Treasury Secretary Jack Lew was confronted with a so-called "Harvard study" at a Senate Appropriations committee hearing on March 3rd, and will probably be asked about it again at the House Appropriations committee hearing on March 4th. That's because Wall Street and its allies are once again pretending to care about community banks while trying to roll back financial reform to help, you guessed it, Wall Street.
But, don't be fooled by industry's spin on this so-called "study." It's a perfect example of how Wall Street's dangerous too-big-to-fail banks hide behind the rhetoric of "helping community banks" to push their de-regulatory agenda. The recommendations are little more than Wall Street's wish list repackaged and re-labeled as a "study." The reality is that this is a working paper written by a former officer of JP Morgan Chase, the biggest too big to fail bank in the U.S. and the world. It's not from Harvard. It even says on the first page that it doesn't reflect the views of Harvard and has "not undergone formal review or approval."
This working paper has multiple significant substantive flaws that thoroughly discredit it. Most remarkably, it ignores the impact on small banks of the financial crash of 2008, which was the worst crash since 1929 and caused the worst economy since the Great Depression of the 1930s. The cost of all that to the U.S. is going to be more than $12.8 trillion. GDP plummeted, business activity crashed, small businesses went bankrupt at historic rates, tens of millions lost their homes, unemployment and under-employment skyrocketed to more than 40 million Americans and home prices fell to 2001 levels. The impact of that economic catastrophe on small banks and its customers was ignored by the author, who wanted to and did blame all problems facing small banks on Dodd-Frank.
Without basis -- and contrary to fact -- he then arbitrarily began what he called the "post crisis" period on March 1, 2010 and then claims that all bad things that happened to small banks after that date have been due to the Dodd-Frank law. Except the Dodd-Frank law wasn't passed until seven months later (July 21, 2010) and it was not self-executing. For the law to be effective and applicable, including any provisions that might be related to small banks, it had to go through the rule making process, which in the ordinary course usually takes years. However, the entire process for Dodd-Frank has been repeatedly delayed mostly due to Wall Street lobbyists who have laid siege to the regulatory agencies. And, even when an agency issues a final rule that doesn't end the fight for Wall Street -- it has often sued the agency in court to get the rule overturned. As a result, depending on how you count, less than half of Dodd-Frank rules have been finalized even today -- in 2015 -- and many that have been aren't yet effective. Moreover, almost none of them apply to small banks! The leading and very effective trade group for small banks actually endorsed Dodd-Frank after it expressly included numerous provisions making sure they were not applicable to small banks.
In addition to the numerous other fatal flaws in the working paper here, the author's proposals to address the problems that his tendentious paper created are directly from Wall Street's wish list and directly contrary to the interests of small banks, the purported object of the author's concerns. They would effectively gut financial reform, unleash the too-big-to-fail banks and result in reckless, unregulated banking -- again. That not only threatens another financial crash and the economic devastation that will result (which will again disproportionately hurt small banks), but it also continues the indefensible subsidies to the biggest banks, which then compete unfairly against small banks.
Ending too-big-to-fail, not perpetuating it as this author's suggestions would do, is one of the best things anyone could do for small banks. But, that is just another one of the many facts ignored in this working paper.
One of the unfortunate things about Washington D.C. policy debates is that they are often fact-free or little more than spin. Too much of that comes from the Wall Street fog machine that creates complexity and confusion in addition to just spewing out propaganda to support their baseless, self-interested positions.
One of the favorite and frequent ways Wall Street does this is to have allies, usually undisclosed purchased allies, put out a "study" or "report" that seems like it is from someone independent and authoritative. Then that study or report focuses on something other than Wall Street's interests, which are never stated, but those other interests nonetheless line up with Wall Street's wish list to be deregulated and go back to policing themselves -- which means no policing at all, i.e., the circumstances that caused the financial crash of 2008, the massive taxpayer bailouts and the economic wreckage still inflicting damage on tens of millions of Americans today. That is exactly what is going on here with this working paper.