The Obama administration has a big opportunity to get on the right side of history and finally do something about the size, complexity and riskiness of our very largest banks. It can support the bill which will shortly be introduced by Senators Sherrod Brown (D-OH) and David Vitter (R-LA). While it doesn't explicitly break up TBTF banks, the bill is a major step in the right direction. It requires banks to maintain a ratio of 10 percent of equity capital to total assets so that they would be much less likely to need a government bailout in the next financial crisis. In addition, it imposes additional capital requirements of up to 15 percent on banks with assets of more than $400 billion, which would encourage the megabanks to restructure.
This is not my perfect bill. That would directly address the fact that banks that are too big to fail and demonstrably too big to manage are too big to exist. Our megabanks should be broken up, ideally using something like the Glass-Steagall approach that served us so well for over 60 years before it was repealed in the 1990s. But support for Brown-Vitter would be a very welcome change in course for the Obama administration.
Led by Treasury Secretary Geithner, Obama's first-term financial team was openly dismissive of any congressional proposals to impose size limits on banks. They actively opposed the Brown-Kaufman amendment to Dodd Frank, which would have imposed asset and liability limits on banks and was defeated by a 61-33 Senate vote in 2010. They announced support for the Volcker amendment, but fought proposals such as the Merkley-Levin amendment that would have made it much better. They supported changes in Dodd-Frank that kicked the can down the road to regulators who were subsequently overwhelmed by bank lobbyists.
A second term is a second chance, but there has not yet been a sign of change in the White House on TBTF reform. By all accounts a smart, dedicated public servant, new Treasury Secretary Jack Lew's revolving door career outside government included a two-year stint at Citibank that paid him a large bonus specifically because he was going back to a high level job in the Obama administration. Mary Jo White, the new chair of the SEC, was a tough, effective U.S. Attorney for the Southern District of New York. That would have made her the right choice in 2008, but right now we need an experienced financial expert, not a prosecutor. In addition, she will have to recuse herself in cases involving her law firm clients, including JPMorgan Chase, Bank of America, and Morgan Stanley.
And yet. The odds were against passage of Brown-Kaufman two years ago, even if the administration had supported it. Since then -- after the London Whale and LIBOR scandals, after the ineffectiveness of much of Dodd Frank became obvious, after the six megabanks continued to grow and now have assets equal to about 63 percent of the country's GDP, after the Attorney General of the United States admitted that megabank executives were too big to jail -- the political climate has definitely changed. If the Obama administration backs Brown-Vitter, I believe it has a real chance to become law.
Jeb Hensarling, the Republican Chair of the House Financial Services Committee has pledged to "end the phenomenon of 'too big to fail' and reinstate market discipline." George Will recently wrote a column supporting Senator Brown's efforts. Peggy Noonan believes that "megabanks have too much power in Washington" and "too big to fail is too big to continue." Sandy Weill, the creator of the Citibank behemoth and the person most responsible for the repeal of Glass Steagall, now supports its reinstatement. Conservative Republican Senator Vitter's enthusiasm for TBTF legislation is indicative of a sea change among some Republicans.
Last week, three leading Wall Street bank analysts wrote reports about the likely outcome if the megabanks were broken up. All agree that the value of the parts would be greater than the whole. CLSA analyst Mike Mayo wrote, "Almost every investor that we speak with indicates that a breakup would be bullish for the stocks." That won't sit well with the executives who run the megabanks, of course. Financial Service Forum CEO Rob Nichols reaction to Brown-Vitter indicates how their lobbyists will fight the bill: "Raising required capital to comically high levels will severely restrict banks' ability to lend to businesses and job creators."
Given the megabanks' record of lending to businesses since they were bailed out, that defense is itself comical. There have been a number of studies that refute the idea that increasing capital requirements would have any negative effect on lending. Among them is the recently published book, The Bankers' New Clothes, by Anat Admati, a professor of finance and economics at Stanford, and Martin Hellwig, director of the Max Planck Institute for Research on Collective Goods. The book concludes that raising capital would lead to a safer banking sector "at essentially no cost to society."
Brown-Vitter gives the Obama administration a second chance they should welcome -- an opportunity to get back to "change we can believe in" and true reform of our banking system.