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A Call to Arms on Too Big to Fail

By: Bill Poquette

A riveting new chapter in the too-big-to-fail saga unfolded last month as a new study quantified the multi-billion-dollar subsidies enjoyed by the nation’s largest banks due to their perceived invincibility; the Senate passed a budget amendment to end the subsidies; and the U.S. attorney general admitted that these financial behemoths are too big to prosecute — or, as some say, too big to jail.

Shortly before Congress broke for its Easter recess, Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., offered an amendment to the Senate budget resolution to end the federal subsidies for too-big-to-fail megabanks.  The non-binding measure passed 99–0. The two senators also have announced plans to introduce legislation to break up the biggest banks.

“It’s time we stop subsidizing risky Wall Street practices. We’ve seen how too big to fail is also too big to manage, too big to regulate and too big to jail,” Brown said. “Yet the biggest Wall Street megabanks are actually rewarded with a government guarantee by virtue of their size.”

“Too big to fail is alive and well, and at the expense of taxpayers,” Vitter said. “These special handouts create an uneven playing field — making it harder for our community banks and credit unions to compete with the megabanks.”

The International Monetary Fund has attempted to quantify the subsidies, the senators said. According to the IMF study, before the financial crisis the amount “was already sizable, 60 basis points, as of the end of 2007, before the crisis. It increased to 80 basis points by the end of 2009.” According to Bloomberg’s calculations, JPMorgan, Bank of America, Citi, Wells Fargo and Goldman Sachs account for $64 billion of the total subsidy; “an amount roughly equal to their annual profits.” 

Attorney General Eric Holder’s “too big to jail” revelation came during a Senate Judiciary Committee hearing in early March. A few days later, Federal Reserve Chairman Ben Bernanke said in a press conference that he agreed with the view expressed by Sen. Elizabeth Warren, D-Mass., that not enough has been done to eliminate the concept of too big to fail. “Too big to fail is not solved and gone,” Bernanke said. “It’s still here.”

Adding intrigue to the drama was a separate but related event: the release of a scathing report from the Senate Permanent Subcommittee on Investigations on JPMorgan Chase Bank’s “London Whale” debacle. With the release of the report, Sen. Carl Levin, D-Mich., chairman of the subcommittee, recalled that in April of last year, “Americans were confronted with a story of Wall Street excess and derivatives disaster now known as the JPMorgan Chase whale trades.

“Our report opens a window into the hidden world of high-stakes derivatives trading by big banks,” Levin said. “And it reveals one overreaching fact: the U.S. financial system may have significant vulnerabilities to high-risk derivatives trading. Our hearing sparked an outpouring of support for action to combat the problems we uncovered.”

What last month’s attention-getting developments may lead to was suggested by Camden R. Fine, president and CEO of the Independent Bankers Association of America, during a press roundtable at the association’s annual convention in Las Vegas last month. The moves of Brown and Vitter “speak volumes” about the progress being made on the TBTF issue, he said. Momentum is building and by late fall of this year there may be “sufficient critical mass to deal in a constructive way with too big to fail.”

Bill Poquette is editor-in-chief of BankNews.

Copyright (c) April 2013 by BankNews Media


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