Larry Summers Defends Megabanks, Says Too Many Small Banks Make U.S. 'Less Stable'

President Barack Obama's top economic adviser defended megabanks Thursday, arguing that breaking them up serves no purpose and that a proliferation of smaller banks would instead make the financial system "less stable."

The remarks stand in sharp contrast to those being made by the presidents of at least three regional Federal Reserve banks, one Nobel Prize-winning economist, top bank regulators in Europe, and former Wall Street chieftains, all of whom argue that in order to truly end Too Big To Fail, the U.S. needs to shrink its top financial institutions so that none of them ever again threaten the financial system.

In an interview with "PBS NewsHour", Lawrence H. Summers, director of the White House's National Economic Council, said that breaking up megabanks would hurt the economy.

"Most observers who study -- who study this believe that to try to break banks up into a lot of little pieces would hurt our ability to serve large companies and hurt the competitiveness of the United States," Summers said in response to a question about whether the U.S. should go further in trying to end Too Big To Fail by limiting the size of banks.

Federal Reserve Bank of Kansas City President Thomas M. Hoenig calls the idea that the U.S. needs megabanks to compete globally a "fantasy."

The leading financial reform bill in the Senate, authored by Senate Banking Committee Chairman Christopher Dodd and championed by the White House and the Democratic Party leadership, does not call for the nation's largest financial institutions to be broken up. It largely preserves their size and market dominance, though Senate and administration officials argue that tougher regulation may eventually lead firms to shed assets.

The banks owned by the four largest financial firms in the U.S. -- Bank of America, JPMorgan Chase, Citigroup and Wells Fargo -- collectively account for nearly half of all assets in the U.S. banking system, according to Federal Deposit Insurance Corporation data.

Those four megabanks collectively hold about $7.4 trillion in assets, according to the most recent regulatory filings with the Federal Reserve. That's equal to about 52 percent of the nation's estimated total output last year.

The top 12 banks in the U.S. control half the country's deposits. By comparison, it took 25 banks to accomplish this feat in 2003 and 42 banks in 1998, according to a Jan. 4 research note by Jason M. Goldberg of Barclays Capital.

But when asked whether the U.S. should break up these giant institutions, Summers said no. He added that it's not significant.

"But that's not the important issue," Summers said during the interview, adding to his answer as to why the U.S. shouldn't break up megabanks. "[Observers] believe that it would actually make us less stable, because the individual banks would be less diversified and, therefore, at greater risk of failing, because they would haven't profits in one area to turn to when a different area got in trouble.

"And most observers believe that dealing with the simultaneous failure of many -- many small institutions would actually generate more need for bailouts and reliance on taxpayers than the current economic environment," he added.

The FDIC has an insurance fund, derived from levies on banks, to process failed banks and protect depositors. The financial crisis of 2007-09, which led to the worst economic downturn since the Great Depression, was not caused by small bank failures.

A bill championed by Democratic Senators Ted Kaufman of Delaware, Sherrod Brown of Ohio, Robert P. Casey of Pennsylvania and Sheldon Whitehouse of Rhode Island proposes to break up financial behemoths. Observers say the proposal is gaining steam.

A test vote in the Senate Budget Committee on Thursday, which essentially would have expressed support for breaking up megabanks, failed by just a 12-10 vote. The small margin was surprising, one Senate aide said.

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HuffPost posed the following questions, which were based on Summers's remarks, to the White House:

- Does Mr. Summers and/or the administration wish to see a Canadian-style banking system in the U.S. in which a handful of firms dominate the market in exchange for tougher oversight?

- Does Mr. Summers and/or the administration believe that larger institutions pose less risk to the financial system, due to their diversity?

- And for clarification's sake, how does "the simultaneous failure of many -- many small institutions...actually generate more need for bailouts and reliance on taxpayers than the current economic environment"?

In response, an administration spokesman e-mailed the following statement:

"The Administration has made clear its commitment to comprehensive Wall Street reform. The Administration's approach to ending Too Big To Fail includes stronger, more comprehensive regulation, higher capital requirements, new resolution authority to allow failing firms to fail, and restrictions on the size and scope of financial institutions. We cannot and will not go back to the status quo that caused the financial crisis."

UPDATE at 2:15 p.m. ET:

"Banks in the United States are proportionately smaller than in Canada and in many European countries," writes Matthew Vogel, a White House spokesman, in an e-mail to HuffPost. "We propose nothing to increase the size of financial institutions. In fact, we tighten the limit on liabilities to further prevent firms from growing excessively large and require firms to separate out their riskiest, proprietary trading activities."

WATCH the video below (scroll to the 4:26 mark):

Comments

[Bayard Waterbury]

02:24 AM on 05/25/2010

Wow, I knew that Summers was dangerous, I just never realized that he is a dangerous as Dick Cheney, but even as Halliburton has dodged guilt for its continuous manipulation of government regulation of off-shore drilling, now Summers believes that he can somehow convince the "poor ignorant populace" that our little peon selves can't appreciate just how destabilizing small banks can be. And, he will sell you the Brooklyn Bridge for a song.

I am betting that he can't find three intellectually honest economists who will believe in him. Mr. Obama, maybe you can salvage some small bit of your reputation by turning his sorry*** out on the street. Or maybe a lobotomy. I actually chuckle as I read things like this. Larry is the last word in pompous. He actually believes what he says.

[lost souls rembrd]

09:32 PM on 05/15/2010

Brooksley is an incredible woman who held her own. That program was/is so insightful into the goings on in Wall street. I was appauled at how the Congressional leaders in that Committee hounded her and were so disrespectful.

Where is she now? My goodness, I deeply wish Pres. Obama would bring her aboard and get rid of those crooks/summers & Geithner. You know at times I get so overwhelmed at ALL the horrible and destructive things that are going on in our Country.

Who needs to worry about bin laden when you have your own countrymen, through their own greed and self righteousness, committing crimes against humanity right in our own backyard.

[lost souls rembrd]

09:23 PM on 05/15/2010

larry summers is a bald faced liar. Him and Geithner should go work on bush's ranch......and they can all gloat on the hood winking of corruption.

[mannapat]

12:48 PM on 04/26/2010

When is Obama going to get rid of Summers and Geithner? By keeping them on, he's sending a message that he's not really serious about cleaning up Wall Street.

[HuffPostSteveKoch]

11:27 AM on 04/26/2010

These statements clearly expose Larry Summers’ hidden agenda: make the U.S. subservient to the global elite. Please everybody, Google ‘Larry Summers’ and learn who this guy is.

In his early academic days Summers proposed ways to ‘globally’ manipulate commodity/security prices and currency exchange rates. His economic/political/social engineering ‘theories’ are central to the grand ‘Globalization’ scheme he and his global elites have been constructing around the U.S. for the past few decades.

First they (i.e. Summers, Rubin, Greenspan, Clinton, Bush, Obama, etc.) printed and funneled massive amounts of money into the finance industry to merge/acquire/consolidate all our industries/skills/resources into massive international/global monopolies/oligarchies. The recent economic crisis was just the latest (accelerated) phase of this process. By now, the majority of wealth has ‘trickled’ up and OUT of the U.S..

These global elite now control the U.S. government. They are now free to move global production/consumption around the world as they will. They have no particular allegiance to the U.S.. Think about it: if you were one of the global elite with a private plane, homes, and friends scattered around the globe in lavish exotic places, wouldn’t you be beyond the lowly status of being a citizen of any one country? Wouldn’t you be beyond taxes and laws? Would you care about the general welfare of one subservient country or another? Would you let your global corporations be controlled by one subservient country or another?

[ThomastonPaine]

09:38 AM on 04/26/2010

For those who have yet to see this critically important work:

Outstanding PBS Frontline Documentary that further touches on Allan Greenspan, Robert Rubin and Larry Summers’ substantial roles in the financial meltdown: "The Warning"
http://www.pbs.org/wgbh/pages/frontline/warning/view/

[Carl Caroli]

07:06 AM on 04/26/2010

An insider all the way. We need to break up the big banks to limit their influence in our government, period. None of these guys ever mention that as part of the argument, when it should be the main reason.

[DiogenesOfAlaska]

08:21 PM on 04/25/2010

My guess is that Mr. Summers needs to go out more often to find what 'most observers' think or argue.

Of course many failing small banks can be a pain in the back as well. But that's a different story. When the question is whether the big banks are too big, then the alternative is not many small banks, but a FEW smallER banks.

So I am still waiting for the response to that HuffPost question to the White House: do you think that large banks pose less risk due to their diversity?

But the answer to that question is not even the only point. Because there's also the simple fact of too little players dominating a market, resulting in an oligopoly.

I'm afraid I really don't know what Summers was talking about.

[gaubladt]

06:53 PM on 04/25/2010

Liken the breakup of the banks to the breakup of the Soviet Union. The dammage that a united Soviet Union could, and probably would, do to its subordinate nations in the future was much greater than the dammage that was done by breaking it up. Likewise, the dammage that Bank of America, Citigroup, and Goldman Sachs can do to the rest of us necessitates their demise.

[hellboundtrain]

06:27 PM on 04/25/2010

Smaller banks are hugely better. If they get into trouble they are more easily managed.
So that the taxpayers will not be on the line for their losses.

Mega banks = mega bill for taxpayers

[kareemachan]

01:20 PM on 04/25/2010

I dunno, I think our local credit unions are doing much better than banks in general. What's wrong with them?

[Mensa]

02:29 PM on 04/25/2010

There's nothing wrong with them. However, they can't extend Coke or WalMart or American Express - to name a few - an additional $500 million line of credit to open a new factory, enter new markets, etc.. like big banks can.

[LibertyBell7]

03:11 PM on 04/25/2010

What makes the Big Banks TBTF is they were allowed to become more than just "banks." Banks became merged with speculative investment firms (gamblers) and allowed to merge with insurance companies (for-profit vampires, the way that insurance seems to work these days) and those mergers left institutions that that took in people's life savings, gambled with them (in many fraudulent ways as seen by the single GS example) -- and the whole works now fell under FDIC protections (federally insuring their gambling and fraud).

In short, what is needed is the un-repealing of Glass-Steagal or putting such similar legislation back in place, that makes it illegal to merge savings and loan institutions with the gamblers and insurance vampires: A de facto breaking of these TBTF organizations in ways that prevented such economic meltdowns between the time Glass-Steagal was put in place following the Great Depression and when it was removed through a Republic Party led congress over Bill Clinton's signature.

And, of course, that repeal of Glass-Steagal and Clinton's signature all happened on the advice of Robert Rubin and his protege Larry Summers.

[PS9]

07:34 PM on 04/25/2010

Nothing is wrong with them.

Although I don't think that General Motors or Ford or Microsoft use community banks.

[Retrofuturistic]

12:45 PM on 04/25/2010

Summers' comments reflect badly on the Obama administration.

[lastams]

09:23 AM on 04/25/2010

Bill Moyers had an interesting interview with William K. Black this past week.

From that interview:

BILL MOYERS: ...Goldman's former lobbyist, his treasury secretary, Timothy Geithner's chief of staff, the head of the Commodity Futures Trading Commission, Gary Gensler, who may soon have new power over derivatives, (all) worked for Goldman.
So did the deputy director of the White House National Economic Council, the under Secretary of State is a former Goldman employee. Goldman's hired Barack Obama's recent chief counsel from the White House on his defense team.
...So is this administration, which still has some Bush holdovers in it, and now has a lot of Goldman people in it, is this administration going to be able to pass judgment on Goldman Sachs?

WILLIAM K. BLACK Well, so far, they haven't been able to do it. They can't even get themselves to use the word fraud.

[backekuchen]

08:39 AM on 04/25/2010

The mega banks are impersonal. I checked my account on line. I saw some odd stuff going on like "checks" taking money from my account that I didn't authorize. I went to the bank and wanted to speak with a banker. Instead the customer service rep gave me a number to call. Now for 30 minutes I'm attempting to discuss a problem with someone who might be in Ohio, Mississippi, or who knows where. This is supposed to take care of the problem.

In the days when banks were "local" you could go in and the banker would work on getting the problem solved or at least explained to your satisfaction. Now you must discuss it with someone you can't see face to face.

Personal banking does not exist anymore.

[Kevin Atlanta]

08:21 AM on 04/25/2010

The Vile Larry Summers not only rode herd over the de-regulation with Clinton but rears it's ugly failure head after delivering the Russian people into the hands of an Oligarchy that is worse than what's here in the USA.
Get this man out Mr President and restore the faith of the American People in your administration. It's bad enough that you have George W Bush Bernanke & Geithner still leading the rape of the American People but you now have Summers, the failure and nepotist in a place where he is offensive.