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GAO and Star Professors Look at Bank Holding Companies — Part I

By    |   Monday, 13 Jan 2014 07:46 AM

On Jan. 8, the Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection, chaired by Sherrod Brown, D-Ohio, held a hearing titled "Examining the GAO [Government Accountability Office] Report on Government Support for Bank Holding Companies." Lawrance Evans, director of financial markets and community investment at the GAO, presented the report.

Evans was followed by an unusually distinguished panel of academic experts who commented on the report, including: Luigi Zingales, a professor of entrepreneurship and finance at the University of Chicago who has recently been engaged by the Public Company Accounting Oversight Board (PCAOB) to run an in-house think tank; Simon Johnson, a professor at MIT and author of Thirteen Bankers: The Wall Street Takeover and the Next Financial Meltdown who has been a leader of the debate over policies that have allowed the "too big to fail" banks to grow "bigger, more profitable and more resistant to regulation than ever"; Harvey Rosenblum, an adjunct professor at Southern Methodist University and former director of research at the Federal Reserve Bank of Dallas, where he worked with Dallas Fed President Richard Fisher to document the exposure created by the financial crisis as $14 trillion, close to the annual GDP of the United States; and Allan Meltzer, a professor at Carnegie Mellon University who has devoted most of his career to advancing the work of Milton Friedman and Anna Schwartz as stewards of A Monetary History of the United States.

The GAO's testimony on "Government Support for Bank Holding Companies" says a lot in the subtitle: "Statutory Changes to Limit Future Support Not Fully Implemented." I predicted when the bill was under construction that it never would be implemented, based on the fact that previous legislation, going back decades, was never implemented, due to effective opposition from financial lobbies and from Congress itself.

According to the report, during the 2007-09 episode of the ongoing financial crisis, "the government extended unprecedented assistance" of "more than $1 trillion in loans, provided hundreds of billions of dollars of capital and guaranteed hundreds of billions of dollars of other liabilities for participating financial institutions."

Evans concluded that these interventions raise issues of moral hazard due to possible expectations of future assistance for activities beyond those of banks.

The GAO recommended that the financial regulators set a timetable for completion of their regulatory agenda, and the GAO plans to produce another report later this year. Sen. Elizabeth Warren, D-Mass., has been conducting a dialogue with Treasury Secretary Jack Lew over how long Congress should wait for the Treasury to be able to state "with a straight face" that the policy of too big to fail has ended. Lew issued such assurances last month, but Warren is not satisfied.

A group of senators led by Brown, Warren and David Vitter, R-La., have introduced legislation designed to require the largest banks to hold 15 percent capital and to create incentives for those banks to downsize their operations in order to reduce their risk.

The expert panelists provided a variety of other suggestions. Zingales contended that the only effective measure would be to require "prompt corrective action" by banks to raise additional capital whenever spreads on their credit default swaps warn of increase risk.

(Archived video and statements of witnesses can be found here.)

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Robert-Feinberg
On Jan. 8, the Senate Banking Committee's Subcommittee on Financial Institutions and Consumer Protection, chaired by Sherrod Brown, D-Ohio, held a hearing titled "Examining the GAO [Government Accountability Office] Report on Government Support for Bank Holding Companies."
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2014-46-13
Monday, 13 Jan 2014 07:46 AM
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