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What Is Going on in the NY Fed? Will They Break Apart Big Banks?

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In a speech, the New York Federal Reserve Board President William Dudley addressed the outrageous misconduct that has been going on within the financial industry. Indeed, it has really just been a few bad apples. Nevertheless, Dudley doesn’t pinpoint any one firm rather he states:

“The problems originate from the culture of the firms, and this culture is largely shaped by the firms’ leadership.”

Dudley’s main message was a warning: If nothing changed, regulators would have to conclude that large financial institutions are too big to manage, and “that your firms need to be dramatically downsized and simplified so they can be managed effectively.”

It seems unlikely still that the regulators will act against the banks until the crash comes. Then the political heat will turn up sharply. Will regulators actually be in the position to undertake a big bank breakup? That seems to be likely but only when they are forced to do so by international pressure and domestic political reaction.


There is a serious question as to who is protecting the New York bankers. Obviously, they buy both sides of politics. The SEC and CFTC have been protecting the most notorious Wall Street bankers for years. The whole unwillingness to actually end the corruption does not appear likely before 2017. The interesting aspect is taxes. If the politicians perceive that the banks have been protecting people from paying taxes, then a break-up becomes possible for government will act only out of its self-interest.

Only when the pressure comes and we see interest rates start to rise, then nobody will be able to put Humpty Dumpty back together again. Rising interest rates will cause the budgets to explode and then they will hunt taxes more aggressively. They are putting pressure on all former tax shelters to commit suicide or they will block them from the Swift System, isolating them within the world economy.

So the key will be interest rates. As they rise, the deficits will rise, the need for taxes will spiral higher, and then they will attack the banks.