A bronze sculpture of the New York Stock Exchange Bull is
seen at the Museum of American Finance in New York, 2 October 2008.
By James Pethokoukis
Federal Reserve Chairman
Ben Bernanke isn’t just a central banker, he’s a banking supervisor and
regulator. And in that role, he said something very interesting Wednesday.
While acknowledging that markets “to some extent” now think it more likely
government would let a major financial institution fail, he also said the “too
big to fail” problem “is not solved and gone.” And later: “I don’t think too
big to fail is solved now. … [It is] a real problem and needs to be addressed,
if at all possible.”
Point taken. Smartly
addressing the issue could involve a) capping bank size, b) restructuring how
banks operate, or c) making them fund their loans with more unborrowed money —
or some combo of all three. Wall Street would change dramatically.
The move to “break up
the big banks” (BUBB) seems to be slowly gaining momentum on Capitol Hill.
Analyst Jaret Seiberg of Guggenheim Securities Washington Research Group gives
it a one-in-three chance of happening, describing the possibility as a “real
risk.”
He says that “if
Congress was ever given the chance for an up or down vote on whether to break
up the biggest banks, the big banks would lose every time.” Not only are
regulators are looking to pressure the biggest banks to voluntarily shrink, but
going after big banks “provides cover for lawmakers and regulators to offer
help to community banks, regional banks, and credit unions.”
Now here’s why Seiberg
doubts that “up or down” vote will happen:
1. The Obama administration has never pushed to
break up the mega banks. So there is no cover coming from the President and no
pressure for action coming from the White House or its political operation.
2. This is not really something the average
voter cares about. What matters more is how much one pays to use an ATM or how
hard it is to get a mortgage. The size of banks is not a major worry for most.
3. TARP made the government money. In fact, the
government is even likely to collect more money from Fannie and Freddie than it
invested in the enterprises. As a result, there is not as big of an outrage
over the so-called bail out of the banking system.
4. We get no impression that leadership in the
House or Senate wants to take on this fight. Without the strong support of
leadership on both sides of Capitol Hill, these measures cannot advance.
5. Big corporations would likely fight any
effort to break up the mega banks. They may not love the mega banks, but we
suspect they would worry that letting the government break up big banks simply
because of their size would create a precedent to go after large companies in
other sectors of the economy.
6. Lawmakers from major financial centers in the
United States would work behind the scenes to kill any effort to break up the
banks. The argument will be that it could diminish New York’s place in the
international financial community, which could result in job losses.
7. On the regulatory front, we believe the
agencies will tighten the screws on the mega banks.
Yet we also believe the
banks are prepared to wait out the agencies until the environment changes. And
the environment is definitely changing. We heard a Republican lawmaker on
Wednesday argue to the FDIC that it was wrong for them to limit C&D lending
to 100% of capital.
If lawmakers are willing
to argue for a return to concentration levels that helped cause the crisis,
then it is hard to see how the anti-big bank campaign can maintain momentum for
more than a few years.
Good points and a needed
reality check. (I will address each point in a forthcoming post.) The roots of this variant of crony capitalism
run deep. Uprooting them won’t be easy. A lot of educational spadework needs to
be done, clearly. But from a center-right perspective, this is a pro-market
policy issue with political potency and immense rebranding potential.
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