A top Republican architect of the 2008 bank bailout stunned financial observers Tuesday with a speech calling on Congress to consider breaking up the nation's biggest banks, injecting an unlikely new voice into a debate that has dogged the Obama administration and roiled the Democratic presidential race.
“I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy,” Neel Kashkari, a former Goldman Sachs executive who worked for Treasury Secretary Hank Paulson during the George W. Bush administration, said at the Brookings Institution in Washington.
Kashkari, now president of the Federal Reserve Bank of Minneapolis, likened big banks to nuclear reactors and said the 2010 Dodd-Frank law championed by President Barack Obama to curb the risks large financial institutions pose to the economy "did not go far enough” to protect against a meltdown.
Instead, Kashkari said policymakers should give “serious consideration” to three proposals: Forcibly restructuring large banks into smaller ones, turning big banks into public utilities, or making it more expensive for all financial firms to use borrowed money.
Voters’ unease with the size and power of large Wall Street firms has energized the Democratic primary. Sen. Bernie Sanders (I-Vt.) and former Secretary of State Hillary Clinton have been fighting to prove who would be tougher on restraining Wall Street if elected. Sanders wants to break up big banks now; Clinton doesn’t.
Sanders said Tuesday that he was “delighted” by Kashkari’s speech. Jesse Ferguson, a spokesman for Clinton, didn’t have an immediate comment.
With the nation’s biggest banks getting larger since the 2008 financial crisis, and larger still after Dodd-Frank, Kashkari joins policymakers and experts who say large financial firms remain too big to fail.
Too-big-to-fail is the notion that some banks, such as JPMorgan Chase or Citigroup, are so important to the economy that government officials always will bail them out if they neared collapse. These firms are inclined to make risky bets because they know they'll be protected. Kashkari said too-big-to-fail "contributed significantly to the magnitude of the crisis and to the extensive damage it inflicted across the economy."
The White House, backed by large banks, has sought to dispel worries. In July 2013, Treasury Secretary Jack Lew said that if policymakers couldn’t agree by the end of that year “with an honest, straight face" that too-big-to-fail had ended, then "we are going to have to look at other options.”
Measures that require banks to reduce their reliance on borrowed money and provide regulators with blueprints detailing how they'd be resolved if nearing failure are among post-crisis reforms that regulators and the Obama administration have argued would end too-big-to-fail.
But last week, Federal Reserve Chair Janet Yellen said it was "premature to say we have solved too-big-to-fail." She added that regulators had made "substantial strides."
The administration hasn’t offered any new options since Lew's 2013 speech. Some lawmakers, including Sen. Sherrod Brown (D-Ohio), have tried to rally support for proposals that would restructure big banks. Rob Friedlander, a Treasury spokesman, declined to comment.
Kashkari said his work during the financial crisis shaped his views on big banks. Citing his experience at the Treasury Department, he said policymakers don’t know all the firms whose failure may trigger a financial crisis and government officials won’t spot the next looming crisis. The consequences of a big bank failure -- a financial crisis that destroys jobs and household wealth -- are so “staggering” that policymakers will bail out an institution rather than allow it to fail, he said.
For example, Kashkari said he and his colleagues at Treasury were forced to support shotgun marriages between relatively strong banks and their weaker peers even though they knew the deals would make too-big-to-fail "worse in the long term."
In 2008, JPMorgan Chase purchased Bear Stearns and Washington Mutual, Wells Fargo bought Wachovia, and Bank of America acquired Merrill Lynch.
Big banks and their allies in Washington often argue that large financial firms confer benefits on the U.S. economy that would be lost if they were broken up, such as lower costs for certain customers, much easier banking, and a competitive advantage against other nations.
Kashkari said such arguments are “unpersuasive.”
The “massive” costs of a big bank failure outweigh any benefits big banks provide, Kashkari said. And it’s wrong to assume that multinational corporations -- which manage thousands of suppliers around the world -- wouldn’t be able to manage a few more banking relationships, he said.
Further, U.S. policymakers shouldn’t try to prop up big U.S. banks so they can compete with foreign banks that aren’t subject to America’s stringent rules. “If other countries want to take extreme risks with their financial systems, we can’t stop them -- but the United States should do what is right for our economy,” Kashkari said.
“Any plan that we come up with will be imperfect,” Kashkari said about breaking up banks. “Perfect cannot be the standard that we must meet before we act.”
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