970's, the banks have exerted power over various government agencies with the approval of Congress. The savings and loan crisis, the Long Term Capital Management (LTCM) fiasco, Enron, WorldCom, et al, didn't teach lessons needed, and Johnson and Kwak say, "the conditions that created the financial crisis and global recession of 2007-09 will bring about another crisis, sooner or later." The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009 attempts to prevent another 2007-2009 financial crisis, and its regulations are currently being formulated. Its summary is 43 pp. long and the entire bill is 2319 pp. according to Time Magazine(7/12/10). One hopes it's not closing the barn door after the horse is out, nor that it was written blindly with Wall Street's lobbying help, nor that our representatives didn't really read it, nor that it does not conflict with the Financial Crisis Inquiry Commission's Report (FCIC) of the causes of the financial crisis, which is due January 2011.

One of the Dodd-Frank provisions, detailed in the 12/21/10 Wall Street Journal, "prohibits any bonus plan that encourages inappropriate risks at financial firms with more than $1 billion in assets." This presumably addresses Main Street's and the tea partiers' abhorrence of the enormous bonuses on Wall Street. Another provision now requires that over the counter derivatives receive the scrutiny that the former chair of the CFTC (Commodity Futures Trading Commission), Brooksley Born, warned about way back in 1998, but was rebuffed by Alan Greenspan, Lawrence Summers, Robert Rubin and others. In fact, a "group of thirty," an international advocacy group composed of private sector bankers, central bankers, and sympathetic academics, lobbied against such regulation and Congress caved in late 1999 and those derivatives were exempted from federal regulation in the Commodity Futures Modernization Act passed by a lame duck Congress and lame duck President in a appropriations act for fiscal year 2001.

The oligarchy of 13 banks is American Express, Bank of America, Bank of New York Mellon, Citigroup, Freddie Mac, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Northern Trust, PNC, State Street, US Bank, and Wells Fargo. The 6 largest banks now are Goldman Sachs, Citigroup, Bank of America, JPMorgan Chase, Morgan Stanley, and Wells Fargo, and they have been busy lobbying for what they want, so the oligarchy appears to be intact. According to the same Time article, more than 2000 lobbyists were "working on financial reform" and "43 members of the Congressional financial-reform conference had received $112 million from donors associated with the finance, insurance, and real estate industries." In addition to lobbying, there is a cultural revolving door that has Wall Street operatives and government regulators going to and from the two sectors. If the Dodd-Frank bill addresses this, perhaps the authors will be wrong in saying, "By leaving banks in the hands of existing managers and going out of its way to minimize its own influence, government (is) ensuring that it (has) no way to encourage banks to do anything other than hoard the cash and in no way to affect banks' behavior in the future." There are reports about the hoarding of cash being one of the impediments to improving our economy, so is government helping the situation or inadvertently contributing to the continued economic malaise?

In legislation after legislation, Congress seems to have deferred to Wall Street's so-called "expertise." Will the authors be accurate in saying "...the conditions that created the financial crisis and global recession of 2007-09 will bring about another crisis, sooner or later?"

Their recommendations include trust-busting to break up these Too Big To Fail entities. This leads one to wonder how the many mergers and acquisitions of smaller banks by larger banks have been approved as not violating the Sherman Anti-Trust Act. Many smaller banks have disappeared. It is one thing for the FDIC to take over struggling or insolvent banks to protect consumers, but that seems different from the large banks taking over the smaller banks, even with shareholder approvals. How does the Sherman Anti-Trust Act protect us and preserve competition? Are we destined for another crisis, as the writers say?

Johnson, now a professor at MIT, was formerly a top economist at the International Monetary Fund, and Kwak, a Harvard graduate with his Ph.D. from UCBerkeley, authored The Baseline Scenario, a commentary on the global financial crisis, mostly focused on the situation in the USA. Readers wondering if the U. S economy is out of the woods will find the writing concise, yet detailed enough to ask if Robert B. Reich is right in saying on the book jacket, "Unless we separate money from politics, we'll never be safe from another financial meltdown... Read this fine book and get to work." The book contains extensive notes and recommended further readings.
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13 Bankers is a more recent book in the crowded market of books on the financial crisis.
This book isn't written to be technical, but easily readable.
The authors offer up sensible solutions with the warning that if changes aren't made, we will experience the same crisis again. The cause of the crisis is a step that hasn't been undertaken by the government.

Page 74 contains a statement that describes American government as we currently know it-
"The basic principle behind any oligarchy is that economic power yields political power."
That's why Wall Street gets what they want.

Some of the avenues used by "the Street" are:
The close relationship with Washington.
Take Rubin, Paulson and a host of lower level crossovers from Wall Street to Washington and you have people making decisions based on their priorities and what's best for their industry at taxpayer's expense.

As deeply committed to the financial sector as Republicans are, the authors list examples of Democrats that supported deregulation and other causes that led to the meltdown. So this problem is a bi-partisan mess.

I think that the solutions detailed in this book are the more popular and those that would be fought the hardest by Wall Street.
Deregulation and size limits.
If an entity is "too big to fail" it is simply too big and that problem can be solved by breaking those companies up.
While derivatives haven't been regulated, they need to be.
Investment banks that aren't regulated should not have a safety net to cover their mistakes and greedy behavior.

This is another very good book to read if you want to know the hows and whys of the financial crisis.

Three other books that I have found to be helpful on the subject of the financial crisis are:
Freefall: America, Free Markets, and the Sinking of the World Economy
Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy
Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

Overall, I recommend this book.The authors clearly show that the purpose of practically all financial derivatives is purely speculative.They play no role at all in producing goods and services.Financial derivatives play no role in creating real wealth ,as in Adam Smith's The Wealth of Nations,because the main goal of the alliance of hedge funds,private equity firms, Wall Street investment banks( who are no longer with us),and giant commercial banks is to extract profit without production.This "shadow " banking system was and is completely unregulated.The "shadow " banking system has effectively taken control of the American economy by simply buying off all of the Presidents, and most of the Senators and Congressmen and women of both the Democratic and Republican parties, since Gerald Ford.Ford was the last President who did not go along with their plans.The authors have certainly identified what the problem is-the purely speculative shadow banking system.However,their solution,to break up the giant banks,may not be the best plan.

Their recommendation, to break up all of the giant banks into smaller banks,overlooks the fact that the Great Depression's catastrophic banking collapse,which occurred primarily due to a lack of deposit insurance and speculative finance,involved primarily small banks that were allowed to fail because the giant private bankers,such as Mellon,Rockefeller,and Morgan,Jr. ,who effectively controlled the Federal Reserve System operationally day to day,thought that letting the small banks fail would cause no significant problem and would remove their competition. Theodore Roosevelt realized that very strict regulation was a better answer. The important economies of scale and size are maintained while the speculative damages created by the bubble creators on Wall Street are eliminated. Theodore Roosevelt certainly realized that Wall Street had effective control of both parties at the turn of the century.That is why he ran for president at the head of the Progressive (Bull Moose) Party in 1912.Roosevelt knew that Woodrow Wilson was in the pockets of J P Morgan as was Taft.What America is missing today is just such an individual as Theodore Roosevelt.

In conclusion, it may be that some of the biggest banks need to be split up.However,without stricter regulation of the private commercial banks and the regulation of the purely speculative "shadow " banks, this solution alone will not lead to the elimination of the Wall Street speculators who control both major parties.A Third party explicitly dedicated to taking back the Republic from Wall Street domination is also needed.

The main message is "The thirteen megabanks used political power to obtain their license to gamble with other people's money; taking that license away requires confronting that power head on." This book is very interesting in two ways, it presents a historical perspective and makes specific convincing recommendations for the actionsgovernment should take, that differ from what the government is doing
Three important issues are (1) Changes in political thinking since America's independence (2) The "blind" faith in deregulation since Ronald Reagan (3) The missed opportunity of the Obama administration.
Right from the founding of America two competing political views were present. One view that the potential power of banks was dangerous and a threat to democracy with Jefferson as its founder and the other view of Alexander Hamilton that banking in general and central banking were essential for the development of America. The great depression in 1930 was caused mainly by failures in the banking system, with several causes similar to the 2007-8 crisis. FDR was convinced that some banks had become too powerful and acted irresponsibly (like many other smaller banks) and proposed and got approval during his first six months in power for acts to break up banks by separating investment banking from commercial baking and new regulatory organisations and new rules to protect the clients of the banking.
Ronald Reagan started to move political thinking in the other direction: deregulation is good. There is no doubt that he was right in many areas, but banking is different from other industrial segments. Various limits to banking freedom and oversight were continuously removed during the Clinton and Bush administrations with Alan Greenspan promoting the superiority of self regulation and unregulated financial innovation. Greenspan claimed and most believed that the self interest of bankers would lead automatically to the best solutions.
The banks were exerting constant pressure on the government to reduce regulation and not regulate any of the innovations the banks were developing.
The crisis of 2007- 8 did not create economic problems of the same magnitude as FDR faced, but unemployment doubled, 1million jobs lost in 2007 and 5.8 million in 2008. and the government had to bail out the big banks.
Different from FDR the G.W.Bush and Obama administration did not act to solve the cause of the problem: the overwhelming power of the big banks. Lobbying, contributions to election campaigns of the regulators, the revolving door practice (top bankers in and out of top banking and government positions). As a consequence the big banks grew substantially even in the crisis. The assets of the six largest banks grew from 18% of GDP in 1995 to 60% of GDP in 2009. The banks and the government agree the megabanks cannot be allowed to fail. The authors point to three negative consequences of accepting this concept (1) when a mega bank is on the brink of failure the government has to bail out the bank immediately because of interconnectedness with other banks ("collateral damage").(2) Taking higher risks has the possibility of higher profits. As the bankers know their bank will be bailed out they will take huge risks (3) As the banks can not be allowed to fail the banks have access to money at lower rates. Large banks paid 0.78% less than the small banks in the wake of the financial crisis. That represents $34 billion for the eighteen largest banks, accounting for about half their profit in 2009
Even though this subject has been much discussed, the authors present convincing arguments that it is impossible for the government to regulate these banks. The banks will pursue the same and new innovative practices they did in the past. Different from FDR, the Obama administration will not break up the big banks. It is a missed opportunity. It could have been done during the crisis.
Alan Greenspan is one of the few that accepted he made a huge mistake in believing self regulation of banks and said in October 2009: "The biggest problem we have to resolve is the too-big-to-fail issue". "Break them up". In 1911 we broke up Standard Oil." So what happened? The individual parts became more valuable than the whole."
The authors present a vast amount of statistical evidence to prove their points. May be they are wrong but their analysis and recommendation merit serious consideration.

I would recommend everyone read this to understand the background behind our current banking and financial system and the crisis we're currently in. Well researched and comprehensive, the book only falters in concluding no criminality was at the core of these issues. Add fraud to the formula and it becomes a complete story.