News Journal: Geithner and company only paid lip service to TBTF

If you remember the dark days of early 2009, you probably recall that as the government spent hundreds of billions of dollars to save our largest banks, just about everybody – those who reluctantly thought the bailouts were necessary and those who opposed them – agreed it should never happen again. Never again, we vowed, would taxpayers be forced to bail out a bank because it was “too big to fail.”
Five years later we now know that some of the most powerful people in government were simply paying lip service to the idea.
The Dodd Frank Wall Street Reform Act of 2010 was widely promoted as the legislative solution to the problem of TBTF. It included all kinds of supposed safeguards. The largest banks were required to submit “living wills,” showing regulators how they would break themselves up in the event of a major crisis. The FDIC was granted “resolution authority,” which meant that in the event of a bank failure, the regulators could take it over and resolve its affairs in an orderly manner.
Huh? At the time, we were watching the resolution of Lehman Brothers, a relatively small bank, and it was not going at all well. The idea that there could be an orderly resolution of a bank the size of JPMorgan Chase or Citibank was, many of us thought, laughable.
Former Fed Reserve Chairman Alan Greenspan might have been wrong about a lot of things in the years leading up to the financial crisis, but he got one thing right after it happened. “If they are too big to fail,” he said, “they are too big.”
By the time we were debating Dodd Frank in Congress, the banks we had bailed out were already bigger than they were in 2008, largely because they had taken over even weaker institutions – Merrill Lynch, Wachovia, Countrywide, and Washington Mutual among them.
That’s why Sen. Sherrod Brown (D-Ohio) and I sponsored a major amendment to Dodd Frank called the “Safe Banking Act.” It was based on the simple premise that the only way to end TBTF was to force our major banks to become smaller and more manageable over time. The amendment would have capped deposits and other liabilities and restricted any one bank’s assets to 10 percent of U.S. GDP. At the time, only JPMorgan Chase, Wells Fargo, and Bank of America exceeded that amount. It also put reasonable caps on any one bank’s non-deposit liabilities.
Given the near unanimous agreement we had to end the TBTF problem, why did the amendment get defeated in the Senate?
Lip service. The day after its defeat, a “senior Treasury official” was widely quoted as saying “if we had wanted it to pass, it would have passed.”
That quote came back to me the other day reading a piece by Andrew Ross Sorkin in the New York Times Magazine. As did then-Secretary of the Treasury Tim Geithner’s repeated insistence while he was in office that Dodd Frank would end TBTF. Sorkin describes a telling scene in which Geithner was recently a guest lecturer at an undergraduate economics course taught by Larry Summers at Harvard. Here’s the exchange that finally tells you everything you have to know about Geithner’s supposed commitment to ending TBTF:
“One student asked a question about ‘resolution authority,’ a provision of the reform laws that is supposed to let the government wind down a complex financial institution without creating a domino effect. The question prompted Geithner onto a tangent about too-big-to-fail. ‘Does it still exist?’ he said. ‘Yeah, of course it does.’ Ending too-big-to-fail was ‘like Moby-Dick for economists or regulators. It’s not just quixotic, it’s misguided.’ ”
“Misguided.” Finally, the truth about Geithner and TBTF.
My contempt for what he did is not the point of this column, although it is real. Far more important is where his lip service has left us. As Thomas M. Hoenig, Vice Chairman of the FDIC, recently said, “Compared to 2008, the largest financial firms today are in most instances larger, more complicated, and more interconnected. The eight largest banking firms have assets that are the equivalent to 65 percent of GDP. The average notional value of derivatives for the three largest U.S. banking firms at year-end 2013 exceeded $60 trillion, a 30 percent increase over their level at the start of the crisis.”
The present Secretary of the Treasury Jacob Lew said in July 2013 if too big to fail was not solved by the end of the year “we’re going to have to look at other options.”
It is now June. Of the next year. More Washington lip service?
Ted Kaufman is a former U.S. Senator from Delaware.