Lurking behind the presidential campaign of 2012 is the huge money issue of what to do with the big banks. Yes, it’s true that most passed their stress tests — at least 15 of 19 big institutions were able to make it — but would the financial system be better off if we started now to gradually downsize our largest financial institutions?
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act we now have a quick and snappy way to take over any large bank that fails.
This new authority is necessary because no major bank was nationalized in 2008. Instead, the Bush Administration handed out $700 billion to save Wall Street. Curiously, the loan terms demanded by the Feds when they had enormous leverage were weak when compared with what real lenders might demand.
For example, Warren Buffett has made major investments in both Goldman Sachs and the Bank of America, $5 billion each. When his Goldman Sachs investment was bought back he received an additional $1.75 billion, a 35% return on his investment — far better than the Treasury has done. He continues to hold his Bank of America interests but the stock has done very well since the news of his purchase.
Start Big Bank Break-ups Now
Richard W. Fisher, president of the Dallas Federal Reserve Bank, says Wall Street reform has it all wrong. The biggest banks are bigger than ever and that’s a problem. Fisher says the top 10 banks now control 61% of all banking assets — that’s up from 26% just 20 years ago.
“These megabanks,” says Fisher, “significantly hamper the Federal Reserve’s ability to properly conduct monetary policy. They were a primary culprit in magnifying the financial crisis, and their presence continues to play an important role in prolonging our economic malaise.”
And what we do about this? According to Fisher, “downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response.”
In other words, start now and don’t wait until the next collapse threatens the entire economy.
Tea Party & Occupy Wall Street
You might expect to hear worries about the banking system from members of the Tea Party as it originated started and the Occupy Wall Street movement, they both share a dislike for big financial institutions. Neither believes that Wall Street bailouts or secret loans from the Federal Reserve were the right financial policy.
Worries from a financial insider are different. Fisher is a member of the club. You can’t say he doesn’t have a good understanding of financial issues. You can’t say he doesn’t know about the marketplace. And you can’t say he’s some sort of crazy radical. He isn’t — he’s as much of the establishment as you can get.
Big financial institutions impact the economy, mortgage rates, VA loans, FHA mortgages, conventional financing, foreclosures, short-sales and the housing market. In contrast, smaller institutions are a blip on the financial radar, neither their existence nor their failure threatens the entire economy.
Mortgage Rates & Such
The next time around the impact of a major bank failure may be even greater because big lenders are larger than they were in 2008. And even with new controls on the books, the record of regulators doing much to control big banks is abysmal. The Federal Reserve — which could have stopped the production of toxic loans in 2002, 2003, 2004 and 2005 — did nothing. The result was central to the ruination of the housing market and the financial system.
So will it be now or later? Mr. Fisher says start now and this many actually be happening — but not as a result of government demand: Big banks are selling off businesses, leaving others, laying off workers and still face the Volker Rule. The era of big banks is certainly not over but perhaps we’re entering a new period when a big bank is at least less big.