Thursday, August 23, 2012

The Fight To Break Up The Mega-Banks Is Bi-Partisan... But So Is The Fight To Protect Them


I have to admit, I don't read RedState much but this David Diapers Vitter tweet early yesterday got me to take a look. And, I admit, I was surprised. It looks like the far right-- or at least the populist version of it-- is picking up one of the key threads progressives have been working towards. I suspect that for them, like for our own left-leaning populists, the whole idea of breaking up the banks, transcends partisan politics.

The Republican Establishment adamantly opposes the idea, of course-- but what about Establishment Democrats like Steny Hoyer, Steve Israel, Joe Crowley, Rahm Emanuel... all that DLC/Blue Dog/Third Way garbage? On the day that vote is taken the Democratic and Republican careerist Beltway Establishments will stand together against America's working families. This is how Erick Erickson put it:

I hope the Romney campaign seriously takes on this idea. We have created a financial situation in this country, with Dodd-Frank and other policies, that have stacked the banks against the American people. They have become so massive that they can do pretty much what they want because they can hire all the lobbyists they need to get what they want from Washington and if they falter or fail, the nation goes belly up.

It is absolutely a conservative imperative to break up the big banks. Conservatism should eschew public-private partnership at this level. The banks have, in effect, become an extension of the government in that they now exist in a wholly symbiotic and unhealthy relationship with Washington. If we want smaller government, we need smaller banks too.

Romney isn't going to care what Erick Erickson says and they're not going to care what Simon Johnson said-- which is that link that Erickson is reacting too and with which he starts his post. The big banks are Romney's world and they're the toxic world his campaign is being financed by. Erickson's analysis might sound off-kilter-- and it should; it is-- but the route the right takes is bringing them to the same goal sane people want as well... breaking up the big banks. Robert Reich has been talking about it for a long time. And the most trustworthy man in the U.S. Senate, Bernie Sanders has as well. Three months ago:
"The debacle at J.P. Morgan Chase reaffirms my view that the largest six banks in this country, including J.P. Morgan Chase, which have assets equivalent to two-thirds of our GDP, must be broken up.  This is important in order to bring more competition into the financial marketplace and to prevent another ‘too-big-to-fail' bailout. At a time when 23 million Americans are either unemployed or underemployed, huge financial institutions should not be involved in ‘making wagers or high-stake bets.' They should be investing in the productive economy creating jobs and improving our standard of living." 

Earlier Bernie was in the well of the Senate explaining why the big banks have to be broken up. It makes a lot more sense than Erick Erickson while bringing us to a similar goal:

Bernie castigates conservatives, but I suspect Erickson and his pals would agree that the Establishment shills standing in the way of breaking up the banks feels towards them the way progressives feel towards Harold Ford, Rahm Emanuel, Joe Crowley, Steny Hoyer, Steve Israel and other "Democrats" in the employ of the banksters. How about if I told you that earlier this month Vitter and Sherrod Brown co-wrote a letter to Fed Chair Ben Bernanke urging the Fed to increase the capital requirements of megabanks and force the mega-banks to bear their own risks? The Wall Street Journal reported it a couple weeks ago. It's a long letter and I've taken a few excerpts, although you can read the whole thing on Brown's website.
We write today to impress upon the Board the importance of robust and reasoned capital standards that will preserve the safety and soundness of our financial system for years to come. Your proposed rule on capital standards misses a huge opportunity to address the too-big-to-fail issue by setting the so-called SIFI-surcharge too far low. We urge you to revisit your proposed rule and modify it so that mega banks fund themselves with proportionately more loss-absorbing capital per dollar of assets than smaller regional or community banks. The surcharge on the mega banks should be high enough that it will either incent them to become smaller or help to ensure they can weather the next crisis without another taxpayer bailout.

Placing higher capital requirements on megabanks is a common sense way to fix the dangers of too-big-to-fail. As you have said in the past, research done by the Federal Reserve and other regulators shows the tougher capital requirements will "significantly reduce the threat of a massive financial crisis" while doing little to limit economic growth. The mega banks should bear their own risks and have their financial incentives positively aligned in a way that protect the taxpayers. 

...The largest U.S. banks have substantial footprints in both commercial banking and capital markets activities.  George Washington University Law Professor Arthur Wilmarth estimates that these firms were responsible for, “about $9 trillion of risky private-sector debt … in the form of nonprime home mortgages, credit card loans, CRE loans, LBO loans and junk bonds … [and] $25 trillion of structured-finance securities and derivatives whose value depended on the performance of that risky debt, including MBS, ABS, cash flow CDOs, synthetic CDOs and CDS[.]”

There is still a high degree of concentration among the largest institutions across various financial products:

• As of September 30, 2010, the six biggest banks accounted for 35 percent of all U.S. deposits and 53 percent of all banking assets;

• The six largest banks also service roughly 56 percent of all mortgages, and nearly two-thirds of the mortgages in foreclosure;

• In 2011, the top 10 banks underwrote 70 percent of the municipal bond offerings, with the top three-- JPMorgan, Citi, and Bank of America Merrill Lynch-- underwriting 38.3 percent of all business.

Finally, the largest U.S. bank is also the second-largest player in the settlement of contracts in the $1.8 trillion-a-day tri-party repo market.

...As we have discussed at length, robust capital buffers will more appropriately align financial incentives and prevent future financial sector bailouts. However, in order to do so properly, you must have the Board to revisit the proposed rule to implement Basel III and modify the rule to include a SIFI surcharge significant enough to change the incentives for the largest banks. 

We agree with the Board’s belief that enhanced capital requirements for the largest, most complex institutions will “meaningfully reduce the probability of failure of the largest, most complex financial companies and would minimize losses to the U.S. financial system and the economy if such a company should fail.” And, we further agree that G-SIFI capital surcharges “would help require that these companies account for the costs they impose on the broader financial system and would reduce the implicit subsidy they enjoy due to market perceptions of their systemic importance.” However, the proposed rule is ultimately just a baby step in the correct direction. The Board must do more in order to protect taxpayers and the financial system. Properly constructed capital standards will take into account the extent to which institutions are already subject to capital requirements imposed by their respective regulators. Regulation of these institutions should not dramatically scale up or fall off a cliff once particular benchmarks have been reached. As Governor Tarullo has argued, $51 billion bank holding company should not be treated significantly differently from a $49 billion bank holding company, and we are encouraged to hear him say that that, “the supplemental capital requirement for a $50 billion firm is likely to be very modest.”

Oversight should not remain constant once particular thresholds have been crossed, so that a large regional bank that makes loans to consumers and small businesses is not treated the same way as a trillion-dollar money-center bank. Rules for capital and leverage should move on a sliding scale, with a focus on the largest and most complex megabanks.

That was signed by Senators Sherrod Brown (D-OH) and David Vitter (R-LA). Here's Brown on the floor of the Senate.

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