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Doubting Dodd-Frank

By: Bill Poquette

The revelation of a trading loss of more than $2 billion and possibly as much as $3 billion at JPMorgan Chase Bank by its vaunted chairman and CEO, Jamie Dimon, arrived as a sort of exclamation point for the rising chorus of critics who would break up the nation’s largest banks or curtail their proprietary trading.

In a timely response to the debacle, during a recent speaking engagement in Louisville, Ky., St. Louis Fed President James Bullard said he supported his colleague, Dallas Fed President Richard Fisher, in calling for the breakup of banks considered too big to fail. “It would be simpler to say we want smaller institutions so they can safely fail if they fail,” Bullard said in response to questions about JPMorgan’s loss.

Other new calls to break up or rein in the financial behemoths are being heard almost weekly. One came from Thomas M. Hoenig, speaking as a new member of the FDIC board. Hoenig, who spoke forcefully and often on this issue in his prior role as president of the Kansas City Fed, told a recent gathering of community bankers in Des Moines that the largest banks should be forced to spin off their investment banking and securities businesses.

Hoenig’s successor in Kansas City, Esther George, emphasized the folly of the concept of too big to fail and unbridled proprietary trading in a speech at Bard College in New York City. Ending too big to fail is the only sure way to curtail the expansion of public safety nets and break the pattern of repeated and ever-escalating financial crises, George advised. Also, “I support the goals of the Volcker Rule in eliminating proprietary trading by bank and thrift organizations, and I hope we can develop an appropriate regulatory and supervisory framework to implement these provisions,” she said.

Voices from the private sector were heard in recent op-eds in The Wall Street Journal. “Taxpayer safety nets such as the FDIC should only be available to banks that are in the loan business, not those in the investment business,” wrote Tom C. Frost, chairman emeritus of Frost Bank in San Antonio, Texas.

In another contribution to the Journal’s op-ed page, investment banker Warren A. Stephens, CEO of Stephens Inc. in Little Rock, Ark., wrote, “We need bank reform that addresses the root of the problem: Some banks are simply too big — for their own good as well as that of investors, the economy and their customers.”
The serious threat to the economy from too-big-to-fail institutions is presented starkly in an essay by Harvey Rosenblum, the Dallas Fed’s executive vice president and director of research, in the bank’s 2011 annual report. The Dodd-Frank Act attempts to address too big to fail, he noted, but he is not a firm believer. “While commendable in some ways, the new law may not prevent the biggest financial institutions from taking excessive risk or growing even bigger,” he wrote. “If allowed to remain unchecked, these entities will continue posing a clear and present danger to the U.S. economy.”

It is troubling that a growing number of regulators and other influential observers are suggesting that Congress may have missed the mark with its response to the recent financial system meltdown. The Volcker Rule is in a state of flux and it’s hard to feel comfortable with the supervisory tools provided in the Dodd-Frank Act. Will they be effective in dealing with too-big-to-fail banks and excessive risk-taking by these institutions? Sadly, we won’t know until the next crisis arrives.

Bill Poquette is editor-in-chief of BankNews.

Copyright (c) June 2012 by BankNews Media