Who’s for too big to fail reform now?

In 2010, the Brown-Kaufman amendment to Dodd-Frank, which would have imposed asset and liability limits on banks, was decisively defeated by a 61-33 vote in the Senate. I was frustrated, but not surprised. Treasury Secretary Geithner and the Obama administration opposed it. Only three Republicans voted for it. It was clear that too many Senators had bought the pitch that the banks had been chastened by their “near death experience,” and that new powers given regulators in Dodd-Frank would solve the TBTF problem.

Two years later, “chastened” is not an adjective I would use to describe our megabanks. They have spent millions in lobbying dollars to gut already watered down Dodd-Frank provisions. And the biggest banks have gotten bigger. In 1995, our six largest banks had total assets that added up to 18% of GDP. Today they are 63% of GDP.

Does anyone doubt that if any of them got into trouble the government would again have to come to their rescue? Certainly the worldwide bond markets are convinced it would happen. That’s why our big banks borrow money on the open market at a rate that is 0.8 percent lower than the rate paid by smaller banks. In the case of JPMorgan Chase, that amounts to a $14 billion a year government subsidy.

If you believe, as I do, in free, competitive markets, that TBTF rate advantage is repugnant. So were the LIBOR and London Whale scandals. So was the admission by the Attorney General of the United States that megabank executives were effectively too big to jail. Events since the defeat of Brown-Kaufman have made it increasingly obvious to more and more people that we still have a critical TBTF problem.

I believed, then and now, that banks that are too big to fail and demonstrably too big to manage are too big to exist. The soon-to-be-introduced Senate bill co-sponsored by Sherrod Brown (D-OH) and David Vitter (R-LA) doesn’t explicitly break up TBTF banks, but it is a major step in the right direction. Requiring banks to maintain a ratio of 10 percent of equity capital to total assets would make them less likely to need a government bailout in the next financial crisis. Because the bill would also impose additional capital requirements of up to 15 percent on banks with assets of more than $400 billion, it is likely its passage would encourage the megabanks to restructure.

Does it have any chance of becoming law? Senator Brown has picked up a lot of allies in the past two years, including his conservative Republican co-sponsor. Jeb Hensarling, the Republican Chair of the House Financial Services Committee, has pledged to “end the phenomenon of ‘too big to fail’ and reinstate market discipline.” George Will recently wrote a column supporting Senator Brown’s efforts. Peggy Noonan believes that “megabanks have too much power in Washington” and “too big to fail is too big to continue.” Sandy Weill, the creator of the Citibank behemoth and the person most responsible for the repeal of Glass Steagall, now supports its reinstatement.

In a speech last month at the Conservative Political Action Conference (CPAC), Richard Fisher, President of the Dallas Federal Reserve, made an eloquent plea for action on TBTF. If you missed his speech, let me close by quoting it at some length:

“I am going to address what I consider the injustice of operating our economy under the thumb of financial institutions that are so large they are considered ‘too big to fail.’

“I will argue that these institutions operate under a privileged status that exacts an unfair tax upon the American people.

“I will argue that they represent not only a threat to financial stability but to fair and open competition, that they are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great.

“I will argue that by the attorney general’s own admission, their privileged status places them above the rule of law.

“I will argue that the effort crafted by Congress to correct the problems of TBTF—known as the Dodd–Frank Act—is, despite its best intentions, counterproductive and needs to be changed, that it is an example of the triumph of hope over experience.

“And, last, I will argue that dealing with TBTF is a cause that should be embraced by conservatives, liberals and moderates alike. For regardless of your ideological bent, there is no escaping the reality that TBTF banks’ bad decisions inflicted harm upon the American people during the ‘awful moment’ of the 2008–09 crisis. The American people will be grateful to whoever liberates them from a recurrence of taxpayer bailouts…

“Don’t listen to the siren song of the megabanks and their lobbyists. Take action to deal with the unfair advantages that these institutions enjoy. They will spend millions of dollars to try to perpetuate their brand of crony capitalism. Resisting their entreaties is the right thing to do. Leveling the playing field is a just cause for all Americans. It demands redress from those who represent us in the halls of Congress, whatever side of the aisle they sit on.”

Originally published 18 April 2013 on forbes.com