Time to get over too big to fail phobia

Back in May 2010, when the Brown-Kaufman amendment to reduce the size of our largest banks failed by a 66-31 vote in the Senate, many who voted against it thought it was unnecessary. The conventional wisdom was that other provisions in the Dodd-Frank Wall Street Reform Act would solve the “too big to fail” problem.

That conventional wisdom is being revisited. Sen. Sherrod Brown, D-Ohio, joined by a conservative Republican David Vitter of Louisiana, has reintroduced a virtually identical amendment. Given the power of the bank lobby, getting the votes necessary to pass it will be difficult. But the odds have greatly improved, for a number of reasons.

• Banks are bigger now than they were in 2008, when the Troubled Asset Relief Program dedicated billions of taxpayer money to make sure the banks didn’t fail. Part of that program merged entities such as Merrill Lynch, Countrywide and Wachovia into the largest banks, making them even larger. A recent analysis by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corporation, used international accounting standards (rather the accounting methods used by the banks themselves) for derivatives and consolidated mortgage securitizations. The results are eye-opening.

JPMorgan Chase, Citibank and Bank of America become the three largest banks in the world. Together with Wells Fargo, which becomes the world’s sixth largest, assets of the four largest U.S. banks amount to an astonishing 97 percent of our 2012 gross domestic product.

• Dodd-Frank’s resolution authority for regulators and its requirement that banks write “living wills” to solve TBTF have already proved to be, and are now generally recognized as, ineffective. Just last week, Fed Chair Ben Bernacke admitted as much, saying “TBTF is not solved and gone. … TBTF was a major source of the crisis, and we will not have successfully responded to the crisis if we do not address that successfully.”

• The evidence keeps piling up that big banks are too big to manage. The recent Senate subcommittee hearing investigating the $6.2 billion loss sustained by JPMorgan Chase in the “London Whale” incident uncovered a mess that would have had old J. Pierpont Morgan spinning in his grave. The bank altered rules on how to set the value of investments and how to measure risk to hide its losses. While CEO Jamie Dimon had claimed the losses were caused by hedges to reduce risk, company documents and the testimony of other executives made clear that the cause was profit-driven speculation.

• The JPMorgan hearing came on the heels of the government’s $1.8 billion settlement with big bank HSBC for drug and money laundering. Another large settlement is expected soon when big bank UBS agrees to terms with the Security and Exchange Commission over allegations it defrauded investors in a mortgage bond deal. The SEC is also going to court in a case involving Standard and Poor’s, because the company would not agree to accept blame for misstating the ratings on millions of dollars worth of mortgage-backed securities. And although banks have already paid out billions, there are still settlements to come in the LIBOR fiasco.

In all of these cases, undermanned and outgunned regulators were kept in the dark. That’s just where the banks would like to keep them. Right now, in fact, JPMorgan executives are involved in a “We’re sorry” media campaign. All the problems have been solved, they are saying. It is time to move on.

If that sounds familiar, it is because they were using exactly the same arguments when their lobbyists were gutting Dodd-Frank in 2009 and 2010. Back then, Dimon was boasting about his bank’s “fortress balance sheet.” We now know how weak the fortress was, and how it depended on misstated assets and liabilities.

A lot of previously skeptical opinion leaders now believe the TBTF problem must be addressed, including conservatives such as George Will, Peggy Noonan and former presidential candidate Jon Huntsman. Former Citibank CEO Sandy Weill, who was instrumental in its repeal, has called for the reinstatement of Glass-Steagall.

The longer we wait, the more dangerous the TBTF problem becomes. And the harder it becomes to hold anyone responsible for its excesses. It was sad to see both Attorney General Eric Holder and Lanny Breurer, the retiring head of the Justice Department’s Criminal Division, admit that the size of a financial institution played a role in whom they felt they could safely prosecute, fearing that prosecuting a top executive of a major bank could imperil a fragile system.

Do we really want to risk another financial crisis because banks are too big to fail, too big to manage, too big to regulate, and are led by executives who are too big to jail? It is time for action.

Originally published 6 Apr 2013 on delawareonline.com