With regulators out of sorts, mention of the issue of too big to fail (TBTF) in Wednesday night’s debate adds some energy both to the campaign and to the policy debate at a time when a shuffle among financial regulators is in prospect after the election, and the chairs of the House committees will rotate regardless of which party controls the House.
Mitt Romney repeated the line of Congressional Republicans and the banking industry that so-called unintended consequences of the Dodd-Frank Act are weighing on the economy.
This writer has always thought that any consequences of Dodd-Frank will be unintended. It is most likely to preserve the status quo, just as all of the previous solutions to the ongoing financial crisis have done, while the scope of the exposure continues to grow. Romney quipped that the resolution provisions of Dodd-Frank amount to a “wet kiss” implanted on the industry.
His remark has been played as a shot at the banks, but President Barack Obama has made a show of admonishing the banks with one hand while propping them up with the other and then bringing the first hand back to accept their political and financial support. On the whole, the financial industry and recent administrations of both parties appear most of the time to operate as affiliated units of a single enterprise.
Speculation centers on Citibank, JPMorgan Chase, Bank of America, Wells Fargo, and Goldman Sachs as the most systemically significant banks. The first three are the same ones this writer identified to the Reagan transition in 1981 as having the potential to bring the economy down. Of the last two, Well Fargo is really the old Norwest Bank out of Minneapolis that took over Wells Fargo and acquired the name and the niftiest corporate logo in the business.
Now Wells is being celebrated for its rapid expansion in the mortgage space only about five years after that sector’s most recent blowup. Bank of America is actually the old North Carolina National Bank, which was allowed to grow to systemic proportions through the acquisition of the old BofA after that bank was weakened by acquisitions of troubled banks such as Seafirst.
Goldman joined the club after it switched from a partnership to a public company, then was allowed by regulators to ramp up its leverage to the neighborhood of 40 to 1, then was allowed, along with Morgan Stanley, to morph into a bank-holding company in order to receive a bailout from the Federal Reserve after its CEO, Hank Paulson, moved to Washington and took over the Treasury.
Behind this first-tier of systemic threats lies another group that may be called “aspirational TBTFs,” regional banks that have the potential to grow to systemic size through acquisition or may already be treated as TBTF because of the group’s exposure to commercial real estate, a segment that caused a crisis two decades ago and has the potential to do so again within the next five years.
Republican critics are right to point out that even as the authorities – the Treasury, the Federal Reserve, and the other financial regulators – proclaim the end of TBTF and the advent of living wills, the largest banks enjoy a funding advantage akin to what Fannie Mae and Freddie Mac received based on the perception that they were government-backed, a view that turned out to be true but did not save them from careening into conservatorship as their shareholders were wiped out.
Community banks whine about the disparity of funding costs and seek federal aid through extension of a program that guarantees corporate deposits above the official ceiling of $250,000.
At the same time that the FDIC holds meetings designed to dramatize its determination to implement the “living wills” provisions of Dodd-Frank, Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke defend banks of systemic size as necessary to serve multinational corporations in the competitive global marketplace, echoing the arguments of industry leaders such as JPM’s Jamie Dimon.
The reality is that it is almost certainly much too late to take measures to contain the exposure of the economy to wobbly banks; these needed to be implemented thirty years ago.
Some other comments in today’s discussion of the policy of the authorities regarding the financial sector include remarks by James Bianco and Edward Yardeni. Bianco pointed out that 25 percent of the U.S. banking industry consists of units of European banks.
Presumably this fact colors actions such as Fed swap lines that are presented as necessary to support dollar lending, not as a means of propping up both U.S. and foreign banks. Yardeni, who is always bullish, mentioned signs of growth in the housing sector as evidence that the U.S. economy is poised for growth like a “coiled spring” thanks to recoveries in housing and autos.
Contrarians will point out that this is the same housing industry whose boom and bust led to the recession and slow growth that still persist.
However, Yardeni injected a useful note of caution when he suggested that even if Romney were somehow to defeat Obama, gridlock with Congress could still occur.
This writer would go so far as to say that this could occur even if the Republicans controlled Congress, but we’ll probably never know.
Robert Feinberg served on the staff of the House Banking Committee for 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms, and trade associations.
Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog, and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.
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