Even Conservatives Are Starting To Understand The Danger Of Banks That Are Too Big To Fail/Jail

You hear it often from figures of the left like Matt Taibbi and Bernie Sanders how crucial it is to have a serious discussion about breaking up the "too big to fail" banks. A few months ago Senator Sherrod Brown (D-OH) did an outstanding op-ed in the Washington Post about it. A month before, his proposal to withdraw taxpayer support of these banks, which have become little more than casinos, garnered 33 votes in the Senate, mostly progressives like Sanders, Jeff Merkley, Tom Harkin, Barbara Boxer, Tom Udall, Russ Feingold, and Pat Leahy but also from dyed-in-the-wool conservatives Tom Coburn ((R-OK) and Richard Shelby (R-AL), Ranking Republican on the Senate Banking Committee.

This act would eliminate the taxpayer support enjoyed by the largest Wall Street banks-- institutions that, by virtue of their size, could topple the entire U.S economy, should they fail.

Our amendment did not pass the Senate, but to judge from the numerous recent calls to limit the size and risk of Wall Street banks-- calls that are coming not only from public squares but from boardrooms too-- it’s clear that this commonsense idea is starting to take hold.

...When the Treasury Department decided which banks to rescue and which to let falter in the fall of 2008, it set the precedent that certain institutions are “too big to fail.” This status comes with an implicit guarantee from the federal government: As a result, ratings agencies give these megabanks a boost, and bondholders charge the banks less to borrow because they know that the government won’t let the institutions go under. Right now, about 20 of the nation’s largest banks can borrow money at a lower rate-- ranging from 50 to 80 basis points by some estimates-- than community banks can, thanks to this government guarantee.

Should the U.S. government give Wall Street banks an advantage over Ohio’s First National Bank of Sycamore? Supporters of truly free markets would say “no.” And yet our nation’s policies favor the trillion-dollar banks, fueling their risky activities.

This isn’t free-market economics. And it isn’t fair.

Government support also encourages megabanks to take more risks, by raising less equity and relying more on debt, than their community-bank competition. Research by Thomas Hoenig, a member of the Federal Deposit Insurance Corp.’s board of directors, shows that such banks need either to raise $300 billion in capital or to shrink their balance sheets by $5 trillion to meet the same standards that the market requires of community banks.

This is not how capitalism is supposed to work. It’s Wall Street welfare. And absent decisive action, U.S. taxpayers will continue to subsidize the largest banks.

...Megabanks should fund themselves the same way that community banks do: by attracting more capital and taking on less debt. Wall Street banks should use investors’ money-- not U.S. taxpayers’ money-- to make their bets.

It’s time for those who profess the virtues of the “free market” to put their equity where their mouth is. That means an end to the government guarantees that create a “heads I win, tails you lose” Wall Street culture. It means an end to picking winners and losers and an end to corporate welfare that gives trillion-dollar banks unfair advantages over regional and community banks. And it means preventing U.S. taxpayers from ever again being put in the position of having to bail out Wall Street.

This week, we heard a similar plea from a less likely source, conservative Establishment champion, George Will. He's urging conservatives to support Sherrod Brown's "break up the big banks" proposals, for the sake of the country.

The Senate has unanimously passed a bill offered by Brown and Sen. David Vitter, a Louisiana Republican, directing the Government Accountability Office to study whether banks with more than $500 billion in assets acquire an “economic benefit” because of their dangerous scale. Is their debt priced favorably because, being TBTF, they are considered especially creditworthy? Brown believes the 20 largest banks pay less when borrowing — 50 to 80 basis points less — than community banks must pay.

In a sense, TBTF began under Ronald Reagan with the 1984 rescue of Continental Illinois, then the seventh-largest bank. In 2011, the four biggest U.S. banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) had 40 percent of all federally insured deposits. Today, the 5,500 community banks have 12 percent of the banking industry’s assets. The 12 banks with $250 billion to $2.3 trillion in assets total 69 percent. The 20 largest banks’ assets total 84.5 percent of the nation’s gross domestic product.

Such banks have become bigger, relative to the economy, since the financial crisis began, and they are not the only economic entities to do so. Last year, the Economist reported that in the past 15 years the combined assets of the 50 largest U.S. companies had risen from around 70 percent of GDP to around 130 percent. And banks are not the only entities designated TBTF because they are “systemically important.” General Motors supposedly required a bailout because a chain of parts suppliers might have failed with it.

But this just means that the pernicious practice of socializing losses while keeping profits private is not quarantined in the financial sector.

...There is no convincing consensus about a correlation between a bank’s size and supposed efficiencies of scale, and any efficiencies must be weighed against management inefficiencies associated with complexity and opacity. Thirty or so years ago, Brown says, seven of the world’s 10 largest banks were Japanese, which was not an advantage sufficient to prevent Japan’s descent into prolonged stagnation. And he says that when Standard Oil was broken up in 1911, the parts of it became, cumulatively, more valuable than the unified corporation had been.

Brown is fond of the maxim that “banking should be boring.” He suspects that within the organizational sprawl of the biggest banks, there is too much excitement. Clever people with the high spirits and adrenaline addictions of fighter pilots continue to develop exotic financial instruments and transactions unknown even in other parts of the sprawl. He is undecided about whether the proper metric for identifying a bank as “too big” should be if its assets are a certain percentage of GDP-- he suggests 2 percent to 4 percent-- or simply the size of its assets (Richard Fisher, president of the Federal Reserve Bank of Dallas, has suggested $100 billion).

By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail. Aux barricades!